Handbook of Fiscal Policy_2 potx

103
Federal Deficits and Financing the
National Debt
Marcia Lynn Whicker
Rutgers Urlitrersity,
Ne~vurk,
New
Jersey
One of the most controversial aspects of federal budgeting is the annual deficits the United
States has accumulated, especially during the past two decades. These deficits have con-
tributed significantly
to
the growth of the national debt. By
FY
1993, projected deficits
were $327 billion. Total outstanding federal debt in 1992 reached $4.08 trillion, more than
double than the
$I
.83 trillion of 1985. Federal debt in 1992 was 68.2% of gross domestic
product (GDP), the highest percentage ever since World War
I1
and the Korean War. Net
interest
on
the debt was $199.4 billion.'
Federal deficits, then, have driven accumulated national debt
to
unprecedented lev-
els. Why have deficits grown and persisted? Few argue that massive federal deficits are
good; rather, controversy surrounds exactly how bad federal deficits are and what
to

do
about them. Policy makers agree that something should be done, but disagree on what
so-
lutions should be embraced. Observers agree, however, that federal deficits have been ris-
ing, despite all efforts to abate or even just ameliorate their growth. Plausible methods of
reducing the deficit all create political pain, and thus are controversial.
WHY DEFICITS HAVE GROWN
Federal deficits have mounted despite the efforts of policy makers
to
curb them. Critics
contend that the budget and spending are out of control.
So
why have deficits mounted and
persisted across the past two decades? Several factors are
at
work, including the following.
Budgets Have Dual Stabilization and Allocation Functions that May
Conflict
Budgets are used to implement both economic policy goals and specific program needs.
This dual purpose of budgets undercuts deficit reduction.? Sometimes the goal
of
stabiliz-
ing the economy by reducing deficits, interest paid, and debt may contradict allocation
goals of increasing federal spending for desirable social and defense goals.
1360
Whicker
By allocating monies to programs, policy makers express national prioritied Trend
analysis may present
a
distorted picture

of
national priorities since
a
unified national bud-
get, including programs funded through trust fund revenues, was only adopted in the late
1960s. Prior to that time, some government programs, including Social Security, were not
included in the budget. However, trend analysis is often used anyway
to
show shifting na-
tional priorities when enacting allocation
goals.
Beginning in 1960, this type of analysis of budget shares reveals
a
decline in defense,
followed by
a
revival of relative funding. National defense received 52.2% of total federal
outlays in 1960. This amount declined to 22.7%
of
outlays in 1980 after the disillusionment
of Vietnam, and then began to climb during the Reagan years. By the end
of
President Ronald
Reagan's second term in 1988, national defense constituted 27.3% of outlays; approxi-
mately 73% of federal outlays were for nondefense programs. With the end of the cold war,
defense spending began to decline relative to other functions, and by 1992 was 2 1.6%
of
out-
lays. Social spending experienced the reverse pattern. Since 1960, human resource spend-
ing has experienced

a
dramatic increase in budget share. In 1960, human resource expendi-
tures constituted only 28%
of
total federal outlays. By 1987, that share had risen to 49%.'
Addressing important defense and social priorities by spending may conflict, how-
ever, with the macroeconomic policy
goals
of reducing deficits by lowering spending.' Ris-
ing deficits have caused mounting national debt. National debt more than doubled during
the Reagan administration. In 1980, when Reagan assumed the White House, national debt
was slightly under
$1
trillion, at $908.5 billion. By 1989, when Reagan retired from office,
national debt had increased to $2,867.5 billion, or almost $3 trillion. Critics contend this
growth resulted from deficits accumulated when the supply-side goal of cutting taxes and
the allocation
goal
of increasing defense spending both escalated the gap between receipts
and outlays.6 Interest on the federal debt
also
increased, both in absolute terms and
as
a
share of total federal spending. Between 1960 and 1987, the budget share going to interests
payments on national debt accumulated by past deficits had grown from 9% to 17%. In each
budget year, continued spending for important allocation
goals
received higher priority
than deficit reduction.

The Budget Process
Is
Decentralized, with no Central Policy
Structure for Controlling Deficits by Coordinating Stabilization and
Allocation
Federal budgets are
a
major tool for achieving fiscal policy
goals
as
well
as
achieving the
specific
goals
of individual programs, yet only in the past two decades has Congress adopted
the structure to realize the potential for fiscal policy stabilization
goals.
Prior to 1974,
macroeconomists often theorized about the desired level of federal expenditures to provide
the appropriate level of fiscal stimulus, given the existing levels of unemployment, intlation,
and interest rates.' But in the real world
of
congressional budgeting, the actual appropria-
tions subcommittee decisions that determined federal expenditures were mostly divorced
from any meaningful consideration of the state of the economy and fiscal policy needs. Nor
was much weight attributed to revenue limitations, since the two finance committees-the
House Ways and Means Committee and the Senate Finance Committee-operated inde-
pendently in setting tax rates and in establishing modifications, exemptions, and exceptions
in the tax code. What drove budget decisions was micro-level attention by members of

ap-
propriations subcommittees to incremental requests for increases in program expenditures.
Federal Deficits and Financing the National Debt
1361
The reality of national budget making was a process impacted more by the highly de-
centralized structure of the
U.S.
government and
of
Congress itself, as well as by interest
group politics than by stabilization theory. Major budget refonns have created new institu-
tional actors to increase monitoring of stabilization goal achievement as well as allocations,
yet
the
process remains highly decentralized, with no single actor or institution assuming
final responsibility for budgets and deficits. Partisanship increased blame shifting. The
largely Democratic Congress charged that the mostly Republican presidents have not sub-
mitted balanced budgets and that they are merely responding to presidential lead. Republi-
can presidents,
in
turn, charged that the mostly Democratic Congress was spendthrift and
irresponsible.
The Budget Process
Is
Lengthy, Providing Many Points at Which
Interest Groups May Block Cuts
Shepherding a federal budget through the various stages of budget development is lengthy
and often laborious, filled with points at which the budget can be snagged on some politi-
cal difficulty and delayed, and spending cuts restored by lobbyists representing powerful
interest groups. Concerns over federal deficits may take second place to reelection and lob-

bying pressures placed on members of Congress
to
restore cuts or increase spending for
specific programs.
The budget process has four stages during which lobbying and pressure may occur.
If interest groups fail to achieve favorable spending outcomes at one stage, the lengthy
process provides other opportunities for lobbying and influence. The stages
of
the budget
process include planning and analysis, budget formulation, implementation, and audit and
review. Interest groups have the greatest access
to
key decision makers, particularly in
the formulation stage, and
to
a lesser extent in the planning stage, although no stage is
mmune.
In
the planning and analysis phase, available resources are assessed, goals are clari-
fied, and alternative approaches to attain goals are analyzed. This stage is conducted in the
executive branch by the budget offices of the federal departments and by the Office of Man-
agement and Budget (OMB). In the legislative branch, the budget committee staffs, and es-
pecially the Congressional Budget Office (CBO), conduct analyses
of
policy goals and op-
tions. The analyses of CB0 have been particularly well regarded for their accuracy, but the
analyses from the administration frequently build in assumptions that favor the interest
groups that are its major constituents. Agencies also are predisposed to produce analyses
that support their clientele.
During the policy formulation phase, the budget is developed and approved. Interest

groups have the greatest probability of exerting influence here. Budget development re-
volves around the budget year (BY)-the fiscal year following the current year. Prior
to
budget development, executive agencies have submitted quarterly financial plans that pro-
vide budget reviewers with estimates of 5-year program costs. Executive departments and
agencies receive guidelines from OMB in the form of a budget call to aid in the develop-
ment
of
budget figures. Once agency figures are prepared, the remainder
of
this phase in-
volves budget reviews-first within the executive branch by the department budget offices
and OMB, and subsequently within Congress. This stage culminates with the final passage
of
major appropriations bills. Lobbying efforts are particularly intense in Congress, with
multiple possible points of intervention.
1362
Whicker
Redistribution Drives Federal Budgeting, yet the Budget Does not
Include Direct Explicit Information on Who Gets What
Often thick, voluminous, weighty, and seemingly dry
to
the unsophisticated reader oblivi-
ous to the clash
of
values and political battles symbolized by the numbers included, bud-
gets represent
a
national
plan

for accomplishing
goals
within the
BY
.'
The budget sets forth
estimates
of
resources required and of resources available, in comparison with previous
years and estimates for future year resources. Federal budgets contain five types
of
infor-
mation. (See Table
1
.)
Yet none of the information in the budget deals directly with redis-
tributive impacts that drive the budget process. While beneficiaries may be implied by the
Table
1
The Federal Budget and Financing Deficits
Information provided in the federal budget:
Estimates of outlays, revenues, and budget authority for the budget year
Presidential budget requests for current and prior years
Five-year projections for revenues, outlays, and budget authority
Economic projections for the economy
Current services estimates
Federal budget legislation:
1921 Budget and Accounting Act
Created
a

national executive budget
Significantly increased the president's role in the budgetary process
Created the Bureau
of
the Budget (BOB)
Created the General Accounting Office
(GAO)
Extended GAO audit authority to government corporations
Required that budgetary policy be used
to
support
full
employment
Crcatcd the Council of Economic Advisors (CEA) to advise the president
on
economic policy
Provided sanctions for officials knowingly overspending
Expanded presidential impoundment authority
1974 Congressional Budget and Impoundment Control Act
Created a top-down process to integrate fiscal policy making with allocation goals
of'
funding
Changed executive impoundments into rescissions and deferrals
Created Senate and House budget committees and the Congressional Budget Office
Required 5-year forecasting on new programs, and current services, tax expenditure, and credit
1945 Government Corporations Act:
1946 Full Employment Act
1950 Federal Anti-Deficiency Act amendments
program needs
budgets

1986 Gramm-Rudman-Hollings Act
Set deficit reduction targets
to
achieve a balanced budget
hy
199
1
Established procedures for automatic spcnding cuts dispersed equally across social and defense
spending if deficit targets were not met
Set new 5-year deficit targets for 1991-1995
Retained the automatic sequestration
of
military and civilian expenditures when deficit targets
Set
discretionary spending totals
in
defense, international, and domestic spending
Made other process reforms
1990 Budget Enforcement Act
are not met. giving the president some new powers
Federal Deficits and Financing
the
National Debt
1363
nature of
programs
being funded, details on how much wealth and income are being redis-
tributed alnong income groups is not in the budget. Such details would likely increase re-
sistance to expenditures that are regressive, increasing the wealth ofthose already relatively
well off. Rather, the information in the budget is more mundane,

as
shown below.
&&1~1.~, reverrrre.s,
(7ild
budget
oufhorify:
Each federal budget presents estimates of
outlays, revenues, and budget authority for the upcoming year. Both outlay and
budget authority figures are presented by agency, function, and account. Out-
lays are actual federal payments or disbursements during the fiscal year. Out-
lays represent the liquidation
of
an obligation, usually by check or disburse-
ment
of
cash. Most frequently outlays occur
in
the actual year the obligation
was incurred, but not always. Outlays may
also
represent payment of obliga-
tions occurred
in
prior years. Revenues are anticipated receipts and collections.
In
addition to outlays and revenues, the federal budget contains budget author-
ity estimates. Budget authority is the legal authority to enter into obligations
that will result in immediate or future government outlays. The three basic
types of budget authority are appropriations, contract authority, and borrowing
authority. Appropriations are the most common type of budget authority and

represent
a
legislative authorization that permits government agencies to incur
obligations and
to
make payments out of the
U.S.
Treasury for specified pur-
poses. An appropriation usually follows enactment
of
authorizing legislation.
Borrowing authority is the authority that permits an agency to spend borrowed
monies (debt receipts), while contract authority permits obligations
to
be in-
curred
in
advance
of
appropriations or in anticipation
of
receipts.
Presidetztial
success:
The budget provides information
to
assess past presidential
success by including data
on
the most recently completed fiscal year, and

a
re-
vised estimate of the fiscal year still in progress. Presidential requests for ap-
propriations may be compared with actual appropriations.
Five-year projections:
Five-year projections for outlays, budget authority, and rev-
enues have been included in recent federal budgets, permitting trend analysis,
and providing Congress, agencies, and the public with an overview of how the
current budget fits into long-term policy. While 5-year projections for certain
types of budget authorities make government management easier, they
also
re-
duce the flexibility
of
the budget
as
a
fiscal policy tool. Presumably the purpose
of S-year program cost projections
was
to reduce providing members
of
Congress with information about future
as
well
as
immediate costs, allowing
them
to
avoid enacting programs whose costs increase rapidly. These projec-

tions have not significantly reduced deficits, however.
Ecorlomic
projections:
Economic projections for the economy are the basis for bud-
get projections and are
also
included in recent federal budgets. The economic
projections in the budget represent
a
sulnlnary of more detailed projections pre-
sented in the
Economic
Report of’the President.
If these projections are overly
optimistic, they may be used to justify higher spending, which
in
turn may pro-
duce higher deficits.
Currenf services estir~rtrtes:
The
1974
Congressional Budget Act requires the presi-
dent to include current services estimates
in
his budget proposal. A current ser-
vices budget consists of required outlays to maintain the current service level
into the budget year, making changes for adjustments in economic and demo-
1364
Whicker
graphic conditions. The current services estimates provide

a
baseline for com-
paring the requests
in
the president's budget. If inflation is high or economic
conditions are otherwise unfavorable, the president's requests may be higher
than last year's outlays, but still represent
a
decrease in actual service level.
Current services estimates allow Congressmembers to determine whether the
president's requests represent a real increase or
a
real decrease
in
the services
provided. Current services estimates provide useful information for interest
groups lobbying for increased funding by enabling them to argue that services
for group members are being reduced, despite increases
in
nominal funds.
Budgeting Has Been Incremental and "Bottom-Up"
Congressional budgeting, especially before the 1974 Congressional Budget Act, was very
decentralized. Major appropriations bills were examined and marked up by subcommittees
of the appropriations committees of each house. The bills were approved by the various
subcommittees and passed on
to
the full appropriations committee for approval at different
times, sometimes months apart. Before the 1974 reforms, congressional budgeting was
a
bottom-up rather than

a
top-down process." Decision making remained very open to polit-
ical influence, and focused on program issues rather than on economic policy goals.
NO
strong incentive existed for the
full
appropriations committees to consider the
budget
in
its entirety."' First, the appropriations bills were forwarded sequentially at dif-
ferent times,
a
procedure that inhibited examining the budget as
a
single document requir-
ing trade-offs and priority setting. Second, an informal norm
of
reciprocity existed between
members of the various subcommittees. Members of the appropriations committees
in
each
house typically sought assignments to subcommittees that oversaw spending in programs
that affected their own constituencies. Members could then take credit for government
spending that their own constituents favored and increase their reelection potential. Not
anxious to have their own subcommittee legislation overturned or drastically modified by
the
full
committee, members would often give cursory approval to the legislation originat-
ing
in

other subcommittees in exchange for equivalent treatment for their own subcommit-
tee work. While some debate would occur on the floor of each house once appropriations
bills were forwarded, the same incentives to logroll that existed
in
the appropriations com-
mittees diminished the ability of Congress
to
set priorities,
to
encourage trade-offs between
policy areas, and
to
curb deficits.
Incrementalism dominated budget decision making. Little attention was directed to-
ward the budget base, the amount of funds that were appropriated last year.'
'
Most atten-
tion was focused on the budget increment, the additional funds requested for the budget
year. One result of bottom-up incremental decision making was rising federal expenditures
and deficits. An iron triangle based
on
a
common interest in increasing program expendi-
tures often formed between agency officials, the affected interest groups and clientele of
the agency, and the appropriations subcommittee that reviewed budget requests by the
agency. Each side of the iron triangle exerted pressure
to
increase program expenditures.
Affected interest groups and clientele were direct beneficiaries
of

greater funding. Agency
officials preferred directing large expanding programs
to
small
shrinking program+-em-
ployees and clients were happier and life was easier when expenditures were growing.
Since members of appropriations Committees typically gravitated toward subcommittees
that directly affected their constituencies, they
also
preferred program growth
to
program
Federal Deficits and Financing the National Debt
Table
2
Characteristics of Bottom-up and Top-down Budgeting
1365
Characteristics Bottom-up Top-clown
Time frame
Decision mode
Timing of decisions
Initial
focus
Decision strategies
Primary constituencies
Branch strengthened
Pre- I974
Incrementalism
Sequential examination of
appropriations bills only

Budget margin, program issues,
and line items totals
Log-rolling, functional and
geographic specialization and
deference, quadriad power,
padding, use of political gaming
Special interests, subnational
constituencies, specific policy
groups of Iron Triangle
President and the bureaucracy
Post-1974
Constrained trade-offs and
Early examination of the budget
Budget base, economic policy
goals
and
broad functional
Forecasting, expert testimony,
greater emphasis on
analysis and budgetary
justification
National constituencies, finance
and
economic cross-policy
groups
priority-setting
as a whole
Congress
decline. Furthermore, subcommittees that reviewed large growing programs were institu-
tionally more prestigious and powerful than those that reviewed smaller shrinking pro-

grams. (See Table
2.)
Incrementalism led to role-playing and strategies by various budget actors.” Agency
officials, knowing that most attention would be focused on the budget increment, were pre-
disposed
to
ask for additional funds. Sometimes the incremental requests would be padded
or exaggerated in anticipation of cuts by
OMB
and congressional committees. Agencies
that were ordered
to
reduce spending might argue that programs popular in Congress were
the only programs that could be cut, expecting Congress to restore the cuts.
Members of Congress also resorted
to
strategies to cope with the mountains
of
bud-
get detail.I3 In addition
to
focusing primarily on the increment, congressional members
would use spot-checks of the figures in the budget base, assuming that
if
the few items that
were examined closely were realistic and accurate, the remainder of the figures must also
be solid. Since budget bills constitutionally were required to be initiated
in
the House of
Representatives, House appropriations subcommittees could often play

a
more extreme
role-inflating the budget of politically popular programs and slashing unpopular pro-
grams-knowing that the Senate could modify the excess.
Major Budget Actors All Have Incentives for Increasing Federal
Spending
Major budget actors involved in budget formulation and approval all have strong incentives
for increasing funding.
Agency
budget
offices:
Agency personnel are typically advocates of increased ap-
propriations.’‘ The duties of agency budget offices may vary somewhat, but
generally this is where the initial executive budget is developed. The functions
Inay be quite diverse. Agency budget officials, in conjunction with the appro-
priate operating officials, develop budget estimates for programs and offices,
conduct budget reviews, and recommend budget allocations. These officials
1366
Whicker
justify the submitted budget to
OMB
antl to Congress by using financial and
personnel exhibits, budget narrative material, and additional support data.
Agcncy budget officials help prepare aycncy operating personnel for testitnony
bcfore both OMB and Congress. Apportionments and allotments are prepared
by agency budget officials who also lnaintain overall control
of
the agency’s fi-
nancial resources and position allocations. Other functions include ongoing re-
views during the fiscal year, making recommendations for reprogramming ac-

tions and other funding adjustments. Budget officials are also responsible for
assuring sound financial management within the agency and for recotnmend-
ing any changes needed
in
financial management procedures. Budget officers
are usually career civil servants who work closely with politically appointed
agency or department heads.I5 These officers serve as contacts with both the
legislative branch and the public on financial matters of agency concern. Bud-
get work is often repetitive and seasonal. When the budget is being prepared
and deadlines are imminent, the budgct officer may log long hours on the job,
working late
at
night and on weekends. Timeliness of information is crucial.
Budget officials must cope with deadlincs and other pressures, including inter-
est groups anxious to retain program funding.
As
they conduct their analyses,
agcncy officials may interact with clientele, becoming sympathetic with the
clientele’s view that
more
funding is needed. Further, as agencies expand,
so
do career options and the power of agency officials. Working in an expanding
agency is more fun than working
in
one constantly beset by budget cuts. When
judgment calls are made, agency officials, within budget constraints, typically
advocate spending more.
Deptlrt~rlent
b~lget

o~ires:
Department budget offices service the entire federal de-
partment
in
the executive branch rather than a single agency, yet tnany of the
functions and activities
of
department budget officers are equivalent to those
of
agency budget offices. The scope rather than the nature of budget activity dis-
tinguishes the two types of offices. Department budget offices also are gener-
ally advocates for increased appropriations for the entire department. In order
to maximize department resources, however, the office may recommend cuts
in
particular agencies within its jurisdiction. Under a fiscally conservative ad-
ministration, or an administration
in
which the policy area of the department
has fdlen out of favor, the advocacy role
of
the departnlent budget office may
be more muted and subdued.
Oflk
of
MtrrlcrKertlerlr
wtd
B~(yet:
Currently, OMB has the powers of budget de-
velopment and legislative
clearance.

Its personnel include a staff
of
several
hundred budget exatniners who review agency budget requests. Transferred
to
the executive office of the president
in
1939,
OMB has been gaining in power
and prestige since its creation
in
I92
I,
accumulating additional influence and
authority through legislation, execulive orders, and reorganization acts. In
1933,
it gained the power to make, waive, and modify apportionments
of
ap-
propriations, a power previously wielded by individual department antl bureau
heads. This power over apportionment was expanded
in
I950
with the passage
of amendments
to
the Anti-Deficiency Act. OMB was reorganized from the
Old Bureau of the Budget
in
I970

and was given an enlarged mandate.
Its
au-
thority to act
in
the president’s name extends to the entire federal administra-
tion,
as
well as
to
state and local governtnents when federal funds are involved,
Federal Deficits and Financing the National Debt
1367
and to federal contmctors. As
a
result of the 1970 reorganization,
legislative
clearance was
centralized
and most policy decisions were subscqucntly made
by political appointees. Previously, decisions made by the OMB director
011
agency budget requests could
be
appealed over his head to the president by dis-
grLu1tIed agency officials. Aftcr 1970. decisions made by the OMB director
were presented
as
presidential decisions, making appeal much
rime

difficult
;111~1
Llnlikely. The general thrust of the Nixon administration reforms and reor-
ganization was to heighten the role of political appointees and to
make
OMB
111ore responsive to the institution of the president. OMB theoretically t11:ly ad-
vocatc spending cuts rather than incrcascs, especially
in
conscrvative presi-
dential administrations. Even conservative presidents, howevcr, may want sig-
nificant increases
in
defense
and
military spending. OMB
has
not been
particuIarly successful
at
holding down spending in other areas. either.
HOrIsc
B//t/p>t
Cottlttljttcv:
Thc House Budget Committee conducts hearings on the
state of the economy, appropriate levels
of
fiscal stimulus, the need for new
programs, and overall spending priorities. Along with the Senate Budget Com-
mittee, the House Budget Committee is also responsible for developing and

passing
a
first
and
second concurrent budget resolution, which is the framc-
work of the congressional budget. When first established by the 1974 Con-
gressional Budget Act, thc House Budget Committee had
23
members whosc
membership overlapped
in
specified ways with the memberships
of
other pow-
erful financial committees. Five members of the House Budget Committee
came from the Appropriations Committee, five from the Ways and Means
Committee,
1
I
frotn other committees, one from the Democratic leadership,
and one from the Republican leadership. Two more at-large members were
added in 1975, increasing the total membership to
25.
Membership on the
House Budget Committee is on
a
rotating basis,
a
feature that weakens the
committee institutionally vis-h-vis permancnt standing conmittees such

as
Ap-
propriations and Ways and Means. Originally, members could serve only
4
out
of
10
years on the House Budget Committee. Across time, the committee
membership has been cnlarged and the tenure has been made
more
generous.
By the Ninety-seventh Conprcss, the committee had thirty members. Tenure
was lengthened to allow members to serve
6
out
of
10
years before rotating off
the
committee. House Budget Committee chairs may serve
8
out
of
10
years.
In theory, the macroecononlic fiscal targets for total revenues and spending
hold down deficits.
In
reality, partisan clashes on the colnmittec at times have
been divisive. The conmittcc tnust rely

on
tnoml
suasion to persuade revenue
committees to increasc taxes, or authorizing committees to cut spending au-
thority. Thus, the success
of
the Housc Budget Conmittee in holding down
spending has been limited.
Srtrtrte
Bdgot
C'ottttnittee:
Thc Senate Budget Committee,
also
established by the
1974 reforms, fulfills
a
role
in
the Senate equivalent to the role played by thc
House Budget Committee
in
the House
of
Rcprescntatives. Originally the
com-
mittee had fifteen members,
;I
number that had been increascd
to
twenty-two

by the Ninety-seventh Congress. Like other committees, members
of
the Sen-
ate Budget Committec
are
chosen by the Democratic and Republican caucuses.
Unlikc the House Budget Colnmittcc, however. the Senate Budget Committee
is
a
stnnding comtnittee with permanent membership,
a
fact that cnhances its
1368
Whicker
power in the Senate to
a
greater level than the power achieved by the House
Budget Committee. Despite the greater relative power of the Senate Budget
Committee, it was more willing during the era of Democratic control of the
Senate between 1974 and 1980 to accommodate requests by standing autho-
rizing committees than was the House Budget Committee. Generally, the Sen-
ate Budget Committee has been more political and accommodating than the
House Budget Committee, which is known for its greater attention
to
technical
budget detail. Many
of
the limits on increased spending confronting the House
Budget Committee are also felt by the Senate Budget Committee.
Congressiotltrl Budget

Office:
The 1974 Congressional Budget Act mandated that
as-
sist congressional committees and members by specified hierarchy. Foremost,
it is required to provide assistance
to
the two budget committees; secondarily
it provides information upon request to the two appropriations committees and
the two revenue committees. Next it is required,
to
the extent that is practica-
ble, to provide information to additional committees on budget, tax, and eco-
nomic issues. Finally it is charged to provide information
to
individual mem-
bers of the House and the Senate. The CB0 director is jointly appointed by the
speaker of the House and the president pro tempore of the Senate to
a
4-year
term. The CB0 director has the authority to hire experts and consultants
as
well
as
to
use CB0 staff
to
secure information from the various executive and con-
gressional agencies. The 1974 Congressional Budget Act charges CB0 with
providing Congress with two kinds of information-budget analysis and pol-
icy analysis. Several CB0 duties relate to the provision of budget analysis-

the computation
of
budget and tax estimates. One major budget analysis func-
tion is scorekeeping-keeping Congress regularly informed of how enacted
appropriations legislation compares with the most recent budget resolution.
The agency also keeps committees that report spending and tax expenditure
legislation, especially the Appropriations, Ways and Means, and Finance Com-
mittees, informed about the compatibility of their legislation with the most re-
cent budget resolution. Five-year cost projections for every authorizing bill re-
ported by
a
House or Senate committee are the responsibility of CBO,
as
well
as
preparing and issuing an annual report soon after the beginning of each fis-
cal year that projects total spending, revenues, and tax expenditures for the next
5
years. The CB0 produces an annual report by April 1 on alternative budget
courses that Congress might pursue in the upcoming fiscal year with an em-
phasis on fiscal policy and spending priorities. The agency also produces anal-
yses requested by the budget committees on specific aspects of federal policy.
Scorekeeping (data on the amount of money appropriated toward the budget to-
tal
so
far) and other CB0 analyses were designed to curb excessive spending
and deficits. Analyses by CB0 have gained the reputation
of
being more accu-
rate and less biased than executive branch estimates, in part because CB0

serves
so
many masters. Once its estimates and analyses are released to mem-
bers, however, political forces become more powerful. Of major budget actors,
then, CB0 has among the least incentive
to
increase spending, but it does have
some incentive since Congress is its major client, and Congress
as
an
institu-
tion is under pressure
to
spend on constituents. Mostly in CBO, however, the
multiplicity of “bosses,” some conservative, some liberal, some moderate, pro-
vide countervailing pressures, leaving CB0 the most neutral
of
budget actors.
Federal Deficits and Financing the National Debt
1369
ConRI.e.ssiorltr1
c~lrthor-izitzg c.otntllittee.7:
Congressional rules require that a program
or agency must first be authorized before funds can be appropriated for it. A
two-stage decision process results, where program decision making is sepa-
rated from financial decision making, to prevent the appropriations committees
from subsuming the business
of
substantive committees and to avoid an exces-
sive concentration of legislative powers. The sharpness of this distinction has

eroded across time, although precedents in each house govern what should be
separated from appropriations statutes into distinct authorizing legislation. For-
mal procedures for waiving or bypassing the restriction against substantive leg-
islation
in
appropriations bills exist in each house. Traditionally, when
Congress established a new agency it granted that agency a permanent autho-
rization by specifying that the agency continue to operate indefinitely and with
“such sums as necessary” to assure that continuation be appropriated. Perma-
nent authorizations have the effect of removing the authorizing committees
from the annual budget process except when the authorizing committees pro-
posed new programs or modified existing ones. The use
of
permanent autho-
rizations has diminished across time, although they still account for over a third
of the federal budget. Currently, the use of permanent authorizations is con-
centrated in the categories of interest on the national debt; mandatory entitle-
ments such as Social Security, veteran’s benefits, and welfare; and the basic
operations of
most
cabinet departments. With the diminishing use of perma-
nent authorizations, the authorizations process has become an avenue for sub-
stantive committees to express budgetary preferences by authorizing desired
funding levels for particular programs. Increasing numbers of agencies must
now appear periodically before their authorizing comnittees in the first step of
the two-stage process required for securing funding. By limiting the use of per-
manent authorizations, substantive committees have gained a role in the bud-
get process. Agencies now subject to annual authorizations include the State
Department, the Justice Department, and the intelligence agencies. Congress
has begun to use the authorization power

to
control executive actions by in-
cluding specific limitations into the authorizing statutes. Typically, substantive
committees are advocates of greater spending for the programs over which they
have jurisdiction, and the authorized amount often exceeds the appropriated
amount. When the authorized amount exceeds the recommended figure in the
president’s budget, the appropriations committee has been more likely to fol-
low the latter than the former. For most annual authorizations, especially de-
fense, the amount appropriated closely follows the authorized amount. For
many domestic grant programs. however, the gap between authorizations and
appropriations has been widening in recent years. The two-stage process within
Congress that separates authorization from appropriations contributes
to
bud-
get uncontrollability and increased expenditures.
CorlSressiotlrrl r/l~~~r-opr-i~/ti[)l?,s comnittees:
Each house of Congress has an appropri-
ations committee that has the responsibility for appropriating funds for all gov-
ernment programs and agencies. Historically these committees regarded them-
selves
as
watchdogs of the Treasury.’” Until
1974,
few guidelines or restraints
other than the budget estimates in the president’s budget were available
to
the
appropriations committees as they annually conducted their business. Devolu-
tion
of decision nuking from the committee level to the subcommittee level oc-

1370
Whicker
curred within these committees, as it did within other congressional commit-
tees. The 1974 Congressional Budget Act presented the possibility of jurisdic-
tional conflict between the older and established appropriations committees
within each house, and the newly created budget committees.” The first con-
current budget resolution established targets for overall spending levels, as
well as subtotals for major functional areas. Appropriations committees after
the 1974 act had to try to work within the time frame established by the act, and
within the totals established by the budget committees and approved by both
houses
of
Congress. The act changed the role of the appropriations committees
from guarders of the federal Treasury to spenders who must be restrained by
the reformed process. The legislative reforms prohibited appropriations deci-
sions before the passage of the first concurrent budget resolution. Appropria-
tions committees must allocate their share of the budget among their subcom-
mittees before reporting any appropriations bills
to
the floor. Before the House
committee brings any bills
to
the floor, it must review all its bills and report to
Congress on how these bills compare with the first budget resolution. A score-
card accompanies each appropriations bill showing its impact on the congres-
sional budget. Despite the hope that scorekeeping would keep members better
informed of the cumulative impact of their actions and help to lower spending,
members
of
appropriations committees often serve on subcommittees that dis-

perse monies affecting their constituents and therefore have an incentive
to
in-
crease spending in specific areas
to
gain or retain constituent support.
Con~t~~ssionrrl
rcwnw
c~ornmittees:
The House Ways and Means Committee and the
Senate Finance Committee are the major congressional revenue committees.
Originally, the revenue and appropriations functions were combined in one
committee in both the House and the Senate. These functions were separated
into two different committees in the House in
1865
and in the Senate in 1867.
Until the 1974 reform, a formal fiscal policy did not exist; tax policy was de-
veloped by the revenue conmittees relatively independently of the appropria-
tions process. The House Ways and Means Committee was particularly pow-
erful in the
63
years between 191
I
and 1974. During this time, the Democrats
on the House Ways and Means Committee controlled committee assignments
for Democratic house members. Democrats seeking committee assignments
found their institutional fortunes controlled by Ways and Means Committee
members. In 1974, the committee assignment function for House Democrats
was moved
to

the Democratic Steering and Policy Committee. The Ways and
Means Committee, however, continues to attract power-oriented rather than is-
sue-oriented members. The Senate Finance Committee has been dominated by
members from small and Western states. Both committees historically have
been defenders
of
special tax exemptions for many powerful interest groups,
including the gas and oil industry. Since the U.S. Constitution specifies that
revenue bills should be initiated
in
the House, the Ways and Means Commit-
tee continues to wield great power. Such is its importance that regardless
of
the
overall ratio of Democrats to Republicans, it traditionally has had
a
dispropor-
tionatc number of members from the majority party
to
ensure its control. The
Senate Finance Committee has jurisdiction over the nomination
of
the secre-
tary
of
the Treasury, the director of the Internal Revenue Service, tax and cus-
toms court judges, members of the lnternational Trade Commission. the com-
Federal Deficits and Financing the National Debt
1371
missioner of social security, and many undersecretaries and assistant secre-

taries of the Treasury. Since both are prestigious, both revenue committees
have had a membership with greater than average seniority. The revenue com-
mittees, and particularly Ways and Means, are now constrained
to
postpone
any action that changes total federal revenues until after the first budget reso-
lution is passed. Also, as a result of the 1974 reforms, both committees must
now deal more openly with tax expenditures. Tax expenditures are now defined
and estimated. Despite 1974 reforms that attempted to increase collaboration
of the revenue committees with their respective budget and appropriation com-
mittees through the budget reconciliation process, this coordination remains
loose. Revenue committees are under considerable scrutiny when debating tax
increases and are not under mandatory instructions from budget committees or
anyone else to do
so.
Thus, resistance
to
tax increases within the revenue com-
mittees as well as within the entire Congress contributes further
to
budget
deficits.
Ager1c.T clientele md ufected interest
groups:
Powerful interest groups impact on
several aspects of the budget process, but are particularly visible during con-
gressional budgeting. Affected interest groups are vocal proponents
of
in-
creased spending for programs for which they are beneficiaries. While both

high- and low-income groups are affected by budget authority and outlays,
high-income groups
in
particular stand to benefit from tax expenditures that are
part
of
the post-l974 expanded budget process. Traditional tactics used by in-
terest groups include preparing expert testimony for congressional committees,
visiting the offices of members of Congress to present the group’s point of
view, and monitoring congressional progress on key bills to keep group mem-
bers informed. Mass tactics, less frequently used, include organizing mass
mailings and letter-writing campaigns and mass demonstrations.
Much
of
the Federal Budget
Is
Now
“Uncontrollable”
Much of the federal budget is “uncontrollable”; that is, not amenable to change because of
long-term commitments and entitlements.
‘x
For uncontrollable expenditures, the decision
about what total outlays will be in any given budget year has been removed from the an-
nual budget process, and lies elsewhere, is dependent on economic conditions, or both.
Across time, a growing share
of
the federal budget has become uncontrollable. This
trend has alarmed budget watchers who feel that the rapid growth in uncontrollable spend-
ing has contributed to mounting federal deficits and rising national debt. The OMB esti-
mated that

in
1970,63% of the budget was uncontrollable. By 1983, the estimate of the un-
controllable budget share had risen
to
76%.’” Uncontrollable spending is sometimes called
backdoor spending to reflect the fact that growth in these types of expenditures often oc-
curs unobtrusively and unintentionally.
Backdoor spending takes several forms. One form is contract authority, which allows
government officials to make legally binding financial obligations, not necessarily in the
current or budget years, that must be paid at some future date. Contract authority is used
extensively in the procurement
of
large complex defense weapons systems. Borrowing au-
thority is also a form of backdoor spending since it allows government officials
to
make
legally binding obligations that government will liquidate debt at some specified future
1372
Whicker
point. Interest payments on the debt, another uncontrollable category, grow in response to
total debt borrowed and market interest rates rather than explicit decisions by budget mak-
ers. Earmarked funds are also considered to be
a
type
of
backdoor spending, since funds
from
a
particular source may only be spent for
a

designated purpose. The Highway Trust
Fund and Social Security Trust Funds represent examples
of
earmarked funds.
A
fourth and very large category of backdoor spending is entitlement programs that
require the payment of benefits to any person, or unit of government. that meets the eligi-
bility requirements specified in the entitlement program authorizing legislation. Major en-
titlement programs include unemployment compensation, welfare, food stamps, and veter-
ans benefits. In addition to being uncontrollable, entitlement programs tend
to
be automatic
stabilizers, since entitlement expenditures fluctuate countercyclically.”’ When the econ-
omy is booming and inflation is
a
danger, entitlement spending often falls,
as
more people
are incorporated into the mainstream of economic life. When the economy is depressed and
recession is
a
danger, the rising number
of
needy individuals eligible for benefits causes en-
titlement expenditures
to
grow.
By including
a
reconciliation provision, the 1974 reforms attempted

to
deal with
the growth in uncontrollable expenditures. The idea of the reform was that in reconcilia-
tion, the budget committees could direct authorizing committees to tighten eligibility
standards or lower benefit levels if projected spending and consequent deficits were too
high. Except for the early years
of
the Reagan administration, however, when benefit lev-
els and eligibility standards for major social programs were altered to reduce total social
spending and social spending budget share, the reconciliation process has not been used
successfully
to
this end. Even in those years under Reagan, deficits did not decrease
as a
result
of
social spending cutbacks, but rather increased for social spending reductions
were more than offset by increases in defense spending and revenue losses from tax
cuts.”
WHAT HAVE POLICY MAKERS DONE ABOUT DEFICITS
Policy makers have tried several things to address deficits, some substantive, but many
COS-
metic.
Adopt a Statutory National Debt Limit
For many years, the United States has had
a
national debt limit. Once this limit was ap-
proached, if it were not changed, no more borrowing to finance current deficits could
OC-
cur. The debt ceiling, however, has not been effective, since each time

it
is
reached,
Congress and the president jointly increase it. Sometimes the increase in debt levels is tem-
porarily held hostage to an ongoing partisan battle within Congress, or between Congress
and the president, but not for long.
Move Expenditures
Off
Budget
One strategy policy makers have used is
to
nlove federal expenditures off budget,
so
that
they are not counted in expenditure totals and do not increase deficits. Expenses attached
to
various federal credit programs have been moved off budget in this manner, including
costs attached to the savings and loans bailout in the early
1990s.
Federal Deficits and Financing the National Debt
1373
Move Trust Funds Carrying Surpluses on Budget
The Social Security Trust Fund and other funds carrying surpluses have been counted in
the budget total. Even though their earmarking restricts fund expenditures to purposes spec-
ified in the trust funds’ authorizing legislation, the addition of these funds to budget totals
allows their surpluses to be used
to
lower operating deficits. Without the inclusion
of
the

trust fund surpluses, operating deficits would be even higher.
At one point, Senator Daniel Patrick Moynihan (D-NY) introduced legislation to
lower Social Security taxes to reduce Social Security surpluses. Moynihan’s rationale was
that this would force the president to submit
a
balanced budget. This strategy, however, ig-
nored surpluses in other funds, and would have left the Social Security fund with no cush-
ion for future needs. His proposal was not enacted, but trust fund surpluses continue to off-
set operating deficits.
Give Authority for Budget Reduction Recommendations to a
Nonpartisan Commission
When faced with
a
thorny and sensitive political issue, Congress has sometimes delegated
the problem to
a
nonpartisan commission. This strategy worked when controlling the
money supply proved difficult and the Federal Reserve Board-nonpartisan in character-
was created. In the 1980s when the Social Security fund was in trouble for unfunded lia-
bilities,
a
nonpartisan commission was established to study the issue and make recommen-
dations. Although its recommendations were to increase tax rates and modify benefit
structures-politically unpopular solutions that could be used
to
partisan advantage if ad-
vocated by one party or the other-these recommendations were subsequently adopted and
rescued the fund.
When deficits continued to grow during the Reagan administration, Congress tried
the nonpartisan commission solution again, but with less success. The National Economic

Commission was established in 1987. It studied the deficit for almost
2
years and made
a
report, but because deficit reduction must necessarily involve raising taxes-which Presi-
dent George Bush pledged not to do in the 1988 presidential campaign-or cutting expen-
ditures from programs with powerful constituencies, the report was largely ignored.”
Introduce a Structure for “Top-Down” Budgeting
One of the two major goals
of
the Congressional Budget and Impoundment Act of 1974
was to reform budget procedures internal to Congress. The act attempted to centralize bud-
geting, to create
a
structure capable of viewing the budget
as
a
whole, to encourage prior-
ity setting, and
to
curb deficit spending in order
to
reduce the high inflation rates of the mid-
1970s. The act created three new congressional units,
a
budget committee in each house and
a
support agency-the CBO-to help Congress prepare and manage the federal budget. A
major function of the budget committees is to construct
a

congressional budget
as
an alter-
native
to
the executive budget. CB0 was charged with helping the budget committees in
budget preparation,
as
well
as
providing information on tax expenditures and economic
conditions.
The architects of the 1974 reforms wanted to change congressional budgeting from
a
bottom-up, micro-level, incremental process to more of
a
top-down, macro-level, nonin-
cremental process. They had two options:
a
rigid structure that required coordination and
1374
Whicker
formal trade-offs between policy areas once total budget, revenue, and deficit figures were
set, or a less rigid structure that relied more on moral persuasion and reasoning than on rigid
institutional controls. Some conservatives in Congress were anxious to curb mounting
deficits and preferred the more rigid structure.
Liberals, fearful that rigid controls would be used to gut social programs, favored the
less rigid structure. Liberals also argued that rigid controls may lead
to
a failure

of
the in-
ternal congressional budget reforms, causing the entire act
to
be discredited, including the
impoundment portions. Such was the tension between the executive and legislative
branches at that time that liberals carried the day. The 1974 reforms relied on informal
rather than rigid institutional controls to enforce adherence to limits required by previously
established budget totals and the trade-offs such commitment requires.
The revised congressional process sets overall nonbinding targets for budget author-
ity, budget outlays, and deficits.’’ Recommended levels of federal revenues, federal debt,
and the amount to increase the statutory debt ceiling are established. The act does not re-
quire either
a
balanced budget
or
a
reduction in national debt. Specific targets are devel-
oped for budget outlays and budget authority for each
of
nineteen major functional cate-
gories in the budget, such
as
national defense, international affairs, commerce and housing
credit, income security, and health. Initially, congressional debate centered on the first and
second concurrent budget resolutions within each house. Across time, the second concur-
rent resolution was largely abandoned and the reconciliation process-in which budget
committees direct the appropriations committees to cut funds, the taxing committees to
raise new revenues, or the authorizing committees to change benefit levels and eligibility
requirements-was moved up to closely follow the first concurrent resolution.

The 1974 reforms have been modestly successful in some areas, but not in control-
ling federal deficits. As a result of the 1974 act, congressional budget decision makers have
more information than ever before. Previously relying
on
the executive branch and interest
groups for information about programs, Congress now may use data collected by the CB0
and budget committee staffs. Further, information is available linking the impact
of
pro-
gram level decisions to fiscal policy goals.
Despite this, the economy was not noticeably improved in the late 1970s in the ini-
tial years after the reforms, and some attributed the decline in inflation during the first Rea-
gan administration to executive branch initiatives rather than to congressional ones. In 198
l
during the Reagan honeymoon period when the presidency was receiving favorable politi-
cal coverage, the congressional budget was virtually ignored and the executive budget was
adopted almost in its entirety. In addition, the reformed congressional budget process has
not noticeably dampened rising deficits.
The 1974 reforms created
a
structure to force discussion on economic policy goals
as
well
as
the impact of federal expenditures upon those goals, but it could not and did
not
force consensus on those goals. Conservatives and many Republicans continue to place
a
higher priority on curbing inflation, while liberals and some Democrats continue to place a
higher priority on reducing unemployment. Similarly, the reforms created

a
structure to
force discussion on the necessity for trade-offs between different policy areas
so
that an in-
crease in spending in one area would imply
a
decrease
in
another. But
it
could
not
and did
not require consensus
on
what those trade-offs should be.
Some inside budget observers argue that the 1974 reforms worked reasonably well in
the pre-Reagan years between I974 and 198
1
if
success is measured by the resulting levels
of federal deficits and debt and by process deadlines being met, although interest rates and
inflation were high.
In
the Reagan years after 1982, separated
from
the earlier period by the
Federal Deficits and Financing the National Debt
1375

watershed Economic Recovery Tax Act of 198
I,
neither process nor results were satisfac-
tory. This act eliminated
$750
billion
in
revenues over a 5-year period, or
$150
billion a
year, virtually assuring massive deficits and an uncontrollable budget. Nor were process
deadlines met
in
the Reagan years. Relatively uninhibited by the 1974 budget structure,
congressional Democrats competed with congressional Republicans and President Reagan
to see who could give away the greatest share of benefits and contracts through tax cuts and
spending increases, particularly in defense. After leaving office, David Stockman, Rea-
gan’s OMB director at the time, described the early Reagan years as a period where “the
greed level, the level of optimism just got
out
of control.”‘“
Because the 1974 top-down reforms did not curb deficits, additional reforms have
been proposed, most dealing with modifications of the budget process, rather than specific
content of the budget. Executive branch reforms have typically emphasized efficiency,
which indirectly would lower budget totals by achieving more with less. Other proposed
reforms are to directly reduce federal deficits.
Introduce Budget Reforms
to
Enhance Efficiency
Several budget reforms have been introduced in the executive budget process oriented to-

ward increasing efficiency and rationality in budget formulation.” While these do not di-
rectly reduce expenditures, by achieving service delivery and other government outputs
with less inputs, one goal of efficiency is to lower deficits. The politics of budget reform
are such that reformers usually must oversell the merits of their proposals
to
overcome in-
ertia and resistance to change. Initially a flurry of excitement occurs and expectations rise.
Since the reform was oversold and since much of the resistance to change is quite real, dis-
appointment and disillusionlncnt soon set in. Dramatic changes do not occur and the bud-
get reform is pronounced a failure, yet a residue of increased rationality may remain after
the reform has been formally abandoned.
One such reform was the programming, planning, and budgeting system (PPBS). first
introduced
in
the federal government
in
the Defense Department in the
1960s,
which
stressed the use of analysis
in
the early stages of the budget cycle. Program budgeting and
the greater use of data associated with programs were advocated. Output nleasures and
5-
year projections beyond the BY were to be employed. Special studies and analyses were
to
accompany specific major program issues. While eventually abandoned as unwieldy, many
of the procedures advocated by PPBS, such as 5-year projections and the increased use
of
analyses, were incorporated into the 1974 congressional budget reforms.

A
second executive reform was nlanagement by objective (MBO), urged upon fed-
eral departments and agencies by the Nixon administration. It called for the establishment
of
specific objectives for agencies and required regular high-level periodic reports on
progress toward agency objectives. While this reform also died an early death. some agen-
cies incorporated various aspects of it
into
their operating procedures.
The Carter administration pushed a third executive budget reform-zero base bud-
geting (ZBB).
A
bottom-up approach, ZBB required program managers
to
create decision
packages that link budget figures with activities and objectives. These packages were
ranked at each successively higher level of authority. High-ranking packages were funded,
while lower-ranking packages may not receive funding. This approach was designed to en-
courage an annual examination of the budget base as well
as
the budget increment. While
portions of the process have been retained, the procedure generated excessive detail and
proved cumbersome.
1376
Whicker
Advocate Constitutional Amendments to Deal with Deficits
In the 1970s, an amendment to the
U.S.
Constitution mandating a balanced federal budget
was endorsed by many state legislatures who passed resolutions requesting the Congress

call
a
constitutional convention to approve the amendment.'" This movement fell two states
short of the necessary number to initiate a constitutional amendment
in
this fashion.
In
the
198Os, President Reagan proposed the amendment
as
a
solution to historically large deficits
accruing during his first term, but with no greater success in passing it."
Generally, conservatives have favored the balanced budget amendment while liberals
have opposed
it.
Critics argue that
it
would vitiate the use of the federal budget
as
a stabi-
lization tool
to
achieve fiscal policy goals, and would not directly address the sources
of
pres-
sure for rising federal expenditures. Proponents argue that safeguards could be built into the
amendment
so
that its provisions could be overridden

in
the event of
a
fiscal emergency.
Another amendment to the
U.S.
Constitution, the presidential item veto amendment,
would give the president the authority to veto specific line items within appropriations bills.
This reform has been urged by recent presidents, but has not been adopted. Current inter-
pretation of presidential veto power requires that the president either sign into law or veto
an entire bill, and does not give him the discretionary power to judge specific narrow parts
of budget authority. Yet governors in forty-three states have item veto power. Proponents
agree that this additional presidential power would help
to
hold the line on deficits, while
critics are skeptical and fearful that presidents would use the power to thwart congressional
intent. The presidential item veto joins
a
long line of budget reforms that, whatever their
economic intent, have tapped long-standing partisan and institutional conflict.
Enact the Gramm-Rudman-Hollings Deficit Reduction Legislation
The focus of budget reform efforts has been on directly lowering deficits. While neither of
the proposed constitutional amendments was successfully adopted, the 1985 Gramm-Rud-
man-Hollings Act was enacted. Despite continual modification
of
the federal budget pro-
cess, by mid- 1985 signs of continuing difficulty were plentiful.'x
In no year since 1977 had all thirteen annual appropriations bills that in total consti-
tute the federal budget been delivered by Congress to the president for approval
by the beginning of fiscal year set in the 1974 ac~, October

I.
In two fiscal years, 1986 and 1987, none of the thirteen appropriations bills had been
sent to the president by the beginning ofthe fiscal year,
so
the entire federal
government in those years began the new year operating under a continuing
resolution.
The first concurrent budget resolution was usually passed from
I
to
4
months behind
the scheduled date of May
1
S,
the second resolution had been abandoned, and
often appropriations bills were being passed before, not after, the prerequisite
authorization bills.
In short, the budget process was
in
disarray by the 1980s,
a
problem Shuman, a bud-
get insider, attributed to the following four factors:
The 1974 act made the budget process more complex, with sometimes-as
in
the
case of the second concurrent resolution and reconciliation process-unrealis-
tic completion dates.
Federal Deficits and Financing the National Debt 1377

President Ronald Reagan had overloaded and overwhelmed the Congress with more
controversial budget and tax proposals than members could digest and act on
in a
12- no nth
period.
Some Senate lnelnbers insisted on attaching “riders””unre1ated amendments and
provisions-on highly controversial social issues such as abortion, prayer in
the schools, and busing to authorization and appropriation bills, ignoring the
rule that such riders be germane to the bill.
Periodically House Democrats and Senate Republicans would deliberately delay ap-
propriations bills to gain tactical advantage.
Most troubling, however, was the growth
in
federal deficits, which increased from
the range of $40 billion
to
$80 billion in the post-Congressional Budget Act pre-Reagan
years between 1974 and 1981 to the range of $80 billion to
$220
billion in the 1980s. The
national debt almost doubled in
4
years, from $914 billion in 1981 to $1,827.5 billion in
1985. Confronted with swelling deficits and national debt, conservatives in Congress re-
sponded by proposing the Balanced Budget and Emergency Deficit Control Act
of
1985,
informally called the Gramm-Rudman-Hollings Act (GRH) after its primary sponsors.
Senator Rudman, one of the sponsors of GRH called it at the time of its passage “a
bad idea whose time has coIne.”20 Its two centerpieces were

a
schedule of deficit targets de-
signed to balance the budget by 1991 by reducing the deficit an additional
$36
billion in
each of
5
years, and a mechanism for automatic budget cuts that were to be activated if
Congress failed to meet those targets. The act allowed for postponing the deficit reduction
if
a recession occurred and negating it in the event of war. Proponents of GRH argued that
only such a drastic measure could withstand the political pressures from special interest
groups for increases in spending. Opponents argued that the law represented a meat cleaver
approach to financial decision making.
The process of cutting funds was called sequestration. Its activation would cause suf-
ficient amounts to be automatically withheld from appropriations to meet GRH totals. Cuts
were to occur equally
in
defense and social spending, with certain programs exempted in
each category. In defense, contracts such as those
on
large weapons systems to which the
government was legally obligated to make payments were exempted, while on the social
spending side, Social Security, reflecting
in
part the growing political power of an enlarg-
ing older population, was exempted. These were not the only areas protected from cuts,
however, since more than forty-five programs were totally exempted from reduction. Once
a decision
to

sequester was made, little discretion remained since the amounts to be cut and
where the cuts were
to
occur were specified by law.
While ascertaining that sequestration was required seems like a technical issue,
in
re-
ality
it
became political. Estimates of budget deficits may vary widely, depending on the
assumptions that are made about overall economic growth and therefore federal tax re-
ceipts. Optimistic estimates
of
economic growth will produce higher estimates
of
tax re-
ceipts and lower deficit estimates, while with pessimistic expectations of economic growth,
federal tax receipts will be lower and budget deficits will be larger. Controlling the eco-
nomic projections and estimates
of
tax receipts means controlling
in
some instances esti-
mates of deficits and therefore whether or not GRH sequestration is required.
Shortly after its passage, the constitutionality of the implementation of the seques-
tration process was challenged by Congressman Mike Synar (D-OK) and eleven col-
leagues. The initial law required the comptroller general, the head
of
the General Account-
ing Office (GAO), to activate the sequestration. Congress placed the GAO comptroller

in
1378
Whicker
charge of deficit forecasting to reflect its greater trust in GAO estimate accuracy over ex-
ecutive branch accuracy. The OMB estimates, by contrast, have sometimes been less ac-
curate, due
to
political pressure to make the most optimistic economic assumptions
as
pos-
sible
so
deficit estimates will be
as
low
as
possible. The Supreme Court, however, found
that having the GAO comptroller determine if and when GRH provisions would be acti-
vated violated the separation
of
powers principle. The Court argued that the GAO
comptroller was an agent of Congress, the legislative branch, not the executive branch,
since unlike executive branch officers the GAO comptroller could be removed by Congress
through
a
joint resolution. The court found this infringed on the executive duties to faith-
fully execute the law and therefore violated the separation
of
powers.
Anticipating that the triggering mechanism for sequestration may be found unconsti-

tutional, Congress actually provided for
a
challenge in the law itself and for
a
quick
Supreme Court review,
as
well
as
a
backup trigger mechanism. After the Supreme Court
decision, the backup trigger mechanism became effective. It calls for the CB0 and OMB
directors
to
issue
a
joint report on August
20
to
a
temporary joint committee of Congress,
consisting of members of the House and Senate Budget Committees. The committee re-
ports
a
joint resolution to Congress on needed sequestration amounts within
5
calendar
days. Each house then has
5
working days to vote final approval on the resolution before it

is sent to the president. Typically, Congress is in summer recess during this period in late
August and early September. In election years, such
as
1988, this resolution addressing the
deficit is scheduled for consideration in September, only weeks before the election, plac-
ing great pressure on Congress to approve overly optimistic projections and to find alter-
native strategies for dealing with deficits.
Initially, Congress used “smoke and mirrors,” including selling federal assets, using
accounting maneuvers, and moving some federal outlays off budget. The surplus in the
So-
cial Security Trust Fund that grew after reforms in 1983 increased taxes and altered some
benefits, was used to offset federal expenditures and lower the deficit, even though Social
Security fund are earmarked for that purpose only. Great pressure was exerted
in
1988 and
1989 to keep funding of the savings and loans thrift “bailout” off budget
as
well. Even
so,
the revised target
was
supposed
to
be $100 billion for 1990, but $140 was anticipated. By
the Bush administration, some observers felt that the federal deficit had gotten “stuck’ at
around $150 billion. Despite numerous budget summits between key budget process actors,
no easy solution
to
large federal deficits appeared in sight.
Adopt the Budget Enforcement Act of

1990
A massive disagreement over the FY 199
1
budget provoked yet another process reform
to
deal with federal deficits. In the fall
of
1990, OMB director Richard Darman presented
bleak figures to Congress. Because of the decline in the economy and the massive increase
in funds needed for the savings and loan bailout3”
The
FY
1991 deficit was projected to be $168 billion, not the anticipated $100 bil-
Including the
S
&
L
bailout funds for that year raised the deficit to
$23
I
billion.
Removing the “masking effect” of the Social Security Trust Fund surplus raised the
The
FY
1990 budget deficit was also raised from its previous estimate
of $100
bil-
lion.
deficit to $280 to
$300

billion.
lion
to
$1
6
l
.3
billion.
Federal Deficits and Financing the National Debt
1379
Congress was deadlocked, and long days were spent hammering out
a
budget agree-
ment. Public confidence in Congress and government plummeted; President Bush was
forced to abandon his 1988 campaign pledge of no new taxes, an abandonment he later re-
tracted in the 1992 presidential campaign when attacked from the right in Republican pri-
maries by challenger Pat Buchanan. Budget stalemate led to threats to close government
down over the 3-day Columbus Day weekend. After
2112
months of negotiation,
a
5-year
budget agreement was adopted, reducing spending by
$500
billion over
5
years between
1991 and 1995. This legislation was technically Title
XI11
of the Omnibus Budget Recon-

ciliation Act of 1990 (OBRA). Title
XI11
is called the Budget Enforcement Act of 1990.
The following are the two main features of the agreement:
Most of the reductions would not occur in the first
2
years but in the last
3
years. Only
23% would occur in the first
2
years; the remaining 77% in the last
3
years.
The reductions were not absolute cuts, but rather cuts from the “current services base-
line estimates” (last year’s budget adjusted for economic growth, inflation, and
other factors).
Subject
to
changes from presidential reestimates, projected moving deficit targets un-
der the 1990 budget agreement were $327 billion for 1991, $3 17 billion for 1992, $236 bil-
lion for 1993,
$102
billion for 1994, and
$83
billion for 1995. The 1990 Budget Enforce-
ment Act also included various process reforms, and effectively vitiated the earlier targets
of GRH. Sequestration, or automatic cuts in spending if deficit targets were not met, still
are to be applied
as

under GRH
to
military and civilian accounts separately. Discretionary
spending ceilings brought about by
a
special sequestration procedure applied to three broad
categories: defense, international, and domestic spending. A pay-as-you-go “minise-
quester” could also be enacted. Budget actors remained optimistic that the 1990 agreement
would be more successful
in
curbing deficits than its predecessors, but basic pressures driv-
ing federal spending and deficits upward were not altered.
CONSTRAINTS
ON
RAISING TAXES
TO
LOWER DEFICITS
Lowering expenditures is only one of two possible approaches to lowering deficits. The
other is
to
raise revenues by raising taxes. Confronted with
a
decentralized and politicized
budget process and
a
budget that is largely uncontrollable, why have politicians not raised
taxes to lower deficits? The political reality of raising taxes, however, is if anything more
difficult than lowering expenditures.
By the
1980s,

a
pledge of “no new taxes” from politicians was almost
a
political lit-
mus test for voter approval. Politicians who acknowledged in the heat of
a
campaign that
they would support raising taxes, such
as
Democratic nominee Walter Mondale did in the
1984 presidential race, went down to resounding defeat. Politicians who railed against new
taxes, such
as
incumbent present Ronald Reagan did, won by large margins. The key ques-
tion for policy makers, then, has been how to raise adequate tax revenues
to
fund govern-
ment in
a
democracy in the face of widespread resistance, and during the Reagan years un-
der the supply-side economics, drastic cuts in taxes, especially for the rich. Several
constraints operate on the ability of policy makers
to
raise taxes
as
demands
on
government
grow.
I

.
Low
ttr.ves
reltrtive
to
other
r~trtio~s cretrte
e.vpectntion.s
oj’cmtirluetl
low
ttrscs.
Despite the seemingly onerous burden of
U.S.
taxes, they remain lower than those
of
most
1380
Whicker
advanced European countries.” In 1984, after the early Reagan tax cuts, taxes in the United
States constituted 29% of GNP. While Japan’s taxes constituted
a
lower percentage of GNP
(27%) and Australia
(3
1
%)
and Canada
(33%)
slightly higher percentages, of European na-
tions besides Switzerland

(32%),
only Germany and Britain (at about 38%) were below
40%. Austria, Belgium, Denmark, France, Italy, the Netherlands, and Norway all taxed at
percentages ranging between 40% and
50%,
and Sweden’s taxes exceeded
50%
of
GNP.
Yet relatively low U.S. taxes do not give policy makers greater room
to
maneuver for more
revenues to fund government; rather, low taxes have created an expectation that taxes will
remain low. These expectations,
in
turn, fuel resistance
to
higher tax levies.
2.
Taxes
trlrecrdy
constitute a
lcrrge
dollar
volume.
Because the U.S. economy is
large, the volume of taxes and other government funds is large-$844,949,000,000 for all
levels of government in FY 1986.’’ Of this, $471,898,000,000
was
collected by the federal

government, $228,054,000,000 by state governments, and $144,997,000,000 by all forms
of
local governments. By FY 1988, total receipts for the federal government totaled
$909,200,000,000. In political debate, these large numbers seem overwhelming
to
many
citizens struggling to make ends meet, who erroneously conclude that such
a
huge dollar
volume should be adequate if only politicians were not evil and corrupt.
3.
Heavy reliance
is
placed
on
highly
visible
trrld
despised income ttrxes.
Compared
to other nations, the United States relies heavily on individual and corporate income taxes,
which constitute 42% of tax revenues for all levels of government combined. This percent-
age is somewhat higher for the federal government
(55%)
and lower for state and local gov-
ernment (21
%).
When rate structures are progressive, income taxes are the “fairest” of taxes,
according to the ability to pay principle. Yet citizens do not judge income taxes to be fair.
Perhaps because withholding is taken from weekly or monthly paychecks, and the process

of calculating annual taxes every year by April
15
is visible and troublesome, citizens hate
the income taxes more than other taxes, increasing resistance to tax hikes.
4.
The
growing
reliance
on
payroll
ttr.ue.7
rrlso
increases
resistrrrwe.
The impor-
tance
of
payroll taxes, mostly in the form of Social Security taxes, has been increasing in
recent decades, and currently makes up over
a
third of revenues
at
the national level and a
fifth
at
state and local levels.33 These payroll taxes, like income taxes, are highly visible,
increasing resistance, with the additional disadvantage of being regressive.
5.
Ttrx
overlap occurs

crcross
levels
of‘
govertttnent contributing to
resenttnent
cf
“overttrsation.
”
Both the federal and state governments have separate constitutional au-
thority to tax, and this contributes to tax overlap, especially between the federal and state
governments. Considerable tax overlap exists at all three levels of government. While some
specialization exists, with the federal government relying most heavily on income taxes,
states on the general sales tax, and local governments on property tax, tax policy more
closely resembles the “marble cake” model of federalism, rather than the neatly categorized
“layer cake” image. States also tax income. Three-fourths of the states have both sales and
income taxes. Some localities have
a
payroll tax in addition to Social Security at the fed-
eral level. Multiple governments taxing the same income or asset adds to taxpayer feelings
of being overtaxed.
6.
The
federal
governtnent
rL1ise.y
the
most
ttrxes,
cw~tt-ibrrtincq
to perceptiotls that

big
governtnent
is
getting bigger.
The federal government remains the “rich Uncle
Sam,“
collecting 63% of all government revenues. The federal government appears
to
be the most
distant and remote to citizens. Because the biggest government collects the most taxes,
some citizens perceive that big government is getting bigger. Further,
as
concern over fed-
eral deficits has grown, intergovernmental transfers from the federal government
to
state
Federal Deficits and Financing the National Debt
1381
and local government have shrunk. Tax revenues have been increasing at the state and
lo-
cal levels, partially to offset recent declines in federal grants, further contributing to per-
ceptions that government taxing is
out
of control.
7.
Conrpnrtrtive cwlstrrrlcy in the
U.S.
tar strrrcture
11rr.s
incwased resistmce to

t~e~i
ttr.res.
The current
U.S.
tax structure has remained relatively constant since World War
11,
when the federal government substantially increased individual and corporate taxes, in
part to fund the war. Changes since then, including lowering the tax rates, increasing ex-
emptions and personal deductions. and raising payroll taxes, have not altered the basic
structure of the system. The relative constancy of the tax structure made the introduction of
new taxes already used in other countries, such as the value added tax (VAT), more con-
troversial.
8. Tm
policy
llcrs
beerr
rrsed
us
(rtl
illstrlmetlt
jiw
strrbiliwtiorr
nrld
redistrihutiorl.
which sometin1e.s rrtldcrclrts the
god
of'
r(ri.hcq revc~~rres to
jirrlcl
govertrrllerlt.

Tax policy,
particularly involving tax cuts, has been used in the past for stabilization: to increase per-
sonal savings, to stimulate investment, to reward businesses for hiring minority workers,
and
to
reduce unemployment. Capital gains reductions were passed
to
stimulate invest-
ment. Tax cuts such
as
oil depletion allowances have had redistributive effects, rewarding
some producers over others. Other tax cuts have helped one income group over others. Tax
incentives have also been used
to
encourage energy efficiency. Sometimes proponents of
these cuts argue that in the long run growth will occur and the tax base will increase, but
each one
of
these cuts reduces the immediate tax base and undercuts the goal of producing
adequate revenues to fund government.
9.
Very
little progressive redistributiorz
occurs
throrqh the tar svstenl,
so
110
otle
supports ttrses
becurrse

they
crre
,sr~~~.st(rt~ti~~ll~l relativelv better
off:
The tax system is only
marginally redistributive. Depending on the assumptions made about who bears the burden
of indirect taxes, the system
as
a whole is either proportional or mildly progressive. State
and local taxes remain both regressive and less responsive
to
growth. Low- and middle-in-
come groups, then, do not become better off relatively as
a
result of tax policy. If they did,
resistance
to
increases in taxes might diminish. The affluent are best off from low nonredis-
tributive taxes, since progressive taxation would hit them harder. Thus, the nonredistribu-
tive nature of the overall tax system keeps high-income groups happy with low taxes. and
the lack of redistribution does not encourage low- and middle-income groups
to
lower tax
resistance. Higher taxes to them, in
a
nonredistributive system, would mean they were no
better off relatively, and were worse
off
absolutely with lower personal disposable incomes.
10.

Citizens ,yet little
ji)rmcrI
edrrcation crborrt tcrxes
crrrd
the
role
oj',qovert1mcnt in
the
ec~)r~on~y.
Despite the fact that concepts dealing with taxes are no more difficult than
those dealing with calculus, finite mathematics, elementary chemistry, beginning physics,
or biology, all of which are regularly taught
in
high schools, basic information about taxes
and the role of government in the economy are often not taught. When one-fourth of all
high school students drop out prior to graduation, and one-half
of
those graduating go into
the labor force rather than immediately to college, wide exposure to tax concepts must be
available
in
high school or even earlier grades
if
most citizens are to learn them. Yet taxes,
the only inevitability confronting all citizens other than death, are not systematically taught.
When taxes are covered,
it
is usually either within a civics course or in the context
of
a

course designed to praise free enterprise and markets
as
the only organizing principles for
economic activities. Government is often
in
this context excoriated
as
being bad and inef-
ficient. Thus,
a
lack of education and biased education further bias citizens against taxes to
fund government services.
1382
Whicker
TAXESHAVENEVERBEENPOPULAR
Taxes have been controversial and unpopular throughout the nation’s history. Previous tax
battles often pitted one group or political party against another. How revenues were raised
in earlier years set the stage for tax policy debates today.
Early Taxes
In the nation’s infancy,
as
now, how to raise revenues for public purposes was a hotly de-
bated matter. While there was considerable consensus about the appropriateness
of
tariffs,
both
to
provide government revenue and to protect domestic industries, varied opinions ex-
isted about other methods
for

raising government revenue.
Assuming the Federalists’ position, Alexander Hamilton argued strongly for full re-
payment of Revolutionary War debt and for the use of tariffs
to
protect manufacturing.
Manufacturing represented the future
of
the country in the Hamiltonian vision
of
it, and tar-
iffs, despite their negative impact on consumers and southern plantations, were necessary
to shield budding industries from foreign competition. The nation adhered to many
of
Hamilton’s positions
on
fiscal affairs. After the 1787 constitutional convention, the federal
government established the First Bank of the United States
to
pay off Revolutionary War
debt, and in
I79
1
also assumed the debts of the states. Public monies in those early days
were raised through customs duties and excise taxes on whiskey, carriages, snuff, sugar,
and auction sales.”
This first tax system has been described
as
an economic success but
a
political fail-

ure. Anti-Federalist groups, disgruntled with the revenue system, contributed to the re-
aligning election
of
1800
and the election
of
anti-Federalist Thomas Jefferson to the presi-
dency, after two Federalist presidents, George Washington and John Adam. Among them
were farmers, consumers, and large land owners hurt by tariffs, excise taxes, and Hamil-
ton’s sound money policies.35
Extensive changes were made in the
U.S.
tax system between 1800 and the War
of
1812,
during the presidencies
of
Jefferson and James Madison. These presidents abolished
excise taxes, used land taxes to encourage western settlement, and lowered tariff rates. De-
spite this, the strength of the economy produced substantial tariff revenues until the War
of
18
I2
cut off trade, resulting in
a
reimposition of excise taxes. Tariffs remained the main-
stay of federal revenues for the next hundred years, producing rare agreement between the
two political parties. Democrats, in principle, often preferred lower tariffs than did Repub-
licans, but in practice often argued for tariffs on different commodities than Republicans,
depending on their respective constituencies. Increasingly,

as
the South grew more depen-
dent on cotton, it grew more resistant to tariffs,
so
that the major differences over taxes were
regional rather than partisan. Further, tariff revenues were unstable and depended on na-
tional and international trends
in
trade, business cycles, and wars, all largely beyond the
control of the
U.S.
government.
Civil
War Taxes
In the period between 1841 and 1860, preceding the Civil War. government control was di-
vided, alternating between the Whigs and the Democrats. Democrats managed
to
lower tar-
iffs early in the period, only to see them raised again when Whigs gained control
of
both
houses of Congress. Most
of
the high tariffs Republicans imposed during this period re-
Federal Deficits and Financing
the
National Debt
1383
mained
in

effect
until
1892, when Democrats recaptured control of the national govern-
ment.
During the Civil War, two major changes introduced into tax policy were
a
progres-
sive income tax and an inheritance tax. Republicans, the wealthier partisans, supported
a
broad application of the income tax, but in
a
position that foreshadowed the modern capi-
tal gains exclusion, opposed applying
it
to income from stocks, bonds, and land sales. The
progressive rate structure was abolished immediately after the war in 1867, and the income
tax itself was abandoned in 1872.
The growing industrial elite shaped post-Civil War taxes,
so
that revenues fell
as
a
proportion of GNP and heavier tax burdens were placed on consumption than on produc-
tion. Excise taxes on liquor and tobacco were adopted for moral purposes, but also had
a
regressive impact, placing
a
greater burden on the poor. Neither individual nor corporate
incomes were taxed. Protest from farmers and workers built up against high tariffs, hard
money, and lack of credit?’

Early Income Tax Policy:
1894-1
930
Despite broad support for an income tax from populists, Republicans disagreed and were
supported by
a
reversal of the Supreme Court
on
the issue. Previously judged
to
be consti-
tutional, the Republican-dominated U.S. Supreme Court of the period reversed
a
century of
precedents
to
rule that
a
tax
on
incomes was
a
direct tax and therefore was unconstitutional.
Republicans remained the majority party, despite
a
realigning election in I896 that changed
the basic composition
of
each party rather than throwing out the party in power.
By the early 1900s, Republican progressives, led by Theodore Roosevelt, advocated

a
progressive income tax. By that time, the United States had become
a
net exporter and
found high tariffs to be an impediment. Eventually, some conservatives
also
supported the
Sixteenth Amendment, which allowed
a
progressive personal income tax, in an attempt to
avert
a
proposed tax on corporate income. When the United States entered World War
I,
the income tax was already in place and was increased
to
fund the war effort. It soon be-
came the major source of federal revenue, surpassing tariff revenues.
After World War
I
revenues subsided, but not
to
their original level, despite the urg-
ings of Secretary of the Treasury Andrew Mellon-now recognized
as
an early advocate of
supply-side economics-to reduce taxes on business and individual wealth. After the crash
of
1929, President Hoover increased taxes
as

classical economic theory advocated to reduce
a
growing federal deficit. In 1930, to increase federal revenues, Congress approved the
highly protectionist Smoot-Hawley Tariff, now widely credited with further depressing the
economy and lengthening and deepening the depression. Discontent over these policies con-
tributed
to
the realigning election of 1932 and the return of Democrats
to
national power.
New
Deal Taxes
The depression forced President Roosevelt
to
deficit-finance government expenditures.
A
payroll tax was enacted
to
finance Social Security on
a
“pay-as-you-go” basis. The tariff
became
a
foreign policy tool largely controlled by the president, rather than
a
domestic pol-
icy tool that had preoccupied Congress, and by the beginning of World War
11,
it was no
longer

a
significant source of federal revenue.
Despite Franklin Roosevelt’s campaign rhetoric about shifting the tax burden from
the lower classes
to
the middle class and the rich, many New Deal taxes were regressive,