Questions from Vice-Chairman Dreier

1. Dr. Reischauer, one of the major themes in your testimony is that the budget process works best when used as an enforcement mechanism, as it was under the Budget Enforcement Act, rather than as a device to compel a predetermined fiscal policy outcome, such as the deficit reduction targets under Gramm-RudmanHollings. I think it is fair to say that the budget deficit has continued to grow without regard to the type of budget process devices employed. The fatal flaw may be that, in each case, the processes provided loopholes through which spending could be driven. I would like to get your views on the budget process from a slightly different angle. Should the budget process be designed in such a way that it either tilts toward making it slightly easier for Congress to spend, slightly more difficult to spend, or should the process be completely neutral?

Answer: While the Congress can choose to create a process that either encourages spending, discourages spending, or is neutral with regard to spending, this choice reflects not economics or process "rules," but a political judgment concerning what role you want government to play in the economy. For this reason, I do not believe that discouraging or encouraging spending is a necessary attribute of the budget process. If the Congress believes that government spending is too high for some programs, it should reduce that spending. If it believes that spending is too low for a particular program, it should increase it. History does show us, as I suggested in my testimony, that making general pronouncements concerning budget outcomes without specifying how these outcomes will be achieved has not proven useful.

Having said that, I should point out that caps on discretionary spending, which are a type of discouragement to spending, have proved effective. The key is the role of the "avoidance mechanism," which is the opposite of the enforcement mechanism. The very fact that discretionary spending is annually appropriated is what makes the caps work. Because mandatory spending and taxes are based on permanent law, the President and the Congress can avoid making promised future cuts simply by failing to take action. But appropriators must act every year in order to provide funding for discretionary programs. They cannot evade the caps by simply failing to act. Instead of the caps being a device to force future actions, they are mechanisms that limit future actions.

2. At page five of your prepared statement, you offer the view that the BEA was largely successful in enforcing the budget agreement of 1990. You also state that the deterioration of the economy and technical reestimates of revenue and spending, especially in Medicare and Medicaid, are largely responsible for the increases in the projected deficit and that Congressional policy decisions had virtually no effect on the deficit. Yet, you criticize the BEA for not including any procedures to reconsider the budget rules if the projected deficit were to expand. I have two questions. First, what alterations in the rules would you have recommended? Second, would changing the rules in the face of increased deficit projections be in conflict with your general view that the budget process should merely "enforce" prior decisions?

Answer: The statement, on page 5 of my prepared testimony, that the BEA did not "include any procedure to reconsider the rules were the deficit outlook to deteriorate" was less a criticism than it was a statement of fact. You are correct to point out that it would be difficult to design a process with such a "trigger" to action without running into the same problem that was so clearly evident under GrammRudman-Hollings. There are, however, other options. One would be for the Congress to require that the President present a plan for dealing with a deterioration in the deficit outlook, if and when one surfaces. A second would be to specify some set of specific deficit reduction actions that would be triggered if the actual deficit exceeds the projected deficit. For example, an income tax surcharge, a specific set of spending cuts, or both could be triggered when the actual deficit exceeds the projected deficit for a given fiscal year. The level of the tax increases or spending cuts would depend on the level of the deterioration.

3. In your statement, you take note of the criticism of the current budget process that votes on the same spending decisions recur numerous times during the fiscal year. Yet, you appear to dismiss the criticisms without much comment. Do numerous, and sometimes contradictory, Congressional decisions on programmatic items engender confidence in the larger budget process?

Answer: Certainly the budget process has been criticized for resulting in recurring votes on the same issues numerous times during the fiscal year. While this may be a problem that is frustrating to Members and may not engender confidence in the budget process, it is not necessarily a problem that results from the structure of the process, as opposed to how that process is carried out. For example, amendments to the budget resolution that focus on specific programs are often voted on in spite of the fact that the function of the budget resolution is to set broad parameters for the budget, as opposed to specifying particular policy actions. Further, some of this redundancy results from the widespread practice of voting on so many authorizations annually. If more programs were authorized for a longer period of time and if the budget resolution focused only on broad budgetary goals, this problem would be much less significant.

3

4. At page 15 of your prepared statement, amidst the discussion of the necessity, as you see it, for flexibility in the budget process, you state that the BEA assisted in the goal of flexibility by providing for an exception to the strictures of the Act by permitting the Congress and the President to declare an "emergency". Many of us believe that the emergency designation has been misused on occasion. Do you believe that the emergency designation under the BEA has worked as it was intended? What modifications, if any, would you make to those provisions?

Answer: The emergency provision included in the BEA has really not been used a great deal. In fact, as Table 1 in my prepared statement indicated, the changes in the deficit outlook since the 1990 budget agreement have almost exclusively been because of economic or technical changes, rather than because of changes in policy. One reason that the emergency provision has not been used much is that, during the Bush administration, the Congress and the President rarely agreed concerning what constituted an emergency. With the end of divided government, of course, there may be greater potential for the use of the emergency designation to push costly spending outside of the BEA's controls. Nonetheless, some kind of provision for emergencies is probably, as I suggested in my statement, unavoidable if we are going to have a budget process that will be able to respond to changing circumstances. I am not convinced that a change in the current procedure is necessary. But if the Congress wanted to make it more difficult to enact emergency legislation than is currently the case, it could require supermajorities in both houses in order to declare any spending as an emergency.