Let’s face it: If it were so easy, it would have been done long ago. Only for a brief period in the last half-century has the government balanced the budget and even earned a surplus. That was during the Bill Clinton administration in the late 1990s, largely because of a combination of fiscal discipline and a gusher of revenue spawned by the dot-com revolution.
Then Congress passed a big tax cut, a recession hit and suddenly the government was back running huge deficits. Now the problem will only get worse as the baby-boom generation retires and costs for old-age programs such as Medicare soar.
Paul has long been a fan of the “penny” plan — the idea that the budget could quickly be balanced if only a penny out of every dollar — 1 percent of spending — were cut every year. When challenged by CNN’s Wolf Blitzer about the potential size of the military cuts in his budget, Paul made it sound so painless — $13 billion a year in total spending cuts, a virtual rounding error in a $4 trillion budget. But Paul is offering his own smoke and mirrors. Let’s explore.
We engaged in a long back-and-forth with Paul spokesman Mathew Hawes to understand how eliminating $13 billion a year in spending for five years would eliminate a budget deficit that is approaching $1 trillion a year. After all, five times $13 billion is $65 billion, which would barely make a dent in the nearly $5 trillion in deficits in that five-year period.
It turns out that, first of all, Paul would repeal the recent spending deal passed by Congress and signed into law. That would wipe out more than $137 billion in spending in the first year, which obviously is far more than $13 billion a year. He would be resetting the entire budget.
On top of that, Paul’s reference to $13 billion was only regarding discretionary spending. (One percent of $1.3 trillion in discretionary spending is $13 billion.) But the federal budget is mostly mandatory spending, for programs such as Medicare and Social Security, so after the $137 billion whack in 2019, Paul would cut between $30 billion and $31.5 billion each year.
“When Senator Paul is saying 1 percent is $13 billion a year, he is just giving an illustrative example of how this could be applied to discretionary spending,” Hawes said. “There is no assumption on how Congress would achieve the necessary reduction in spending, so we cannot make an assumption about how the cut would break out between mandatory and discretionary.”
That may sound as if it’s doable. But the reality is that the budget cuts being proposed by Paul are much, much bigger.
That’s because Paul ignores baseline budgeting. There’s often a fight about baselines in Washington, but it makes a difference of billions or even trillions of dollars. And it’s not really smoke and mirrors, as some critics would have you believe.
A “current services” baseline is designed to measure the impact of policy changes in government spending and taxes vs. current policies. The baseline records what would happen if nothing is changed and current policies remained the same.
But that’s not the same as simply believing that the dollars spent or raised remained the same. Inflation and population growth over time raises the cost of programs, while a growing economy will result in more taxes being collected. If you earned the same salary year after year, eventually you would feel pinched as costs for groceries and housing rise.
Here’s our favorite example of this phenomenon: Defense spending technically remained constant from 1987 to 1994: $282 billion a year. But look what happened to the military during those seven years: The number of troops fell from 2.2 million to 1.6 million, the number of Army divisions was reduced from 28 to 20, Air Force fighter wings dropped from 36 to 22 and Navy fighting ships declined from 568 to 387. That’s because inflation over time ate away at the value of those dollars. By most measures, defense spending was trimmed in that period, although in theory, not a penny was cut.
When Paul says he’s just cutting $13 billion a year in discretionary spending — or $30 billion a year including mandatory spending — he’s ignoring not only the fact that he would wipe out the recent spending bill; he’s acting as if there is no baseline and 1 percent can be easily cut from the previous year’s budget. But it’s not really 1 percent; it’s 1 percent plus the impact of inflation and population growth. Look at what happened to the military when spending was constant in raw dollars over seven years — and now imagine cutting even more.
By our calculations, in 2020, the difference between Paul’s budget and the Congressional Budget Office baseline would be roughly $383 billion. By 2022, the difference would be $1 trillion. That’s real money that would be cut — far more than the $30 billion listed that year in the Paul budget.
Hawes, in defending Paul’s statement, cited a study written by staff members at the St. Louis Reserve Bank that found CBO’s forecasts “have a troubling level of inaccuracy, which is magnified and made worse with each additional year. It makes much more sense to look at each year’s cut/increase relative to the prior year instead of CBO’s projections.” (The study mainly faulted CBO’s deficit forecasts. In terms of expenditures, the study found the CBO had the biggest misses in discretionary and defense spending, in part because of Congress’s habit of passing supplemental spending bills that CBO could not predict.)
Hawes said that using a baseline of prior year’s spending is “intellectually honest and more accurate.” He added that “baseline adjustments are often characterized by the budget community, the media, and partisans on both sides of the aisle as gimmickry.” As for whether Paul’s remarks were misleading, he said: “You’re discounting our explanation to fit your wrongful conclusion.”
The Pinocchio Test
Paul is free to use whatever baseline he wants. But he should not go on television and pretend that the budget reductions envisioned in his budget are so small — or relatively painless. A “1 percent cut” is far more than $13 billion, even under Paul’s math. And when adjusted for a baseline that takes into account population growth and inflation, it’s trillions of dollars. His remarks on national television are highly misleading and worthy of Four Pinocchios.
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