Obama’s budget blind spot

It has been three years since President Obama’s American Recovery and Reinvestment Act was enacted. The stimulus was one of the administration’s first attempts to micromanage the economy with short-run policies instead of offering a long-run strategy for restructuring government. The president’s proposed 2013 budget is the latest. If we learned anything from the stimulus, it’s that the country would be better served if the president did less tinkering in his budget — like handing out tax breaks for manufacturing and “clean” energy — and more leading.

If the federal government had started looking at the big picture three years ago, we might be in a much better financial position today. Fortunately, the budget process provides both Congress and the administration with a clean slate. Each year, they are given the chance to demonstrate leadership by refocusing priorities. We now have several opportunities to start laying the groundwork for fiscal sustainability by addressing our tax system, our spending habits and our approach to dealing with entitlements.

On taxes, the president is expected to broach a long-term issue in the coming weeks: simplifying the corporate tax code. But one has to wonder how committed he is to this initiative, given that his budget calls for more complexity in the form of tax breaks for some industries and tax penalties for others. A “leadership budget” would contain no new tax breaks or penalties and would instead move toward a complete overhaul of the tax system, for individuals as well as corporations.

Tax code tweaks may help win votes by currying favor with politically valuable constituencies, but they distort markets by encouraging some activities at the expense of others. For instance, suppose that a tax break for clean energy causes investors to divert their resources toward certain technologies. This has to mean that investors simultaneously divert resources away from other economic activity. Of course, the president can’t know what the money would have been used for if not invested in clean energy, but that is precisely the point. Individuals and businesses are best positioned to decide how to invest their money, and tax breaks reflect an attempt by the government to influence those decisions.

On the spending side, the president calls for cuts across a wide range of programs, but his plan is also rife with gimmicks. He touts a 10-year “deficit reduction” of $850 billion from our reduced roles in Iraq and Afghanistan, but virtually nobody believes the country intended to spend that money. Despite the proposed cuts, total spending in 2013 is projected to be 25% higher than just five years ago and 75% higher than 10 years ago. Notably, the budget does nothing to restructure entitlements — Medicare, Social Security, Medicaid. A leadership budget would focus less on minor program changes and more on major reforms to combat the coming fiscal crisis driven by runaway entitlement spending.

Many critics of entitlement reform say that now is not the time for these kinds of changes, and that the first priority needs to be economic recovery. Without a doubt, economic recovery is important. However, what many observers miss is that a focus on our long-term problems would help solve our short-term ones. If the tax code were simplified and businesses could invest and hire without worrying about what the government’s next “pet industry” would be, the economy would work more efficiently. If entitlements were redesigned to acknowledge economic and demographic realities, markets would react positively to the increased likelihood that the U.S. government would be able to pay its bills.

The conventional wisdom says that in a presidential election year, no major changes to fiscal policy have a shot at becoming law. That very well may be true, but the country still would be well served by a robust debate regarding competing plans for restructuring the federal government for the long run. The entitlement problem is not going away, and the longer we wait to address it, the more difficult the choices we’ll have to make.

David M. Primo is a senior scholar at the Mercatus Center at George Mason University and an associate professor of political science and business administration at the University of Rochester.