Is the House on Track to Reverse the Spending Binge?

The goal of the new House leadership is to reverse the spending binge of the past three years. They have already laid out the first step: the House Appropriations Committee has agreed to spending levels for nondefense discretionary spending for fiscal year 2011. However, because the previous Congress did not pass a budget for 2011, the year will be nearly half over before the new budget is passed and this is causing confusion about what the agreed spending levels mean, as illustrated by today’s Wall Street Journal news story headlined: “Republicans Splintering on Size of Cuts.” It is also causing confusion for Economics 1 students and their teachers trying to apply the principles learned in their economics textbook to current events.

A graph might help to see what’s going on. To keep it simple consider the Congressional Budget Office’s data on nondefense domestic discretionary outlays in the past few fiscal years:

2007 $459 billion
2008 $485 billion
2009 $538 billion
2010 $614 billion

(You can find these numbers in the supplemental material “Historical Budget Data” Table E7, Economic and Budget Outlook: Fiscal Years 2011 to 2021, January 27.)

The Continuing Resolution (which passed last December 21) put spending for fiscal year 2011 through March 4 at approximately 2010 levels, or $614 billion. The period from the start of the fiscal year through March 4 represents approximately 5/12 of the year. The House leadership said it wants to bring spending to 2008 levels. If the 2011 budget set spending to 2008 levels for the part of the fiscal year following March 4, it would have an actual spending of 614 X (5/12) + 485 X (7/12) = 539, which is very close to the $537 billion in budget authority which the House Appropriation Committee agreed to. So in this sense the House has taken spending down to 2008 levels for what is remaining of 2011, and thus it begins to fulfill the goal of reversing the spending binge, as illustrated in the graph below. The graph shows the size of the budget from 2006 to 2011 with the 2011 budget interpreted as a blend of two levels.

But a very important question going forward is what will be the base for discussing budget proposals in 2012. If one keeps to the logic of the House leadership, then the base to reduce from should be $485B, not $537B, as shown by the dashed line. To complete the reversal of the spending binge, 2012 spending would be brought down to 2007 levels of $459B, which would be a 5 percent reduction from the appropriate 2011 base.

Of course much still depends on whether the House Appropriations bill for FY 2011 passes the Senate and is signed by the President. And we will see on Monday if the President’s budget for FY2012 comes close the goal of reversing the binge.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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