Moody’s Investor Services announced Friday that none of the plans currently being considered in Washington reduces spending enough to fully protect the United States from a potential downgrade of the nation’s credit rating. As I wrote yesterday, House Republicans were able to pass Speaker Boehner’s, R-OH, plan, but Senate Majority Leader Harry Reid, D-NV, announced it DOA and had it tabled so the Senate could take up Mr. Reid’s plan.
Ironically Mr. Reid is “filibustering” his own bill by delaying a vote until Sunday at 1 A.M. in an effort to punish Senate Republicans for insisting on a 60 vote threshold for passage of Reid’s bill. Meanwhile House Republicans intend to vote on a version of Mr. Reid’s bill so as to demonstrate by defeating it that it cannot pass the House. For their part, a source inside the White House indicated they are frustrated there has not been a market panic similar to 2008, as this would have frightened Congress into passing whatever deal they could.
Friday’s announcement from Moody’s indicates that despite all the posturing and hyperbolic claims, the spending reductions being discussed do not address the potential for long term fiscal insolvency. Entitlement programs remain unsustainable in current form and spending continues to increase. Indeed, even Mr. Boehner’s vaulted “conservative” bill, does not actually reduce spending. In the standard Washington game of “baseline” budgeting, all that is being reduced is the level of the spending increase.
For the uninitiated, Washington has used the baseline budgeting practice since the late 1970’s. Rather than looking at what is coming in and then determining spending priorities from there, baseline budgeting entails starting with the previous year’s spending figures and the “assumed” increase as the baseline for funding. Therefore, if a program or agency was set to see funding increase by $500 billion over the previous year and instead it only increases by $400 billion, politicians will say spending has been “cut” by $100 billion. That is like you or I looking at a $100K car we cannot afford, then purchasing a $50K car and saying we “saved” $50K when in fact we spent $50K.
This is the fundamental distortion in all budget battles going back for decades. Federal spending continues to grow on average about 7% a year under both parties. It is little wonder the “Tea Party Hobbits” are pushing for a rejection of any bill that does not make real spending cuts, and include a provision to force a balanced budget. I understand their frustration, but considering all they have been able to achieve this year relative to the small size of their caucus, this is the point at which they should declare victory and marshal their forces for the next battles.