Personal Finance

Zero Sum Game – The Black Box of the Congressional Budget Process

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So, how do you do your household budgeting? Millions of us use QuickBooks or some variation thereof. For those who are technologically challenged (I was for years), yellow pads, composition books, copy paper, accounting journals, even index cards, are the medium of choice.

However different their materials may be, most consumers who keep a household budget without the aid of an accountant or bookkeeper use pretty much the same method. As a rule, even accountants and bookkeepers use the same method as those who scribble on scraps of paper.

We call it household budgeting—a simple, straightforward name for a simple, straightforward, sometimes painful process. Number crunchers, however, simply can’t resist giving things like this a much more complicated-sounding name.

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According to them, your household engages in what is now called “zero-based budgeting.” Simply put, you start at zero and go from there. If cash gets tight, you might reduce your line item for baseball game tickets from $1000 a year to only $500 or from $100 a month to $30. You can also add or eliminate line items with a simple stroke of the pen—maybe you can’t afford baseball tickets at all. Regardless of what you decide to do, one thing is certain—if you spent $1,000 on tickets last year and $1,000 again this year you didn’t cut your spending.

You also intuitively recognize that budgeting and spending is only meaningful across certain time periods. If you budget ahead, as you should, you might have budgeted $1,000 for tickets next year. But you wouldn’t have budgeted, under any circumstances, $1000 for baseball tickets in 2016. Why? Because you’re smart enough to recognize that there are too many unknowns. In five years, your 10-year-old might be bored with baseball; maybe there will be a strike in 2016 (it seems like every minute players in some league are walking out and owners are locking them out); maybe—no, certainly—ticket prices will have changed by then. And, of course, it’s in the back of your mind that you might be making less money in 2016, though perhaps you’ll be making a lot more. Heck, maybe you’ll win the lottery.

All of this makes sense, doesn’t it? Unfortunately the way you, and most members of the human race think about money—the way that corporations, even very large ones, think about money—is NOT the way the United States government thinks about money (i.e., your money).

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The federal government uses “baseline budgeting,” as mandated by the Congressional Budget Act of 1974. Here is how baseline budgeting is defined in current law: “For any budget year, the baseline refers to a projection of current-year levels of new budget authority, outlays, revenues, and the surplus or deficit into the budget year and the out-years based on laws enacted through the applicable date.” And you thought credit card and mortgage contracts were indecipherable?

Here’s what that means in plain English. Each year, instead of starting at zero, the government begins budgeting based on what they spend the previous year, with projected increases over time. Therefore, there’s no place to go but up.

And here’s the real kicker: originally, the mandate was to use baseline budgeting for a projected period of five years, but soon after the passage of the 1974 Act, that legislatively-mandated period was extended to a 10-year projection.

This is voodoo economics at its best: the Congressional Budget Office “CBO” baseline projects a spending increase for the federal government of approximately $9.5 trillion over the next 10 years. Thus, through the magic of baseline budgeting, an increase in federal expenditures of only $7.5 trillion over the same period would be characterized as a budget CUT of $2 trillion! That’s right, in 2021, even if we were spending $7.5 trillion more than we are today, we would all be celebrating the “significant” budget cuts that were made in 2011. A “non-cut” cut!

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Zero Sum Game (cont.) »

Image: DaveBleasdale, via Flickr.com

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