Institutions & Governance

Debts of the Past Limit the Future: An Interview with Eugene Steuerle

March 11, 2014

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In his new, must-read book, Dead Men Ruling, Gene Steuerle tackles the extent to which the decisions made in the past increasingly thwart our ability to innovate and create new and more effective approaches to today’s problems.

 

RR: First, tell me about your title: Dead Men Ruling.  Seems like an odd title for a discussion of American governance and budget challenges.

ES: The modern budget debate is almost entirely defeatist.  Yet I want to convince voters and their representatives that we live in an age of extraordinary possibility. This is not an age of austerity, yet we tie a straightjacket around ourselves that stops us from reviewing, revising and reinventing policies crafted by now dead or retired legislators decades ago.

And, I might add, our problem isn’t a lack of resources. We’re a richer nation than we were before the recession. Income levels are higher than at any point in the past. We benefit from many things that our ancestors would never have dreamed of, from healthcare to telecommunications to better cars to fresh food even in wintertime. Our can-do confidence has always led us forward, and it needs to be restored to establish a virtuous cycle of new creativity and growth.

 

RR: And “dead men” get in the way?

ES: That’s correct. Today’s government is constructed and constricted by programs and policies that were designed by men (women, too, but they were largely excluded) decades ago, many of whom are not with us today.  Many of these programs were well designed to improve the economic and social welfare of Americans at the time they were created and some years into the future. But the world has moved on, and these programs have not.

 

RR: What do you mean “rule”?  These politicians and public figures aren’t around today.

ES: For the first time in American history we have long-term spending obligations that cost more than all the revenues we could ever take in.  These long run fiscal imbalances arise from long-standing programs (including tax subsidies) that in many cases are legally required to grow forever faster than the economy–which, of course, is impossible.

This is a new disease. The deficit is merely a symptom, not the disease. The question is what to do when you make so many promises that they dominate all the possibilities going forward. Imagine if a business or household signed today all the contracts for all the transactions it will make in the next 100 years. All of us need the flexibility to respond to unforeseen events and to make new investments or purchases of items we might have only dreamt about before (think cell phones or robots or, for an aging population, long-term care) —but you can’t do that if the money is already spent.

 

Steuerle-Roeper Fiscal Democracy Index

RR: Your Steuerle-Roeper Fiscal Democracy Index shows a steady decline from 1962 to 2022. What is that tracking and what does it tell us?

ES: The Index measures how much money is left for Congress to allocate on a discretionary basis after you take out all the commitments made in the past and from which retreat is only possible through new legislation.  These include permanent entitlement spending and tax preferences, many with built-in growth, and interest on the debt.

In 2009, for the first time in U.S. history, the Index went negative. In other words, all the revenue that the government collects was spent before Congress walked in the door. We have a slight post-recession respite now for a few years, but we are still spending roughly 80 percent of all the revenue we take in on this pre-committed spending. The Index will go back into single digits or even negative territory again in about 10 years if nothing changes.

Steuerle-Roper Fiscal Democracy Index

The index demonstrates vividly that we live in a much different world than when these laws originally began taking over the budget.  And much of the developed world has exactly the same problem, which means you can’t put the blame on any unique American phenomenon like the Tea Party or Occupy Wall Street.

My intention with the book was to convince the reader that this is a very different problem from a more traditional “deficit” problem that would arise when government becomes profligate through new legislation year after year.  The profligacy is now built in. The former problem could often be solved by temporary legislative inaction; the new problem requires legislative action to remove it.

 

Political Action

RR: You say that the “disease” from which we suffer is “the effort of both political parties to control the future.” Isn’t that what political parties have always done?

ES: There is always an effort to invest today so tomorrow is better. You build a road, put in a post office, and hope the return on that investment will pay off in the future. Certainly, some discretionary spending can also build obligations for the future.  You have to maintain the road, for instance.

But there’s a big difference between that and determining yesterday or today how all the money will be spent in the future. Traditionally, you allocated resources you had on hand and waited for the future to decide how to allocate the new resources provided by economic growth.  Moreover, resources would be freed up when the past commitments actually solved the problems to which they were addressed.  Thus, most spending wasn’t permanent and it didn’t grow automatically.

Think of Franklin Roosevelt’s New Deal.  The Depression era spending largely went away when employment was restored.  Indeed, domestic spending as a share of the economy was lower at the end of the Roosevelt-Truman era than 20 years earlier when Franklin Roosevelt was first elected.  By contrast, the automatic rate of spending growth in many programs today is higher than the rate of economic growth.

Dead and retired elected officials are determining how most or all government revenues will be spent today and 50 years hence.  No wonder so many members of Congress retire, frustrated that they aren’t achieving much.

 

RR: What does each party need to do to correct the situation, to cure the “disease?”

ES: It’s simple economically although not politically.  They need to restore discretion to the budget. Democrats need to agree to limit automatic increases. Programs can still grow on a discretionary basis if that is what voters want. A growing discretionary budget, however, does not automatically favor retirement over education, or chronic health care over preventative care which is the way the budget is constructed today.

Republicans, in turn, need to limit automatic, built-in, growth in tax subsidies. They also need to agree to pay our bills as we go along. As the economy improves and we near full employment, debt should be falling significantly relative to the size of the economy.

If together they restore discretion to the budget, we can more easily move to a system of continual redesign and improvement.  With yet uncommitted revenues that arise with economic growth, we can spend more on something new, or something old if it still merits expansion, or return them to taxpayers in the form of tax cuts. That’s our history, as when Hamilton helped give the new government stability and discretion with tariffs higher than the taxes the British had formerly threatened, Jefferson later reduced those tariff rates as the economy grew then decided to spend more to purchase a little piece of territory known as Louisiana when that opportunity arose.

 

Voter Expectations

RR: Are politicians the only ones married to the idea of automatic increases in government programs over time and tax cuts paid for by passing on debts to our children? Or do voters expect them as well?

ES: It’s the language of politics. Politicians run on what they give us—spending increases, tax cuts, and on the promise that nothing will be taken away from us. If one party tries to cut back on automatic benefit growth or starts paying our bills by raising taxes, it looks as though they are taking something away from us rather than giving us flexibility for longer-term prosperity. In truth, there’s always a balance sheet, and deficits are nothing more than bills we’ve left to unspecified future payers.

This natural language of politics, combined with excessive commitments from the past, makes it very hard for politicians to deal honestly with the public.  Instead, their messages tend to say that we’re entitled to these excessive promises, and, if there is a problem, it’s due to someone else getting too much or not paying their fair share.

Let me note that this is the opposite of the flexibility with which we approach the private economy by continually seeking to buy and produce new, better, and less costly products.  We don’t commit to buy ice transported from the Great Lakes in perpetuity because we suspect that refrigerators might come along, or contract to watch three national TV networks when other entertainment options might develop, or communicate telephonically only through land lines.  Yes, we do and should worry about who loses jobs as the future economy evolves, but not by prescribing today what our children will purchase tomorrow.

 

RR: Can you give us an example of how we hide what we are doing to ourselves?

ES: Sure. We can see this dynamic at work in how we treat younger generations. Retirement programs, including much of Medicare, are largely pay-as-you-go. Almost all the money that comes in from today’s workers goes out immediately in benefits to yesterday’s workers.

However, benefits increase automatically because we get more healthcare as new procedures become available, more years of retirement support as we live longer, higher annual benefits as our wages go up, and, additionally, legislative increases in benefits.  If you’re 60 years old when a benefit increase requires a higher level of taxes, you might pay the additional taxes for only 5 years and get 20 years of higher benefits. Someone who is 25 will pay those higher taxes for 40 years. Over and over again, we have put lifetime burdens on the young that we have not imposed on ourselves.

 

Constructive Solutions

RR: These problems seem so obvious. Why can’t we move toward more constructive solutions?

ES:  We can’t move forward in part because there is almost no budget flexibility left at all – Dead men are ruling. Although today’s politicians recognize that this situation can’t go on, neither party has figured out how to move forward politically.  In fact, the extent to which we have obligated the future gets in the way of the two parties working together for constructive change because they have no resources to work with and they fear that if you lead, you lose.

 

RR: I am trying to be optimistic but it’s not easy!

ES: Once we take this straight jacket off ourselves, we can move from a vicious to a virtuous cycle.  My motivation in writing this book is to show how we have limited our natural instinct to innovate.

Government at all levels now spends and provides tax subsidies on the order of about  $55,000 per household, and the number will continue to grow in the future under both conservative and liberal agendas as revenues rise with economic growth.  It may sound counterintuitive, but we enable the future by trying to control it less.

Engaging full bore in this massive restructuring process would not only enable politicians to retain much of the economic and social value of today’s programs, but also to move to what I consider a real 21st century agenda.  This would include doing for our children in this century what we were able to do for the elderly in the last century, building a modern infrastructure, and moving forward with an opportunity and mobility agenda to which both parties now provide verbal, but not real, support.

Politicians could once again run on their positive contributions to the nation’s future, not on how they are trying to protect the past.  Frankly, it would be a breath of fresh air for all involved–not the least of whom are the voters!

I think there are real leaders out there who can peer into the future and help move us in this direction. I certainly know that change is inevitable since what we are doing is unsustainable.  That doesn’t necessarily mean we will choose the right path but we can’t move back from this turning point.

We stand with our backs to an ocean of possibilities.  My simple hope is that we turn around and wonder how we ever became so transfixed on our past and not the future journey.