Wall St. and Business Wednesdays: E-Letter To Congressman James Clyburn Re: A Capital Budget

I was very impressed with part of your presentation made yesterday during C-Span’s Washington Journal program. I was pleasantly surprised to hear you, while discussing the Bush tax cuts and spending related to hurricanes Katrina, Rita, and Ophelia make reference to a subject very dear to me and one that I believe holds a key to the future political power and economic prosperity of Black America. That subject being the need for the United States government to adopt a capital budget. I sat in rapt attention as you made the case that the spending on Katrina redevelopment should be amortized. Explaining that the government was investing in ‘big ticket’ items, you advocated that such outlays should be treated like a mortgage. I was further impressed by your reference to history, making it clear that the current ‘unified budget’ we now have is a legacy of the Vietnam War. And I was practically applauding when you concluded this line of thought by stating that the budget needs to be able to properly categorize spending.

You are correct, Sir.

The unified budget dates back to the year 1968, when a commission established to study the federal budget by President Lyndon Johnson recommended that the numerous federal trusts funds, like Social Security be merged into what was then called the administrative budget. While the commission sought to alleviate confusion in what it proposed it actually enabled a political objective of the President and his advisers who recognized that the inclusion of the Social Security ‘trust fund’ surplus in the administrative budget would allow the President to mask an increasing deficit due to the Vietnam War, and produce a balanced budget into the 1970s. Today, another President at war, George W. Bush, reaps a similar windfall, on paper.

But the current budget is not a reflection of the universe of diversity in government outlays and does not adequately distinguish between expenses and investments. And thus, it makes things look better than they are in some respect and worse in others. This would not matter except that an entire nation measures, balances and advocates its priorities according to a finite amount of money - the revenue it takes in through tax receipts.

I do not necessarily think that the current budget format should be scrapped altogether. Rather, what I would like to see is the federal government forced to publish a variety of mandatory financial statements, like a publicly-traded firm, and be forced to make decisions according to the information that an analysis of these official statements reveal. While the government is not a business, per se, I think that we all would benefit from our elected officials and bureaucrats thinking more like businessmen and women. I think the process would represent a paradigm shift, unleash creativity and make government and political leaders more responsive to voters as it makes corporate management and executives more responsive to investors. If the federal government was also forced to publish a variety of financial statements - not exactly similar but somewhat like what publicly-traded companies are forced to file with the Securities and Exchange Commission (SEC) - and defend its decisions on the basis of said documents, I believe the process and exercise would foster a robust debate that would improve transparency, accountability and, public trust, as well as improve the overall financial literacy of Americans.

I have found understanding federal budget realities to be particularly important for those folks whose priorities are not consistently represented by advocates, lobbyists and even, elected representatives. I consider the Black electorate to be among that group. This fact places great importance, in my worldview on those Black elected officials, such as yourself, and Rep. Bobby Scott of Virginia, who have expertise and knowledge of not only the specific items in the federal budget but also how the budget process really works, behind-the-scenes. For over six years I have personally been searching for a member of the Congressional Black Caucus (CBC), who I believed understood some key factors related to the federal budget and who also had the insight and courage to play chess and not checkers with his or her Congressional counterparts on behalf of the self-enlightened interest of the Black electorate. In October of 1999, I wrote an article specifically on this subject. I have included it below. While a few sessions of Congress have passed since it was first written I believe the underlying logic, dynamics and terrain it depicts are still applicable to today. I hope that you will read all of it, paying particular attention to the section, “The Need For a Capital Budget.”

Congressman Clyburn, I like what I heard from you yesterday and hold out hope that perhaps, it is you, among others who will one day soon fill a void that currently exists among our community’s political leadership.

Sincerely,

Cedric Muhammad
Publisher
BlackElectorate.com
http://www.blackelectorate.com

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October 18, 1999

The Black Political Establishment and Budget Politics

By Cedric Muhammad

The debate currently raging in Congress over the federal budget serves as a poignant reminder of the void that exists in Black political leadership. The face-value acceptance of the budget analysis conducted by both parties is a telling sign that very little critical thinking takes place when Black leadership interacts with American fiscal policy. Rather than break ranks with Republican and Democratic number-crunchers, Black liberals and conservatives alike become spokesmen and women for special interest groups that hope to carve up the budget as if it were a Thanksgiving turkey. The deafening silence in the Black media on the budget process, how it works , who controls it and who benefits from it is unfortunate. It is a rare experience these days to encounter a Black political reporter who does not seem outright intimidated by the scope of the federal budget much less confident enough to attempt to analyze it. Some of these politicians and reporters even believe that they would be out-of-place to do so. In many respects, the hesitancy of Black media and politicians in addressing the issue takes one back to the days when Blacks were slow to "figure behind" white Americans in business transactions. The result of such a leadership style is that false and peripheral fiscal issues are placed before the Black Electorate.

Blacks get so little from the budgetary process because the premise from which its political establishment operates from in fiscal matters is flawed. For the last 35 years, Black leadership has been locked in a covenant with the American political establishment, undeniably through the Democratic Party. The arrangement, in essence, sprung from the dissatisfaction expressed and demands made during the Civil Rights Movement. It coalesced into a relationship between Civil Rights Leaders and the Democratic Party establishment and became an agenda in the form of the Civil Rights Bill of 1964 and President Lyndon Johnson's Great Society programs. The Great Society programs, including Medicare, were designed to alleviate economic distress among the poor, elderly and Blacks. And for a brief period of time, they were embraced by the country as a necessary step to address the disequilibrium between Black and white that the Civil Rights Movement exposed. However, the American electorate gave the agenda only a small window of opportunity in which to operate and soon many voters began to link the country's cultural decay with the attention that the American government was giving to Black issues. It is a tactic that many cultural conservatives continue to use today.

Before 1997, America last had a balanced budget in 1969 and many have used that year as a marker in their efforts to show that America's budget problems were a result of the increased social spending of the Great Society programs. Those who speak and write in this vein are often conservatives with an ax to grind and little room in their political agenda for much stronger arguments that expose the role that increased defense spending and U.S. monetary policy played in the growth of the deficit.

Unfortunately, no Black political leader in the last 25 years has been able to put such economic arguments together, and because of that, the Black electorate is defenseless when it attempts to counter conservative and Republican attacks on the only political agenda that Blacks have known - Civil Rights, the New Deal and the Great Society programs. By merging the Civil Rights Movement with the interests of the Democratic Party, Black spiritual leaders began to defer to white liberal politicians, economists and social scientists in the arena of public policy development. Nearly 30 years later, this deference is still evident as Black political leaders, many of whom are sincere, do little beyond accepting the latest agenda developed by the leadership of the Democratic Party, and its affiliated think-tanks. One needs to look no further than the Black Caucus' cry that in this year's budget battle their top priority, like that of other Democrats, is to "Save Social Security First." But just because President Clinton wants to "Save Social Security" in order to score political points on the GOP, does not mean that doing so must be the top priority of Black America. Far too often, leadership in the Black community has linked the interests of the Democratic Party with that of the fate of Black America. The same is 100 percent true of Black conservatives who promote the fiscal policies of the Republican Party as if it were God's plan of redemption for the Black masses.

In American politics, the budget debate can be likened to a shell game that recruits economists, budget analysts and think-tanks of all political persuasions in an effort to build a foundation for the perpetuation of partisan policies. These policies are usually two-fold in nature and represent the interests of the two-party system. For Democrats the research and position papers always justify the continuation of troubled New Deal and Great Society Programs and for Republicans they justify the continuation of a half-hearted Supply-Side and Devolution agenda. The biggest loser in this shell game is the Black electorate and the poor who are forced to accept the continuation of troubled spending programs or the total elimination of these programs. The option of picking between the lesser of two evils is all that is available to Black voters because their leadership does not aggressively advocate policies in the early stages of the budget debate. Often, Black members of Congress wait for the party establishment, presidential advisers and Democratic congressional leaders to develop and communicate the agenda. Never is this more evident than in the yearly budget battles where closed-door negotiations and behind-the-scene deals are the norm. After the private talk is over, the process shifts into a vote-garnering mode where Black members of Congress get their first peak at what already has been agreed upon. Of course, if the President and Congressional leadership support the "deal", Black members of Congress are supposed to automatically endorse it - in the spirit of party unity.

If the best interests of the Black electorate are ever to be obtained, the approach that Black leaders take toward the budgetary process must be reformed. Black political leaders must move beyond agreeing to support pre-arranged agendas and must begin to take a more proactive approach. This should begin with a total review of the impact that American fiscal policies have had on Blacks as well as a critical review of the federal budget process. A thorough analysis should be conducted of all calculations, accounting practices and partisan maneuvering involved in budget talks. In addition to this, non-partisan reviews of all government budget reports authored by the Congressional Budget Office (CBO) or the president's Office of Management and Budget (OMB) should be undertaken. If more analysis of CBO and OMB reports were performed by Black economists and made available to Black members of Congress and Black media outlets, it is less likely that these same members of Congress would be willing to repeat fallacious arguments in order to score points with their political party and special interests. Rather than simply analyzing the budget surplus and whether or not the social security trust fund is being raided, Black political leaders should turn a critical eye toward the larger macro issues shaping budget politics. From that starting point, reform can take place. We take a look at three factors missing from the current budget debate and how black politicians can use these factors in the best interests of their constituents.

The Need for a Capital Budget:

If any major corporation or small business in America operated and presented a budget in the format which the United States government does, they would not be in business for long. True, the U.S. government does not have the pure profit motive of a business, but there do exist critical similarities between the government and business that if properly recognized, would change the entire budget debate. A major similarity between the government and a business is in the area of capital investment. When a corporation buys a building, purchases a computer system or a van, it is building up its capital in a manner that positively affects the business. The new building may mean that the corporation can warehouse its own inventory of goods, or even open a new office. The new computer system means that the corporation can now save thousands of dollars in expenses as it moves more of its communications workload from fax machines to e-mail. The van means that the corporation can now move its own products throughout the city without postage or courier expenses. A similar effect exists when a government builds a bridge, completes a new mass transit line of builds a dam that harnesses energy. All of these government expenses can lead to increased tax revenues as businesses are able to improve their bottom lines through the use of such improvements to the infrastructure of the nation. The similarities end here though because unlike a business the government is not able to spread the entire cost of the capital expenditure over the productive life of the new capital. The government charges the entire cost of the new capital in the year in which it was acquired. All government expenditures, no matter what they are for, a new bridge or widgets for Air Force One, are lumped together. Unlike a business, there is no distinction between the current budget and a capital budget. This is the case even though the bridge makes a direct contribution to the economic growth of the country as numerous businesses are able to more efficiently transport their products thus increasing their profits and subsequently tax revenues. Can anyone imagine how businesses would show anything but a deficit if they had to account for their expenses as the government does?

If the United States government had a reasonable budget which made the key distinction between capital and current expenses, the deficit debate of the last 30 years would never have reached a fever pitch. There must exist a mechanism in the federal budget that recognizes that not all federal expenditures are created equally. Some expenditures contribute nothing to economic growth and others have the totally opposite effect of serving as a catalyst for growth and producing higher tax revenues. Such expenses more than pay for themselves. Conservatives that pooh-pooh the New Deal policies of Franklin Delano Roosevelt fail to recognize the enormously positive impact that some of his infrastructure projects had on the American economy. Black politicians should take the lead in advocating legislation that mandates that the government's accounting practices make a distinction between capital and current expenditures. Such an action if implemented today, would dramatically increase the non-social security related surplus and strengthen the case of Black members of Congress who wish to preserving key government spending programs.

Recognizing the Impact of Monetary Policy:

One of the largest factors that led to the booming deficits of the 1980's was the fact that spending for entitlements, such as Medicare and Social Security, skyrocketed because these entitlements were indexed to the cost of living and thus inflation. According to one measure, inflation grew at no more than the rate of 2.4 percent in the 1960's, but grew as high as 7.1 percent in the 1970's. Some prices went up by 50 percent to 100 percent, depending upon the measurement instrument. The Nixon administration marked a time period where Democrats and Republicans attempted to out-do one another in their efforts to make Social Security benefits immune to the scourge of inflation. Nixon and Congress dueled over who could increase benefits for Social Security recipients the most, and the result was that benefits were increased by 20 percent - some believing that this was more than enough to compensate for inflation. The same benefits that rose slightly in the 50s and through the mid-60's, skyrocketed thereafter and from 1979-1981 they rose some 40 percent because benefits were indexed for inflation. This meant that from 1979-1981 the U.S. government paid out $400 billion more in entitlement benefits than it would have if cost of living adjustments were maintained at the level they averaged from 1973-1979. Therefore, the root of the huge deficits of the last 20 years can be found in the monetary policies of the Nixon administration when the link between the dollar and gold was severed, and inflation shot upward. Black political leaders who place sole blame for the deficit on the Reagan tax cuts are presenting an incomplete picture. The deficits were a direct result of the boom in entitlement spending due to inflation. If any of the members of the Congressional Black Caucus had understood that Nixon's decision to take the dollar off gold would lead to inflation, they would have been able to predict how Federal Reserve monetary policy would have influenced the size of the entitlement programs.

The Need for Dynamic Scoring:

Under the infamous 1990 budget deal, a pay-as-you-go rule (known as PAYGO) was imposed on the federal budget. The PAYGO system required offsets for: 1) any new entitlement program 2) expansion of benefits in an existing entitlement program, and 3) tax cuts. In the area of tax cuts, this meant that any tax cuts had to be paid for by an offsetting cut in spending. If taxes were cut, they had to be paid for with a corresponding spending cut. The problem with PAYGO and its use today, is that it treats all tax cuts equally. Therefore, even though a tax cut may increase the profitability of businesses, and increase economic growth, and subsequently tax revenues, it would be frowned upon if it was not "paid for" by a cut in spending in that same budget year. The process of forecasting the effects on economic growth and tax revenue that a tax cut creates is referred to as dynamic scoring. Dynamic scoring like a capital budget, would reflect a more realistic view of U.S. fiscal policies and their impact on tax revenue. It also would open the door to targeted tax-cuts that could revitalize distressed inner-city and rural areas. For the purpose of balancing the budget, the PAYGO rule does a fine job, but it also has a destructive effect on policies that can foster economic growth where it is needed most. The Black Electorate has to think through the question of how a balanced budget has impacted them. Have they truly benefited from the elimination of the deficit? Furthermore, if the budget indeed has been balanced "on the backs of the poor", where has that left Blacks? The PAYGO rule makes it extremely difficult to justify tax cuts that could unleash the productive capacity of inner city entrepreneurs. In 1990, Republicans and Democrats thought they had a mandate from the American electorate to balance the budget at all costs and the vast majority of Black political leaders sided with Democrats in that debate, thinking that they were rolling back the gains that the wealthy made during the Reagan administration. However, in reality they were depriving themselves and the Black Electorate of the option of using tax-cuts as a vehicle to economic growth. Ever since Blacks have had the right to vote they have relied upon spending programs to address their problems - which has resulted in a one-sided approach to their woes and a one-party affiliation that hinders their embrace of other fiscal policy options. When Blacks undertook class warfare against the policies of President Reagan, they did so in a manner that demonized policies that could one day prove to be to their own benefit. If affirmative action is ended, and the safety net totally removed, what fiscal policy vehicle, other than tax cuts, will the Black Electorate turn toward? With an investor class growing rapidly, and entrepreneurs developing everywhere you turn, the Black Electorate deserves more than a one-sided approach to fiscal policy. To think that all the budget and American fiscal policy has to offer Blacks is Medicare, Medicaid, and Social Security is insulting. By depicting almost every tax cut offered in Congress as "for the rich", Black leaders do themselves and their community a disservice. Surely these same leaders can craft together tax cuts that will help inner city businesses thrive and capital flow into distressed areas. Reps. Danny Davis (D-IL.) and William Jefferson (D-LA.) are two members of the Congressional Black Caucus who have been able to break free of the spending paradigm and advocate measures that cut taxes, and promote investment and production. If the Democrats take back control of Congress next year, they will be in control of the Congressional Budget Office (CBO) which serves as the official referee for tabulating the surplus. If members of the Congressional Black Caucus can embrace the concept of dynamic scoring and persuade the CBO to embrace it, Democratic control of Congress could be one of the best things to happen to the Black Electorate in the last 30 years. But only if Black members of the Congress free themselves from their current state of party dependency. The 30-plus year covenant between establishment Black leaders and the Democratic Party has to be reformed if the masses are to benefit. If Black political leaders can obey the President's call and rally to save a retirement program, why can't they interpret the poverty in the Black community as a call to action on the development of an economic growth agenda? Only in the Black community does social security come before economic prosperity.

Wednesday, September 28, 2005

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