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Congress’ Broken Budget System Helped Create Inflation
Controlling government spending and debt via budget reform would help maintain stable prices
By Kurt Couchman
With inflation at a 40-year high and the economy slowing, the American people are hurting. The Federal Reserve is scrambling to bring the money supply back in line with the economy’s real output. The public correctly blames inflation on mistakes by Congress and the White House and the Federal Reserve. Often overlooked, however, is the contribution of dysfunctional federal budgeting. Congress’ broken budget system fails to check bad ideas and magnifies mistakes. Important repairs include adopting well-crafted budget targets, managing the budget holistically and ending the threat of government shutdowns.
Debt, Inflation and the Pandemic
Over the past 20 years, the Fed’s ultra-low-interest rate policies have convinced policymakers that borrowing is cheap. Officials from both parties have run up the debt in good times and bad. From March 1, 2001, to March 1, 2020, federal debt held by the public grew 205%, from $5.7 trillion to $17.4 trillion and from 32% of GDP to 79%. It jumped another 20 percentage points of GDP during the pandemic.
Granted, much of the $3.9 trillion bipartisan pandemic response made sense, and emergency response is part of sound budgeting. Yet after getting full control of Congress and the White House, congressional Democrats abused the budget reconciliation loophole—budget reconciliation bills require a simple majority in the Senate instead of the three-fifths majority needed for almost all other legislation—to push through the mostly wasteful $1.9 trillion American Rescue Plan in March 2021. In other words, they used budget reconciliation, a process intended to manage spending and revenue to reduce the deficit, to pass partisan legislation that only made things worse.
Just then, inflation started taking off as the Fed seemed to lose control of monetary policy. It bought most of the new debt generated during the pandemic, expanding its assets and therefore the money supply. While these purchases were understandable and necessary at the start of the pandemic to stabilize the overall money supply and prevent deflation, the problems from too much federal debt are now showing up as inflation and the erosion of the U.S. dollar as the leading global reserve currency.
Had there not been so much pre-pandemic federal debt, the Fed might not have worried about a lack of demand during tough times. It might have retained more flexibility and more independence from Congress. Unfortunately, Congress’ broken budget system does nothing to check the debt growth, nor does it promote sober budget management.
Well-Crafted Budget Targets
The federal government lacks effective budget controls, but it needs them. States are supposed to balance their budgets each year. Some are looking to upgrade their rules to balance over the business cycle, which produces more policy stability than balancing annually, reduces uncertainty for the public and lets policymakers focus more on higher-value policy questions and less on short-term budget tinkering. That way states can build up reserves during the good years to draw from during recessions and emergencies. Several countries, including Switzerland, already do that.
Related legislation has been introduced in Congress. Sen. Mike Braun (R-Ind.) and Rep. Jodey Arrington (R-Texas) offered the Business Cycle Balanced Budget Amendment, a proposed amendment to the U.S. Constitution, to limit spending to a rolling average of the last three years of revenue. Sen. Braun and Rep. Tom Emmer (R-Minn.) introduced the Responsible Budget Targets Act, a statutory gradual transition to balancing revenue and noninterest spending over the business cycle. Both these bills have smart approaches to emergency spending. Either or both would set powerful expectations for Congress to reduce inflationary borrowing.
Holistic Budget Management
Meeting budget targets would be far easier with a coherent annual budget process. Congress doesn’t have a real budget, meaning a single bill that encompasses all spending and revenue. Annual appropriations are just 30% of spending; the rest goes to direct spending programs such as Social Security, healthcare, welfare and interest on the debt. Congress has no regular way to adjust autopilot entitlement programs, to manage the tax code or to head off looming insolvencies in Social Security and Medicare.
By comparison, 14 states pass one budget bill per budget cycle, which may be annual or biennial, and 16 more enact two to five bills per cycle. The North Carolina legislature’s budget includes all spending, a revenue statement, tax credits and any statutory changes necessary to make it all work. That’s the right way to manage a budget, and it would replace today’s polarizing, simple-majority reconciliation.
Requiring only a simple majority for budget reconciliation was meant to make it easier to manage revenue and mandatory spending to reduce the deficit, but separating reconciliation from discretionary spending and exempting it from the Senate’s standard 60-vote requirement has made it little more than a vehicle to ram through partisan legislation under one-party control. The chance to enact partisan priorities during the rare times when the same party controls the House, the Senate and the White House has proved politically irresistible. Such legislation—like last year’s $1.9 trillion American Rescue Plan Act—almost always grows the debt and puts pressure on inflation through a compliant Federal Reserve.
Ending the Shutdown Threat
In the event that new appropriations cannot be passed, Congress never intended for government shutdowns to be a possibility. Against a shutdown, many legislators face intense pressure to rubber-stamp a leadership deal or else be blamed for shutdown-induced disruption of services. The risk of shutdowns generates waste and bloat as leaders take care to avoid upsetting interest groups, even on low-value programs.
With an automatic continuing resolution like the Prevent Government Shutdowns Act from Sens. James Lankford (R-Okla.) and Maggie Hassan (D-N.H.), the alternative to a new budget bill is not a shutdown, but rather status quo spending and tax policies. A new budget has to be better than current policy, not just better than a shutdown.
The Benefits of Budget Reform
Advancing these solutions would benefit both the American people and members of Congress. The Government Accountability Office says they are necessary to restore fiscal health. Legislators would have more ability to use their life experiences and resources to shape policy than they do today. A well-functioning system would create more opportunities for deliberation and inclusive legislating than the current system, which forces leaders to take a heavy hand as Congress lurches from crisis to crisis.
Congressional budgeting that makes it easier to manage and control the entire budget—and harder to go on spending sprees—would reduce pressure on the Federal Reserve to buy too much debt, which can increase the monetary base and produce inflation. Controlling spending and debt preserves the Federal Reserve’s ability to conduct an independent monetary policy with stable prices.
Fortunately, thoughtful legislation to address these issues exists, or it could soon. Congress’ controlling spending and debt would help the Fed restore stable prices. Then, instead of blaming each other for bad results, legislators and the White House would be better able to work together on solutions.