Makin' Sausage

Posted February 26, 2009

Those who consider Obama's budget will naturally keep in mind Otto von Bismarck's famous warning to lovers of laws and sausages not to watch either being made. We need some high quality sausage making here because, as foreshadowed in his speech to Congress, Obama's budget is audacious.

Obama runs the deficit up to $1.5 trillion next year – more than 10 percent of GDP. He hopes to bring it back down to 3 percent of GDP by ending both the war in Iraq and the Bush tax cuts. But he assumes the economy will shrink only 1.9 percent this year, then grow 2.1 percent in 2010 and 4 percent annually after that. This year is likely to be much worse. And real GDP growth for the last 28 years has averaged only 2.8 percent annually. When the dust settles in 2013, Obama hopes that the economy, health care, energy, and education are all vastly improved by federal outlays. This is an enormous gamble.

Obama gives his domestic cabinet agencies an average budget increase of 7 percent. Why? Many of these agencies could absorb a 7% cut and never miss a beat. He gives the Pentagon
a 4 percent bump — but holds them to increases of 2 percent or less
after that. And they have wars to fight and F-22s to build. If we really are to believe that Congress can bring deficits down as well as take them up, the chefs need to toss more sacred cow into the sausage.

Obama proposes to create a $634 billion health care fund to expand coverage to some of the 48 million
uninsured Americans. Note that the anticipated revenues from cap and trade total $645.7 billion over the decade — so we are paying for health care by taxing oil. Works for me — but only if health care spending begins to shrink as a share of GDP. Another gamble.

But most of all, Obama proposes the largest income transfer since the New Deal.
Repealing the Bush tax cut raises taxes on the highest earners from 35 to almost 40 percent. Mortgage and charity deductions are capped, which
makes sense, and taxes on capital gains go from 15-20 percent. Higher
income Medicare beneficiaries pay higher drug premiums. Obama grabs
$24 billion over nine years from hedge and venture fund managers by
rightly declaring their carried interest to be income, not capital gains (these folks have become huge Democratic contributors, so props to the prez for doing the right thing here). The politics of this budget will be anything but bipartisan.

This document is just meat for the grinder however, because presidential budgets are policy documents, not fiscal ones. A President is not a Prime Minister — he or she cannot authorize anyone to spend anything. Congress does that. They are the sausage-makers.

First Congress slices the President's budget into pieces and hands it to the relevant House and Senate committees. The committees debate the budget, consult their lobbyists and campaign contributors, add a bit of horsemeat, and revise it to suit.

These committee budgets (which are still advisory) are then reassembled and chopped up again — this time into tax and spend. The revenue budget goes to the two Ways and Means Committees, the spending budget goes to the Appropriations Committees. Now the master chefs enter the room, each with their own spices and techniques.

The drafting of actual budget language is a specialized process that many legislators turn over to lobbyists (remember, each legislator has 70 registered lobbyists at his or her beck and call. And budget committee members get more than their share). Lots of cooks and a tendency to substitute pork for beef at this stage.

With sausage being made in two committees in both the House and the Senate, at some point there is a budget reconciliation process. More spice and gristle. The tax bill and appropriations bills that emerge may or may not be on speaking terms.

Will the Congressional sausage bear any resemblance to the Obama budget?

It probably will. For one thing, the President is a lot more popular than Congress. For another, Democrats control Congress and are within one vote of a filibuster proof Senate if Al Franken is seated.

But will it work? Politically, sure. Conservatives will challenge the wisdom of aggressive federal intervention in the economy — and they will lose. Even in those cases where the evidence is on their side (face it, when Congress raises and spends this much money, a bunch of it will be wasted or stolen).

Will it taste good? When you are hungry, anything tastes good. But is it healthy for America over the long term? Ask my grandkids.