It is hard to imagine a bigger disconnect between what Congress and the White House want to do with the budget and what the Federal Reserve is saying and doing about the economy than what has occurred over the past two weeks.
On Monday, June 28, the Office of Management and Budget released a revised budget estimate showing that the projected budget surplus will be greater than previously anticipated. As a result, the White House came up with a new plan for spending increases and tax cuts that will put more money in the hands of consumers-and in so doing, spur economic activity.
Barely two days later, the Fed formally decided that the economy needed to be slowed to avoid inflation, and raised interest rates to decrease economic activity.
The very next day the Congressional Budget Office released its own budget update showing the surplus to be greater than it previously estimated. That started a virtual stampede on Capitol Hill, with proposals for increased spending or bigger tax cuts announced almost daily, even though those moves are likely to cause the economy to grow faster than the Fed thinks is appropriate.
In other words, fiscal and monetary policy are hardly in sync these days. To the contrary, Congress and the White House seem hell-bent on providing a tax cut, a spending increase or both-regardless of what the Federal Reserve is saying or doing. This is in spite of the fact that both Congress and the White House give much of the credit for the past decade's extraordinary U.S economy to the way the Fed has managed it.
At least part of the reason for this extreme disconnect is the lack of experience with budget surpluses. There have been so few surpluses in the last century that voters, businesses, financial markets and therefore politicians are not sure what to do with them.
A greatly changed economy is also partly the cause. It used to be that Washington policies-like spending increases and tax cuts, which increased the number of jobs and decreased unemployment-were the keys to voters' hearts. Now, however, with unemployment already at a low 4.3 percent, "Help Wanted" signs in the windows of almost every store and home ownership at record levels, interest rates have become far more important to the average family. Policies that lead to lower interest rates and allow homeowners to refinance will have a bigger impact on family finances than almost any tax cut or spending increase that could conceivably be enacted. Lower rates also make it possible for more families than ever before to own their own homes.
Part of the reason is also fiscal policymaking atrophy. Reducing the deficit has been an almost unquestioned policy and the federal budget process has been devoted blindly to it since Gramm-Rudman-Hollings was enacted in 1985. This means the current process provides few opportunities for threshold questions to be asked, let alone answered, about where the economy is going and what Congress and the administration need to do to get it there.
Federal budget procedures also are biased against lower interest rates. Representatives and senators get to vote and, therefore, take credit for tax cuts and spending increases. Interest rates, on the other hand, do not require votes and are set by the Fed or financial markets rather than Congress. Similarly, the president gets to sign budget bills but only can watch, with no direct input, while interest rates change.
Finally, part of the reason is the Federal Reserve Board's recent unwillingness to indicate its fiscal policy preferences.
This means that the budget talks scheduled to take place at the White House this week between congressional and administration leaders may be dealing with the wrong questions. The higher surplus estimates are not an excuse to start the budget equivalent of a shopping spree. Instead, they offer policymakers the luxury of being able ask whether any change from current macroeconomic policies is needed. Any talk about Medicare, taxes, Social Security and discretionary spending should come only after an agreement is reached on that.
Fiscal Y2K Countdown
As of today there are only 32 potential legislative days before the start of fiscal 2000. If Mondays and Fridays, when Congress typically does not conduct legislative business, are excluded, only 18 days are left.
Question Of The Week
Last Week's Question. We will not know the winner to last week's question for about three more weeks. After all, there is no way to know how many fiscal 2000 appropriations conference reports will be passed by both houses by the time Congress recesses for the summer until members, well, recess. Note: To be fair to the many people who sent in their guesses last week, no other responses will be accepted as of today.
This Week's Question. How many budget analysts does it take to screw in a light bulb? Come up with the most interesting answer, and you will win your very own "I Won A Budget Battle" T-shirt to wow your friends and family. Send your response to scollender@njdc.com.
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