- Shopping Bag ( 0 items )
What's in a word? Plenty, when it's a word such as “taxes,” “spending,” or “deficits” that pervades Washington political debate despite lacking coherent economic content. The United States is moving toward a possible catastrophic fiscal collapse. The country may not get there, but the risk is unmistakable and growing. The “fiscal language” of taxes, spending, and deficits has played a huge and underappreciated role in the decisions that have pushed the nation in this dangerous direction. This book proposes a better fiscal language for U.S. budgetary policy, rooted in economic fundamentals such as wealth distribution and resource allocation in lieu of “taxes” and “spending” and in the use of multiple measures (such as the fiscal gap and generational accounting) to replace misguided reliance on annual budget deficits.
THE FAILURE OF OUR FISCAL LANGUAGE
Language, the greatest human invention, helps us to understand the world, but also to misunderstand it. We use it to inform other people, but also to deceive them. It connotes more than it directly says, increasing the amount communicated but adding a subliminal element that we may not consciously appreciate even when it sways us.
Fiscal language, or the set of terms such as “taxes,” “spending,” and “budget deficits” that we use to categorize the government’s dealings in cash, exemplifies the bad side much more than the good. Our fiscal language depends on form, yet seems to connote real substance. The result is confusion and deliberate manipulation that increasingly endanger our national economic welfare.
Words enable us to behave like human beings, but also to behave more stupidly than dumb beasts.
– Laura Huxley
Language, n.—The music with which we charm theserpents guarding another’s treasure.
– Ambrose Bierce, The Devil’s Dictionary
The Fiscal Crisis and Its Roots in Fiscal Language
The United States is presently moving toward a possible catastrophic fiscal collapse. We may not get there, but the risk is unmistakable and growing. Whether we get there or not depends on whether our political system can generate responsible decisions. Like a car headed for a cliff, our present course is clear, but the driver could still turn the wheel.
It might seem that our economy is too strong, and our political system too stable, for us ever to face the sort of discredited-debtor purgatory that has recently plagued nations such as Brazil and Argentina, complete with hyperinflation, high unemployment, and recurrent bank failures. We can indeed afford a lot of mistakes, and our political system has never entirely failed us since the Civil War. But if our policies are foolish enough for long enough, default or hyperinflation can and will happen here.
Our march toward government insolvency is a complex historical event with multiple causes. The central causes involve health care technology and demographics, and are being faced by countries around the world. Improved but costlier health care and the aging of our population have made Social Security and Medicare ever more expensive, and are expected to keep on doing so. Recent tax cuts and spending increases, however, have made the problem much worse. And worse still are the dim political prospects for a course correction any time soon. Tax increases and entitlement cuts are both effectively off the table. Democrats advocating the former, or Republicans the latter, would risk dire political consequences. Nor does a bipartisan deal, combining both poisons but inoculating both parties against the attacks they would face if acting alone, seem plausible today. The Republican leaders and the party’s “base” are adamantly opposed to any such deal, and the Democrats might turn them down even if offered it.
The current political impasse reflects the Republicans’ march to the right, starting in the aftermath of the first President Bush’s defeat in the 1992 presidential election, and cemented in place by the 1994 “Contract With America”–led congressional takeover. During the ten years before 1992, major bipartisan budget deals promoting fiscal responsibility were almost an annual event. Not any more. Nowadays, even the return of enormous budget deficits has failed to prompt any movement toward revival of the earlier pattern.
Bipartisanship is bound to be harder when the parties are further apart ideologically. But Ronald Reagan and Tip O’Neill, who were not especially close either, nonetheless worked together when necessary in the early 1980s. The key difference this time has been the rise of a conservative anti-tax movement that relied ideologically on basic misperceptions and misunderstandings that were shared across the political spectrum. These errors, in turn, depended importantly on the language that we use to organize events into a coherent narrative. Failures of fiscal language – the set of terms we use to describe government and categorize programs that deal in cash – have played a vital role in the recent rush toward default, and will continue to need correction even if the budget crisis passes.
The defects in our preexisting fiscal language have mattered on two levels. First, they have helped to supply the ideological motivation for the anti-tax crusade, by encouraging the mistaken belief that the tax cuts of recent years actually advanced conservative small-government principles. Second, the defects in our fiscal language have contributed to grave and often bipartisan misunderstanding of the long-term implications of our current budgetary course.
We can start with the policy choice to cut taxes. For many decades, a dominant theme in American conservative thought and politics has been battling “big government.” While in part waged on the regulatory front, the main action for at least three decades has centered on tax policy, and is well conveyed by Ronald Reagan’s famous, oft-repeated charge that Democrats like nothing better than to “tax and spend.” Conservative Republican advocacy of tax cuts, after premiering nationally in Reagan’s 1980 presidential campaign and the ensuing 1981 tax act, became a core ideological and policy aim with the promulgation in 1994 of the “Contract with America,” and then bore fruit in the recent tax cuts.
Controversial though the tax cuts have been, their supporters and opponents alike generally agree that they are steps toward smaller government. While merely reducing the government’s tax take for now as spending continues to rise, they are likely to require much tighter spending controls in the future. Indeed, down the road they will require, not only offsetting tax increases, but also substantial Social Security and Medicare cuts, since that is where the money is.
The effort to make future spending less affordable was deliberate, reflecting antigovernment sentiment. While the Bush Administration was circumspect about this goal (and has largely ignored spending discipline for the present), its close political allies were more forthcoming. Tax-cutting advocate Grover Norquist, for example, stated that his “goal is to cut government in half in twenty-five years,” and thus “to get it down to the size where we can drown it in the bathtub.”
The English writer Saki once observed: “When one’s friends and enemies agree on any particular point they are usually wrong.” So it was this time. The point of agreement between supporters and opponents of President Bush’s tax policy, that the tax cuts were a step toward smaller government, reflected a shared misunderstanding of what “smaller government” means. More specifically, it rested on spending illusion, or confusing the amount of the nominal dollar flows between individuals and the government with the actual size of government. Once we really examine the idea of government size, we can see that the tax cuts may well, on balance, prove to have been a step toward larger government, because their main effect may be to increase economic distortion, along with wealth redistribution from younger to older Americans.
The flawed fiscal language that encouraged the Bush Administration to view large-scale wealth transfers to older generations as a march to smaller government was as vital to its fiscal policy as faulty intelligence information was vital to its Iraq policy. However, the truly Enron-style aspect related to the long-term fiscal picture. And here the misunderstandings, while equally bipartisan, have been more deliberate. Both parties are averse to long-term fiscal measures that would make the unsustainable character of their preferred policies more evident. Better to rely on annual cash-flow deficits and surpluses, even though they reflect the use of an accounting method that would lead to jail time for any corporate executive who tried to use it.
What is the rationale for computing deficits and surpluses? We might think of them as trying to measure the government’s annual departure from the no-free-lunch principle, which holds that everything must ultimately be paid for. Deficits seem to indicate a lack of full financing, while surpluses seem to indicate that the government is accumulating more cash than it needs. Unfortunately, however, both are highly defective as measures of departure from the no-free-lunch principle. In particular, while they take account of changes to explicit public debt, such as that occurring when the government sells bonds to finance a deficit, they ignore rising implicit liabilities, such as those under Social Security and Medicare, that most consider almost as sacred a commitment as repaying the national debt.
Economists have recently developed a long-term measure, called the fiscal gap, of our government’s long-term departure from the no-free-lunch principle. In effect, this is current public debt plus the present value of all future debt that would have to be issued if we continued on our current course. As we will see, this measure is far from perfect, and can itself be gamed in certain ways, but it does avoid the myopic time frame that constitutes the chief shortcoming of annual or even ten-year budget deficits.
The fiscal gap has recently been estimated at $68.6 trillion, or alternatively $85.5 trillion, with the main difference lying in whether the tax cuts of recent years are assumed to be permanent. In 2003 alone, it increased by more than $20 trillion, reflecting the nearly simultaneous adoption of tax cuts and of an unfunded Medicare prescription drug benefit that the Medicare trustees subsequently estimated would cost $18.2 trillion over the long run. This was quite a spree by any imaginable yardstick. And while it was entirely done by Republicans, Democrats might have made the Medicare portion larger still, given their support for a more generous drug benefit.
The fiscal gap admittedly uses a more ambitious system of projecting the government’s long-term finances than anything a company is required to use in financial reporting. It takes into account expected future cash flows that have not yet, in an accounting sense, accrued. This difference reflects the fact that an elected government has a commonly understood, if legally unenforceable, commitment to its citizens to keep doing certain things, such as paying retirement benefits and providing national defense, in sharp contrast to a company’s mere expectation (without any sort of commitment) that it might want to hire new workers in the future. So corporate executives would not go to jail for failing to publish fiscal gap–style measures of their companies’ long-term net revenue projections. But they most assuredly would go to jail if they published financial statements that ignored accruing liabilities, like those owed by Social Security to current workers. By one recent estimate, the consequence of this omission for Social Security in 2002, a reasonably typical year, was that the system reported a $165.4 billion increase in assets, whereas it should have reported a $467.5 billion loss (Jackson 2004). This might have been grounds for jailing the responsible officials, if not for the fact that for decades the U.S. Congress has mandated the misreporting, and is not about to send itself to jail.
Short-term measures for long-term issues are inherently a recipe for mischief. They have encouraged budgetary game-playing for decades, practices such as back-loading the costs of proposed changes to arise outside the official budget window, or scheduling tax cuts for expiration even though everyone knows the plan is to extend them. But the worst blow of all, planned and expected by no one, was the short-lived emergence of budget surpluses in the late 1990s, encouraging the view that fiscal discipline no longer mattered. As we soon learned, a measure that gives the wrong sign, relative to the actual long-term picture, is even more damaging than one that has been lowballed through “smoke and mirrors” gamesmanship. By the time annual budget deficits were back, the rules and habits that had aided fiscal responsibility despite all the games had vanished, and to date irretrievably.
Throughout all this, most experts recognized that we faced a long-term fiscal gap. But this understanding lacked a sufficient political voice, in part because focus on the surplus was so inescapable. So our fiscal policy was powerfully pushed in the wrong direction – away from sustainability, and often explicitly premised on the idea that “if we don’t blow the surplus our way, the other guys will do it their way.”
By fostering confusion about how “taxes” and “spending” relate to the size of government, along with the view that a temporary surplus was meaningful, fiscal language has played a major role in the U.S. government’s march toward bankruptcy. This book is therefore dedicated to two vital agendas, one short-term and the other long-term. The short-term agenda is correcting the misguided beliefs that tax cutting is bringing us smaller government and that annual deficit measures adequately show what we are doing. I explain, moreover, why the threat of bankruptcy or hyperinflation is so real and potentially so dangerous to our economic welfare.
The book’s long-term agenda is to improve our fiscal language so that similar episodes of confusion and irresponsibility will be less likely in the future. This long-term agenda, in turn, has both a destructive and a constructive side. I aim both to show in detail just how bad our fiscal language currently is, and to sketch a better one that is rooted in such fundamentals as resource allocation, wealth distribution, and policy transparency.
Fiscal Language in the Labeling Sense
Again, by “fiscal language” I mean the set of terms we use to describe and categorize government programs that deal in cash. Its use and abuse occur at two different levels, distinguishable by their degree of generality.
At the superficial level, politicians give nice names to policy instruments they like, and not-so-nice names to those they dislike, with “niceness” being defined by the same sort of intensive research with focus groups that underlies the choice of brand name for a new toothpaste. Thus, potentially controversial law enforcement legislation is named the “Patriot Act” (who in politics would want to oppose patriotism?), while a Bush Administration plan to increase permissible air pollution is dubbed the “Clear Skies” initiative.
Recently in the fiscal policy realm, the “estate tax,” an accurate name for a tax levied on decedents’ estates, suddenly got renamed the “death tax,” an inaccurate name given that death without a requisite estate would not trigger it. The labeling change was pushed by proponents of repeal, who determined that it would make the tax politically more vulnerable. But this was just bold marketing, not misleading or mistaken reliance on formal categories to mischaracterize the policy effects of estate tax repeal.
Also in the fiscal policy realm, Republicans in Washington never speak of “tax cuts,” a term that might run afoul of status quo bias, or the view that changes in current policy require affirmative justification. Rather, the term of choice is “tax relief,” conveying that “there must be an affliction, an afflicted party, and a reliever who removes the affliction and is therefore a hero” (Lakoff 2004, 3).
These word games are reasonably entertaining and undeniably important, and I will examine them in a number of cases, such as the recent Social Security debate. However, my main interest in writing this book is to look at the fundamental categories that we use in describing the federal budget and its parts. Here there are basic organizing terms, more stable and far-reaching than the name of a given proposal. To describe a whole range of fiscal institutions as “taxes” means more than simply changing a particular tax’s name or demanding “relief” from all the rules that are called taxes.
Fiscal Language in the Structural Sense
The fundamental subatomic particles of our prevailing fiscal language are “taxes” and “spending,” defined as cash flows to and from the government, respectively, leaving aside those from voluntary consumer transactions (such as paying for mail service or a subway fare). Taxes and spending, ostensibly, are the main things governments do, along with regulation. The budget deficit, our third core fiscal language term, builds on the first two by comparing annual taxes to annual spending as officially defined, with the aim of measuring – well, whatever it is that budget deficits and surpluses are supposed to measure, a topic that I address in Chapter 4.
The account I will offer in this book of the fiscal language that is built on these core terms may initially remind some readers of postmodernism, which emphasizes the power and artificiality of words and their “texts” while also denying that there is an outside, objectively describable reality. The important thing about fiscal language, however, is that, postmodern though the players’ writhings may be, there really is an objectively describable reality. For example, a given government policy actually has some set of effects in the world, which a better language could be used to describe – even if we face irreducible uncertainty about exactly what these effects are, along with normative controversy about how to evaluate them.
Unfortunately, the prevailing structural fiscal language creates a backward world where “up” may mean “down” and “green” may mean “red.” The good news (such as it is) is that we are not in the linguistic world of George Orwell’s 1984, where the authorities decide that war is peace and freedom is slavery. Our structural fiscal language, rather than being dictated from on high by Big Brother, involves formal rules of the game that participants can manipulate but not openly flout. It tilts and constrains real policy choices, and induces political actors to befuddle themselves even as they labor to befuddle constituencies whose support they need.
Part I. Labels and Consequences: The Failure of Our Fiscal Language; 1. Fiscal language and the fiscal crisis; 2. Taxes, spending, and the size of government; 3. Fun and games with budget deficits; Part II. The Why and How of Long-Term Budgeting: 4. What are we talking about when we talk about budget deficits?; 5. Long-term measures in lieu of the budget deficit; 6. Fiscal gap politics; Part III. Labels and Policies Across Budget Categories: 7. Benign fictions? Describing social security and Medicare; 8. Tax expenditures; 9. Welfare, cash grants, and marginal rates; Part IV. Conclusion: 10. Some modest proposals.