Imagine for a moment that you own a business, or are CEO of a business. Either at start-up, or during an expansion, your business borrowed money and you were lucky enough to get an interest only payment schedule. Now things are humming along and the revenue stream is stable, perhaps expanding slightly. What do you do about the debt? You’ve been paying the interest all along, but the debt is still there. You look at your expenditures, cut whatever fat you need to cut, keeping in mind what your revenues are, and you pay off the principle. Correct? You don’t cut anything essential, but you find where money is wasted, or where things can be done more efficiently.
Why can’t the government do that? Part of it is the difference between an enterprise in the private sector, which has only the money it can earn through voluntary exchanges with customers (perceived as beneficial to both parties), and has a motive of profit, and a government which has the money it can seize from the people through involuntary taxes, has political interest in accruing power through redistribution from unorganized masses to powerful constituencies, and whose services people must utilize no matter how poorly they are delivered or how unwanted they may be. Businesses operate through a mutually satisfying voluntary exchange and government operates by coercion. Let’s forget that for a moment, though.
The problem now is that government never has to look for inefficiencies, duplications of effort, or even reasons to justify expenditures. Why? Baseline budgeting.
Baseline budgeting assumes that every nickel spent is spent wisely, thus spending the same amount, plus X% is justified. Justified by what? By baseline budgeting. Does the money allotted to some department have to be actually useful in addressing the problem or concern that department was created to address? No. As long as they spent their money this year, next year they’ll automatically get the same amount this year, plus X%.
X% was originally supposed to be last year’s expenditure. Then it became last year’s budget plus inflation. Then, it became last year’s budget, plus inflation, plus 3%. Now the baseline is last year’s budget, plus inflation, plus 7%.*
This turns prudent financial management on its head. In prudent financial management, you spend as little as you can in order to get the job done. You look for efficiency increases, finding out how you can do more with less money. You seek to manage your enterprise to get the biggest possible “bang for your buck” knowing that every buck you don’t spend is better so long as you are actually accomplishing your enterprise’s purpose.
With baseline budgeting, as a manager your goal is to always appear not to have enough money to accomplish your purpose. Your goal is to spend every penny of your budget, no matter how inefficiently or ineffectively. You have a built-in excuse that you could have accomplished more if only you’d gotten more money, like the 7% increase coming next year. Without that money, the enterprise will certainly fail. It sets up the ultimate perversity in management, where you actually try to be as inefficient and ineffective as possible so that you can continue to get increases in funding.
You know that no one is going to look to see if you accomplished anything. If you spent the money, you must have been doing your job. Your job is obviously important or the Congress or whichever entity created your department wouldn’t have created it in the first place. Your test is not going to be results achieved, or satisfied customers, or the efficiency with which you accomplished your task. Your test is going to be whether or not you spent the money.
John Hayward points up an absurdity today, which involves what I think is a near miracle:
But even though the government continue to grow, certain individual agencies and programs will see actual cuts. The White House Office of Management and Budget long ago prepared a list of them. For example, there’s the National Drug Intelligence Agency, which is losing $2 million out of a $20 million budget.
A 10 percent reduction might not really be “draconian,” but it’ll certainly be felt in the halls of the National Drug Intelligence Agency! Or at least it would… if the agency had not ceased to exist, three months before the OMB report was prepared in September 2012, according to Mike Riggs at Reason.
So President Obama is galloping around the country and insisting that an overall 2.3 percent trim will prove fatal to a $3.6 trillion government that can’t even keep track of which agencies are still in business. No surprises there. This is the same Leviathan State that subsidizes pizza advertising at the same time it’s spending millions to hector Americans about the fat in their diets. And those were two different initiatives of the same agency.
The near miracle is that an agency actually ceased to exist (no doubt actually being absorbed into another agency). The non-miracle, typical Washington DC aspect, it had a $20 million budget and (horror of horrors) was slated for a $2 million dollar cut, which you know damned well somebody in the White House would have: A) claimed was a calamity that will result in some terrible thing happening that otherwise would have been prevented if the National Drug Intelligence Agency would have only kept that $2 million dollars. B) Will simultaneously claim both the $2 million dollar cut, and the $20 million dollar savings for getting rid of the agency, for a total of $22 million in budget savings. (You know I’m right!)
I left Hayward’s last paragraph in there just to pile on the absurdity.
Here are my questions: How can we ever expect to get deficit reduction with baseline budgeting in place? How can we ever know what programs, agencies, or departments should be done away with entirely with baseline budgeting? When no one has to prove up their usefulness in order to get more money, how do you know what to cut?
Baseline budgeting has made even the language of budgeting obtuse and obscured reality from the general public. A “cut” is a reduction in the percentage of growth based on the baseline. It’s not an actual cut where next year they have to spend less than this year. A “cut” is now where you get more next year than you had this year, but not as much more as you wanted, because you wanted the whole 7% whether you needed it or not.
Baseline budgeting has also obscured how analysis of the effectiveness of government is calculated. It is so far off from what takes place in the real, non-government, world that I doubt most people can even fathom what the reality of it is. Most people probably think that government is run like a business, and if something isn’t working, if the goal is not being achieved and achieved in the most efficient manner, changes would be made. When they ask for more money, they must need it. But it’s not that way at all. In government there is no incentive for success, there is only incentive to spend the taxpayers’ money so that you get more next year.
People can talk all they want about balanced budget acts, or whatever else. The thing that could make a big difference right now would be the end of the scheme that keeps government growing, removes management responsibility, and obscures every budget conversation: baseline budgeting.
*From Wikipedia: “The Deficit Control Act of 1985 provided the first legal definition of baseline. For the most part, the act defined the baseline in conformity with previous usage. If appropriations had not been enacted for the upcoming fiscal year, the baseline was to assume the previous year’s level without any adjustment for inflation. In 1987, however, the Congress amended the definition of the baseline so that discretionary appropriations would be adjusted to keep pace with inflation. Other technical changes, annual increase of now approximately 3% plus inflation, to the definition of the baseline were enacted in 1990, 1993, and 1997. Presently, the [automatic annual] Baseline Budgeting increase is about 7%.”