- The Washington Times - Thursday, December 15, 2011

ANALYSIS/OPINION:

The deficit supercommittee was undone by Washington’s fundamental dynamic: Spending almost never falls. However, we miss the most important lesson if we do not see that this failure was bigger than either Congress or Washington. It again proves that an economic problem cannot be solved by a political process.

It is natural to assume that spending and revenues bear equal responsibility for today’s historic deficits. After all, aren’t all ledgers made up of just those two components? If each is half of the equation, how can each not be half of the solution?

Instead, it is wishful thinking and bad bookkeeping to assign equal blame for the current deficits to falling revenues and increasing spending. To understand the problem the supercommittee faced in particular and Washington faces in general, look at the past five years. In 2007, the year before the current economic downturn hit, the federal government simultaneously reached what were then all-time highs in revenues and outlays.

By 2009, gross domestic product had fallen below the previous year’s level. The impact on both revenues and outlays was pronounced.

As the table shows, revenues have fallen, but outlays have skyrocketed. Though this divergence may be commonly understood, its details are overlooked. Most important, the percentage increase in outlays is threetimes the percentage decrease in revenues.

The enormous deficit problem has not been balanced between revenue decreases and spending increases. So how was a real solution ever to be balanced between them?

Yet in a political process, where the two sides are evenly balanced, it is logical for each side to expect to see its policy priorities given equivalent weight - a 50-50 split.

The current deficit problem, while enormous - $4.465 trillion since 2007 - reveals Washington’s fundamental problem: Revenues are volatile because they are based on economic performance, but spending growth is virtually constant because it is based on political process.

To appreciate how unrelenting spending’s growth is, consider a rare thing that happened this year: Federal spending fell from 2010 levels. The last time this happened was in 1965. Of course, as the Congressional Budget Office (CBO) pointed out, this decrease was caused by certain quirks, such as a calendar-induced shift of payments back into 2010. Without these, “outlays in 2011 would have been $64 billion … higher than in 2010.”

Washington’s fiscal scenario is one of politically perpetuated spending increases financed by economically volatile revenues. On the outlay side, no check inherently exists to control spending - either internally through the political process or externally through competition. Unchecked, it grows almost continually. On the other side, revenues do have an inherent check - the economy itself.

Outlays are immutable, revenues are volatile. Under such a scenario, outlays will always outstrip revenues over the long run. In any other endeavor - unclouded by politics and policy preferences - the inevitable outcome would be obvious. Outlays are like the casino in gambling - the odds favor it, and if the gambler wagers long enough, the casino eventually will win everything.

The supercommittee essentially inherited a conundrum: The only way to balance the federal budget is through an unbalanced approach. Balancing reduced spending and increased taxes, while seemingly possible in theory, is impossible in practice. Its failure only seems to prove once again that Washington cannot govern. What it really proves is that politics cannot govern economics.

That is no different in Washington than it is in Europe, which is flummoxed by an even larger version of the same problem. Washington is being singled out for what is a global problem.

The fiscal crisis is really an economic one. Yet because it involves government spending, we tend to misclassify it as a political one. In economics, such an imbalance between outlays and income solves itself. In politics, such an imbalance perpetuates itself.

Politics can work quite well in using compromise to solve political problems, but economics does not compromise. Its laws are not as malleable as those politicians craft.

The failure of the supercommittee and governments globally is one of the political process attempting to exert its will on the economic process. A wide array of governments have erected economically unsustainable spending structures. This is not something the political process can solve so long as it ignores the economic process. Politics is the art of the doable, but economics remains the art of the affordable.

J.T. Young served in the Treasury Department, the Office of Management and Budget and as a congressional staff member.

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