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Three Ways To Avoid Future 'Fiscal Cliffs'

Though the dust from the election has barely settled — the nation has already moved on.

Consuming our attention now is the budget crisis du jour. The “fiscal cliff,” as we’ve come to call it, amounts to a $700 billion combination of expiring Bush tax cuts and congressionally mandated spending cuts that could, if fully enacted, tip the economy back into recession.

It’s the latest in a series of budget fiascos that are occurring with growing regularity. We narrowly averted a total government shutdown in May 2011. Four months later political hostilities resumed over raising the debt ceiling. This follows a decade in which Congress enacted more than 75 “continuing resolutions” (stop-gap budget extensions) because it couldn’t agree on a budget.

The national budget process has become highly dysfunctional.

Each year thousands of officials in government departments and agencies spend weeks preparing detailed estimates showing how much it will cost to run their organizations. Congress routinely ignores most of this effort and instead scotch-tapes together budgets based on the previous year’s spending, plus or minus some amount that is usually the result of political horse-trading.

Government agencies have an elaborate process to evaluate how well they are performing. But Congress provides money almost regardless. Any remaining scrutiny is avoided by the routine use of so-called “emergency” supplemental appropriations. These are supposed to be reserved for genuine emergencies, like Hurricane Sandy, where the goal is to get money out the door as quickly as possible. Instead emergency supplementals are exploited to pay for all kinds of foreseeable expenses. For example, more than a trillion dollars has been spent on operations in Iraq and Afghanistan through more than 30 such “emergency supplemental" bills over the past decade.

This breakdown in budget discipline is a major contributor to many of the problems we are struggling with today – high deficits, an absurdly complex tax code, over-payments to government contractors, duplication, waste and poor service. Budgeting is supposed to be a mechanism for allocating our scarce resources among competing priorities. Instead, the chaotic, crisis-driven budget process we have today makes it very hard to track where taxpayer money flows and how effectively it is spent.

It leaves government agencies operating in a fog of uncertainty, unsure how much money they will have for the next year — or even the next month. Long-term planning is impossible. Innovation is nearly impossible. Some agencies, such as the National Parks, are stuck perpetually trying to fathom how they will function in the event of a government shutdown. Will fires be allowed to rage? Will animal protection programs lapse and allow animals to die? Who knows?

At the Harvard Kennedy School where I teach, students from around the world are incredulous that our citizens tolerate such a dysfunctional budgeting process.

The absence of coherent budgets has increased the cost, and lowered the quality, of government services. A recent study by Philip Joyce of the University of Maryland documented the pernicious effects of funding delays, which include paying higher prices than necessary to hire contractors. Other problems include delayed maintenance (leading to higher costs in the future) and significant harm to employee morale, retention, hiring and training.

The country desperately needs to look not just at what is urgent (the fiscal cliff) but what is important — reform of the budgetary process. There are several concrete steps we could take to bring sanity to the budgeting system in Washington.

Extend the budget cycle

One of the simplest — and best — mechanisms to restore discipline to the budget process would be to do it less often. The U.S. should implement multi-year budgeting to lay out a set of spending priorities over three to five years. Multi-year budgeting would provide more continuity for government agencies and avoid some wasteful year-end spending.

A good start would be to convert most departments to biennial budgeting, which is already used in many state governments and in the Department of Veterans Affairs. The VA argued successfully that it was impossible to manage hospitals, pay doctors and care for the wounded amid constant uncertainty about funding. But there are thousands of programs in the same situation — from cancer and food safety research to weather forecasting. My colleague Jeff Liebman has studied the pattern of spending in federal agencies and found that it spikes in the 52nd week of the year, as programs spend money in a "use it or lose it" year-end rush. Not surprisingly, Liebman discovered that much of this spending goes to lower-quality items. By extending the budget cycle to at least two years, and allowing agencies more leeway to manage resources over time, the government would do better at grant and contract funding, as well as eliminate a lot of the wasted time and effort currently devoted to annual budgeting.

Program budgeting

Second, we need to adopt budgets that track the costs of government activities — for example, the costs associated with helping veterans find jobs, which are spread across multiple agencies. In the current system, most federal agency budgets are simply line-item lists of salaries and expenses. Private companies, as well as many top-performing local governments, routinely break down spending to look at each step of the process — so they can figure out how to minimize the cost at each stage or re-engineer the process to have fewer steps. This type of “program budgeting” would bring greater transparency over where money is spent and provide a basis for better decisions, for example, on what tasks should be done in-house versus contracted out.


Third, the federal budget process should be simplified. Congress is organized into committees that are supposed to adopt 12 separate appropriations bills each year. Many of them are in unrelated subject areas (for example the "Commerce-State-Justice" bill). They should be consolidated into a smaller number of bills, and redesigned so that similar themes (e.g. "health care") are bundled together. And the authorization committees (which govern non-discretionary spending, such as Social Security and Medicare) need to be better integrated into a multi-year budget and planning process. "Continuing resolutions" should be limited to once during a two-year cycle. And the use of "emergency supplemental" funding should be foresworn except in cases of true emergencies or brand new programs enacted during the fiscal year.

At the Harvard Kennedy School where I teach, students from around the world are incredulous that our citizens tolerate such a dysfunctional budgeting process. And we should not. Our political leaders are focusing too narrowly on "cutting the deficit" for its own sake. If we want to make smart choices about allocating and spending taxpayer dollars, then we need a better process to help us do it.


This program aired on November 26, 2012. The audio for this program is not available.

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