HELPFUL THINGS TO KNOW
RE: The Federal Government and Issues
Introduction
Office of Management and Budget (OMB)
Congressional Budget Office (CBO)
CBO Baseline
Macroeconomic Effects
Static Effects
National Debt
Deficit
Debt Limit
Default on the Debt
Balanced Budget Amendment
Constitutional Amendment
Filibuster
Super-delegates
Executive Orders
Means Test
Poverty Guidelines
Federal Employees
BUDGET PROCESS
Federal Fiscal Year (FY)
President
Congress
Concurrent Resolution(CR)
Continuing Resolution
Appropriation Bills
Budget Functions
Budget Authority
Budget Outlays
Deficit Neutral Reserve Fund
Mandatory Spending
Discretionary Spending
Defense Spending
Earmarks
Tax Expenditures
Reconciliation
Off-Budget
Federal Reserve System
Sequester
Overseas Contingency Operations Account
Gold Standard
HELPFUL THINGS TO KNOW RE: The Federal Government and Issues
Introduction – The motivations to document these helpful things to know were my friends and writers of letters to the editor of the Times-News who simply did not seem to understand how the government operates. In fact, I don’t believe many pundits, news anchors and even politicians understand how government works. Consequently, politicians and pundits can say almost anything, true or not, and their comments go unchallenged. I believe this failure to understand how the government operates is a threat to our Republic and democracy. If a reader takes issue with any of the following “things,” or believes some are incorrect, please let me know.
Office of Management and Budget (OMB) – OMB is part of the executive branch of government. It advises the president on budget matters and prepares the president’s yearly budget proposal. The OMB also maintains historical tables of actual spending, revenues and deficits that are a great source of information and readily available to the public on line.
Congressional Budget Office (CBO) – The CBO is a resource for Congress that evaluates the effects of legislation on future spending, revenues and deficits, frequently at the request of the Chairman of the House or Senate Budget Committee. The CBO was established by the Budget Control Act of 1974 to give Congress an independent analytical tool separate from the OMB.
CBO Baseline – The CBO maintains a rolling 10 year projection of federal spending, revenues, deficits, etc., which is based on the then current law. It is updated at least once each year. The CBO evaluates new legislation or legislative proposals to determine how they would affect the baseline. For example, the CBO would evaluate a tax cut or tax increase proposal as reducing federal revenue or increasing federal revenue vis a vis the baseline. Legislation that increases spending is likewise measured against the baseline. The baseline is the key to all budgeting.
Macroeconomic Effects – Virtually all spending and taxing legislation by the federal government has some effect on the economy. For example, a tax cut (Tax Expenditure) gives consumers more money to “use.” They may spend it, save it or invest it. Since consumer spending is around 70% of the economy, the more consumers spend the more goods are needed and the more jobs are created. However, the same is basically true for other government Expenditures. Food stamps for example are used to buy food, which provides the farmer and grocer with more revenue so they can hire more employees who pay taxes on their salary. Starting in 2015 the Republican controlled Congress directed the CBO to evaluate certain legislation based on macroeconomic effects. Republicans are particularly interested in showing that tax cuts have a positive effect on the economy and therefore do not cost as much as the actual dollars lost in revenue. But evaluating macroeconomic effects of legislation is a real guessing game, and in my opinion it is not reliable.
Static Effects – These are the effects of legislation or appropriations on the CBO baseline without considering the macroeconomic effects. So a dollar spent is simply a dollar spent or a dollar of tax cut is a dollar of lost revenue. Although the Republican controlled Congress has ordered the CBO to evaluate “major legislation,” like tax cuts, based on its macroeconomic effects, appropriations for spending on infrastructure, etc. are evaluated based on static effects. Clearly a major infrastructure project has tremendous macroeconomic effects, particularly on job creation.
National Debt – This is the total amount the government has borrowed and on which it must pay interest. The national debt has two major components, debt owed to the public and debt owed to itself (internal borrowing). For FY 2017 debt owed to the public, which includes foreign countries, will be around 73% of the total national debt, or around $14 trillion.
Deficit – The federal deficit refers to the amount the government spends each year in excess of what it collects in revenues. This amount adds to the national debt.
Debt Limit – The debt limit is the amount authorized by Congress for the ceiling of the total national debt. If legislation or projected spending authorized by Congress is expected to exceed the current limit, the president asks Congress to increase the debt limit so the government can borrow to meet its obligations. Raising the debt limit does not authorize additional spending. It simply authorizes borrowing to pay for spending already authorized by Congress.
Default on the Debt – Before 2011 raising the debt limit was a routine matter in Congress. But since 2011 when newly elected Tea Party candidates allowed Republicans to take control of the House, conservatives have used the threat of not approving a debt limit increase to gain concessions to cut spending or repeal some law, like Obamacare. It is risky business. If the US were to default on its debt, even for a short period of time, it would have catastrophic effects on the stock markets. But more importantly it would cast doubts on the US dollar as the global reserve currency and significantly increase the cost of US borrowing due to a downgrade in the U.S. debt rating. The net effect of default would be to significantly increase the national debt.
Balanced Budget Amendment – Forty-nine of 50 states cannot spend more than they receive in revenues. Thus if revenues decrease for some reason in a given year the state must either cut spending, raise taxes or draw down a state reserve fund, if one exists. Many Republicans have been advocating a balanced budget amendment to the US Constitution that requires the federal government to operate something like a state government. It sounds like a good idea but it is not as simple as it sounds.
Unlike state governments, the federal government has responsibility for defense, among other national security interests, and is called upon to react to national disasters like the Great Recession and hurricanes Katrina and Sandy. So if the country is threatened like it was in WWII, the federal government must react with a military buildup. And when a bad recession hits and states cut spending and layoff public employees and businesses do the same, the federal government must react differently. If it didn’t a depression would likely result that would create economic chaos, more layoffs and lower federal revenues. The federal government must have flexibility to react to such situations with funds that usually must be borrowed. Typically a balanced budget amendment would suspend the requirement for a balanced budget when national security is threatened.
Constitutional Amendment – Two-thirds of the states can call for a constitutional convention to amend the constitution. It has never been done. Two-thirds of both the House and Senate can pass an amendment to the Constitution. Amendments must be ratified by three-quarters of the states. The Republican controlled Congress almost passed a balanced budget amendment in 1995. It passed in the House but just fell short of the required two-thirds in the Senate. Several states have called for a constitutional convention, mainly Republican controlled states.
Filibuster – The filibuster became part of the Senate rules in 1917. It is a process in the Senate whereby debate on legislation can be extended thereby delaying a vote. Passing most legislation can be accomplished by a simple majority. But to end a filibuster requires a 60 vote majority on a cloture (close debate) motion. Until the past 10 years or so a senator who proposed a filibuster had to speak against the bill (or on anything) for as long as he or she could hold the floor. Sen. Strom Thurmond, then a South Carolina Democrat, holds the record by speaking for 24 hours and 18 minutes in opposition to the Civil Rights Act of 1957. These days a Senator simply states he or she will filibuster a bill. That act alone delays a vote until 60 senators vote for cloture. It is a very effective way to delay or prevent a vote from occurring on bill. These days the majority party will just table a bill if they don’t have the 60 votes for cloture.
Super-delegates – These Democratic delegates are designed to act as a check on ideologically extreme or inexperienced candidates. It also gives power to people who have a vested interested in party policies, like elected leaders. The GOP doesn’t have very many super-delegates, I think three per state. Because the primary and caucus voters do not have to be active members of the party (in New Hampshire they can sign up and sign out going-and-coming at the polls), the super-delegate system has been called a safety-value. Super-delegates are: Elected members of the Democratic National Committee (~450), Democratic Governors, Democratic US Senators and US Representatives, Distinguished party leaders (current and former Presidents and Vice Presidents; former Democratic leaders of the Senate and House; former DNC chairmen), Unpledged “add-on’s” chosen by the Democratic National Committee.
Executive Orders (EO) – A presidential executive order is a directive issued to federal agencies, department heads, or other federal employees by the President of the United States under his statutory or constitutional powers. An EO is similar to a written order, or instruction issued by the president of a corporation to its department heads or directors. No part of an executive order may direct the agencies to conduct illegal or unconstitutional activities. As of November 2016 President Obama had issued 260 EOs. During his two terms G. W. Bush issued 291 EOs and Reagan issued 381. There is no specific authority in the Constitution or in statutes for EOs. It is up to the courts to determine if a president has exceeded his authority with an EO.
Means Test – Typically a “means test” is a determination of whether an individual or family is eligible for government assistance, based upon whether the individual or family possesses the means to do without that help based on the Poverty Guidelines. Many so-called welfare programs are means tested. However, a means-like test is applied to premiums for Medicare where a beneficiary’s premiums are based on his or her level of income in the prior tax year. Higher the incomes result in higher premiums.
Poverty Guidelines – The poverty guidelines are issued each year by the Department of Health and Human Services (HHS). The guidelines are used for administrative purposes — for instance, determining financial eligibility for certain federal programs. The Guidelines are sometimes referred to as the Federal Poverty Level.
Federal Employees – Executive branch employment includes the postal service but does not include the military. Federal employment was between 3,000 and 3,100 during last two years of Reagan’s administration and during the four year term of President George H. W. Bush. These were the highest numbers since 1962 and reached a high of 3,067 employees under Bush. The latest current federal employment numbers are for 2014 when 2,663 were employed. The highest under President Obama was 2,776 in 2010, which was probably because of the census takers. The employment under President G. W. Bush in 2008 was 2,692. Of course there were fewer Americans to service in 1990 but computerization since then has no doubt helped reduce federal employment to some extent.
BUDGET PROCESS
Federal fiscal year (FY) – The federal fiscal year starts October 1st and runs through September 30th. This means an outgoing president actually prepares a budget for most of an incoming president’s first year in office. For example, President Bill Clinton prepared the FY 2001 budget that President George W. Bush inherited when he took office.
President – The Budget Control Act of 1974, as amended, contains a schedule for the budget process that starts with the president’s budget. The president is required by law to submit a budget to Congress in February of each year for the subsequent 10 years. If the process works the way it is supposed to, Congress holds hearings on the President’s budget and invites the President’s budget director to testify. I don’t think that happened between 2010 and 2017.
Congress – After receiving the president’s budget the Senate is supposed to pass a Concurrent Resolution (CR) on the budget. The House may pass its own CR on the budget. The Senate and the House Budget Committees, with input from other congressional committees agree on a CR which is supposed to be passed by April 15th. This budget resolution starts work in Congress on the 12 appropriations bills that establish the discretionary spending levels for the main functions (departments) of the government for the coming fiscal year. These bills must be passed by September 30th for the upcoming fiscal year or a partial shutdown of the government occurs. That is what happened in October 2013. Republican House members refused to appropriate funds to operate the government unless President Obama agreed to repeal or significantly weaken Obamacare. He refused and the partial shutdown of the government continued for 16 days at an estimated cost of over $20 billion.
Concurrent Resolution (CR)– This is a resolution adopted by a vote of both houses of Congress that lacks the force of law and does not require the approval of the president. Concurrent resolutions are typically adopted to regulate the internal affairs of the legislature. In 2015 the Republican controlled Congress adopted a concurrent resolution on the budget for fiscal year 2016 that set forth the appropriated budget levels for 10 years. These resolutions are aspirational and not necessarily followed. The Republican controlled Congress failed to agree on a CR for FY 2017 due to Tea Party opposition to the Budget Control Act of 2015 that Speaker John Boehner negotiated in September 2015. This Act raised sequester caps and increased spending.
Continuing Resolution – A continuing resolution is a bill passed by Congress and signed by the president that “continues” funding the government for some period of time, usually at the levels that have been approved by earlier budget laws. For example in September 2016 Congress had not passed appropriations bills for FY 2017 that was to start on October 1, 2016. In order to prevent a government shutdown on that date, Congress passed a continuing resolution to fund the government through December 9, 2016. Then in December Congress passed and the president signed another continuing resolution to fund the government through April 28, 2017. In the meantime, Congress is supposed to be working on 12 appropriations bills for FY 2017.
Appropriations Bills – As required by the Constitution, spending bills originate in the U.S. House of Representatives. These bills are produced by 12 sub-committees in the House. Hence, you might hear Speaker Paul Ryan state that the House needs to consider 12 appropriations bills. A given appropriations sub-committee may have responsibility for more than one government agency funding. So that committee will be responsible for funding more than one of the 20 plus budget functions. When signed by the President, these appropriations bills are the budget.
Budget Functions – For FY 2017-2026 the President Obama’s budget had 20 functions and numerous sub-functions. These are the categories, like defense, agriculture, energy, etc. that comprise the budget and were probably set by the Budget Control Act of 1974. The concurrent resolution passed by Congress has 22 functions and no sub-functions. The two extra functions in the concurrent resolution are “Government-wide savings and adjustments” and “Overseas contingency operations-Global war on terror.” I suspect that the Government-wide savings function is somehow being used by Congress to achieve a balanced budget by 2026 and is based on additional savings they expect to achieve through consolidation of programs or whatever. Most of the numbers are negative so they would subtract from the overall budget totals. See more on the Overseas Contingency Operations below.
Budget Authority – Both the President’s budget and the concurrent resolution passed by Congress specify two numbers for each budget function, the budget authority and the anticipated outlays. The budget authority is what that function is authorized to spend in a given fiscal year.
Budget Outlays – During a given fiscal year an agency may make commitments to spend based on the budget authority granted by law. However, not all of the funds committed will be spent during that fiscal year. Consequently the committed funds that are expected to be expended during that fiscal year are the expected budget outlays.
Deficit Neutral Reserve Fund – This is an unfunded line item in a concurrent resolution that is something like a place marker in the budget for a project that could be funded in the future so long as the deficit is not increased. There is a DNRF for an Obamacare replacement in the FY 2017 budget was considered by House Republicans. Funding for a DNRF requires either a tax increase or a transfer from another item or items in the budget.
Mandatory Spending – The federal budget basically funds two types of programs, mandatory and discretionary. Mandatory programs are those that were established by Congress like Medicare, Medicaid, Social Security, unemployment insurance, certain farmer’s subsidies, some veteran’s benefits and many more. Spending for mandatory programs depends on the criteria specified by the enabling law. That is why these programs are called “automatic” spending programs because they are not subject to yearly appropriations. Spending on these programs can only be altered by legislation enacted by Congress and signed by the president. Medicare and Medicaid are the largest mandatory spending programs.
Discretionary Spending – Discretionary spending is contained in the 12 appropriations’ bills that are passed by Congress each year. This spending has two major components, defense and nondefense. Nondefense appropriations are for the various departments of the executive branch other than the Dept. of Defense and Congress. These include Treasury, EPA, Energy, Education, etc. Discretionary spending pales by comparison to mandatory spending. Typically discretionary spending is around 30% of total federal outlays, around half of which is defense.
Defense Spending – The U.S. spends roughly $600 billion each year on defense. That amounts to 36% of all defense spending in the world. In 2016 it was 2.8 times more than the second highest spender, China and almost nine times more than fourth place Russia. Surprisingly Saudi Arabia was the third highest spender on defense. The US spends $1,854 per capita. For FY 2016, defense spending was roughly half of all discretionary spending. In my opinion the Defense Dept. is the most wasteful federal department by far but is subject to very little congressional oversight.
Earmarks – These are funds provided by the Congress for projects, programs, or grants where the purported congressional direction (whether in statutory text, report language, or other communication) circumvents otherwise applicable merit-based or competitive allocation processes, or specifies the location or recipient, or otherwise curtails the ability of the executive branch to manage its statutory and constitutional responsibilities pertaining to the funds allocation process. Typically, a legislator seeks to insert earmarks that direct a specified amount of money to a particular organization or project in their home state or district. This is why we continued buying Abrams M-1 tanks that the military said it didn’t need. Some commentators call earmarks “pork-barrel” spending. According to one report Congress approved more than $5 billion in earmarks for FY 2016, despite a congressional ban on earmarks.
Tax Expenditures – This is government speak for cutting taxes. In theory the government has a certain amount of revenue each fiscal year to spend. If Congress enacts legislation that cuts taxes, they are “expending” part of that revenue by not collecting it.
Reconciliation – This a legislative process under rules of the US Senate that allows consideration of a budget bill with debate limited to twenty hours. In other words it is a process by which legislation can be passed in the Senate without being blocked by a filibuster that requires 60 votes to override. Under the original design of the Budget Act of 1974 reconciliation had a fairly narrow purpose: It was expected to be used together with the second budget resolution adopted in the fall; it was to apply to a single fiscal year; and it was to be directed primarily at spending and revenue legislation acted on between the adoption of the first and second concurrent budget resolutions. This process was used by Democrats in 2010 to pass Obamacare and in 2015 by Republicans attempting to repeal Obamacare. NOTE: Only components of a law with federal budget implications can be changed through reconciliation.
Off-Budget Spending – The most significant off-budget spending is for Social Security benefits. The Social Security trust funds and the Postal Service are “off-budget.” Their spending and receipts are walled off from the rest of the budget. Putting Social Security and the Post Office “off-budget” shields them from some budget pressures, but policymakers often focus on the unified budget that includes them because they can add to the deficit. A few other agencies and accounts are excluded because of their independence (e.g., the Federal Reserve).
Federal Reserve System – The Federal Reserve System (the Fed) is part of the federal government but is explicitly excluded from the budget in order to shield monetary policymakers from political pressure. Other developed nations do the same. The Fed sets its own spending and finances itself from earnings on lending to banks and owning financial assets. The Fed remits its profits to Treasury each year, which the budget records as receipts. Otherwise the agency operates outside the budget. I wouldn’t attempt to explain how the Fed operates but they control trillions of dollars and the agency is not generally supported by Republicans. Sen. Rand Paul’s bill, “Audit the Fed” had 29 co-sponsors—one Democrat and 28 Republicans. The Fed is given a lot of credit for bringing the country back from the financial crisis of 2008. The GOP platform implies that Republicans want to consider going back to the gold standard. Oh my! That would no doubt dramatically alter what the Fed can do.
Sequester – Tea Party Republicans elected in 2010 allowed the GOP to take over the House in 2011. These folks were dedicated to severely cutting government spending and were totally against raising taxes on anyone or anything. After a tense confrontation with President Obama over raising the debt limit in July 2011, House Republicans finally agreed to pass the Budget Control Act of 2011. This Act substantially raised the debt limit and established the “super committee” to reduce the deficits. When the super committee of House and Senate Republicans and Democrats failed to agree on specific measures to reduce the deficit over 10 years by $1.8 trillion, across the board automatic spending caps called “sequester” went into effect for 2013. These caps reduced projected spending (CBO baseline) by around $1.2 trillion. But sequester spending caps have been significantly raised in various budget acts passed by Congress since 2013. This infuriated Tea Party Republicans and is probably the major reason Speaker John Boehner was deposed and why Speaker Ryan had a tough time with a FY 2017 CR and with appropriations bills.
Overseas Contingency Operations Account (OCOA) – This is an off-budget account that was used by both the Defense and State Departments in the G. W. Bush administration to fund the wars in Afghanistan and Iraq and the “Global war on terrorism” I have been unable to determine why this off-budget account was created. I suspect it was created in 2001 as off-budget so that it would not be subject to budget pressures or political pressures to balance the budget. It is still used to this day because as an off-budget account it isn’t affected by the caps set in the various budget agreements in recent years, like the “sequester.” It has decreased significantly in recent budgets from its high point of $186.9 billion in FY 2008. Still, some commentators call the OCOA a “slush fund” for the Defense Dept. that allows them to spend more than appropriated in their budget.
Gold Standard – According to Webster the gold standard is a monetary standard under which the basic unit of currency (for the U.S., the dollar) is defined by a stated quantity of gold and which is usually characterized by the coinage and circulation of gold, unrestricted convertibility of other money into gold, and the free export and import of gold for settling of international obligations.
The first U.S. paper currency was printed under U.S. Treasury Secretary Salmon Chase in 1862. He is said to have opposed this “fiat” currency and later as chief justice of the Supreme Court held that the printing of paper currency was unconstitutional.
The gold standard in the U.S. has a long history but it is safe to say it started eroding with the Great Depression in 1929 and under President Franklin Roosevelt in 1933. Then WWII further complicated the gold standard’s place in monetary policy. The 1944 Bretton Woods Agreement set the exchange value for all currencies in terms of gold. It obligated member countries to convert foreign official holdings of their currencies into gold at par values. Gold was set at $35 per ounce and remained at this level for many years.
However, the United States held most of the world’s gold at that time. As a result, most countries simply pegged the value of their currency to the U.S. dollar instead. Therefore most countries no longer needed to exchange their currency for gold. The dollar had replaced it. This made the U.S. dollar the de facto world currency, which is still the case in 2016.
In 1971 Nixon changed the dollar/gold relationship to $38 per ounce. The Fed was no longer allowed to redeem dollars with gold. That made the gold standard virtually meaningless, since it was on paper only. The U.S. government repriced gold to $42 per ounce in 1973, and then decoupled the value of the dollar from gold altogether in 1976. The price of gold rose to $120 per ounce.
The 2016 GOP Platform stated that President Ronald Reagan established a commission to consider the feasibility of a metallic basis for U.S. currency. Obviously nothing changed as a result. In 2012 Republicans proposed a similar commission to investigate ways to set a fixed value for the dollar. The 2016 Republican Platform recommended the same type of commission to “secure the integrity of our currency.” The commission could happen under a President Trump, but I seriously doubt such a commission would recommend a metallic basis for U.S. currency. I think the world economy has moved way passed the gold standard.
Ron Davis
December 2016
From the Center 