Last week President Biden released his Fiscal Year 2023 budget proposal. The annual release of the budget proposal is always exciting for economists that study public finance. The president’s proposal is the first step in the federal budgeting process, which in some cases leads to the full passage of a federal budget by the start of the fiscal year in October (though perhaps surprisingly, the process rarely works as intended).
This year’s budget is especially interesting to look at because it gives us our first look at what post-pandemic federal budgeting might look like. And while the budget has a lot of detail on the administration’s priorities, I like to go right to the bottom line: does the budget balance? What are total spending and revenue levels?
The bottom line in the Biden budget this year is that permanently large deficits are here to stay. Keep in mind that a budget proposal is just a proposal, but it’s reasonable to interpret it as what the president wants to see happen with the budget over the next 10 years (even if Congress might want something different). Over the next 10 years, Biden has proposed that budget deficits remain consistently right around 4.5% of GDP, with no plan to balance the budget in the near future.
How does this compare to past budget proposals? For comparison, I looked at the final budget proposals of Biden plus his two predecessors. I start Obama’s in 2021 to match Trump’s first year, and all three overlap for 2023-2026. I put these as a percent of GDP so we don’t have to worry about inflation adjustments (though we might worry about optimistic GDP forecasts, see below).
While I was listening to The New Bazaar and enjoying an episode with Tim Harford, I was reminded that economists don’t just have the job of understanding the world. We have a responsibility to our fellow man of keeping fallacy and economic misunderstanding at bay (a Sisyphean task). That doesn’t mean that we just teach economic theory. We can and should advocate for good economic policy ideas and try to think up some policy alternatives that fit our political climate.
Here I was sitting, being grumpy at the US Federal deficit, when an idea came to me. I am full of ideas. Especially unpopular ones. So, I especially like ideas that make political sense to me given that the political parties care about their policy values and re-election. Asserting that people in congress actually care about policy apart from re-election is kind of a pie-in-the-sky assertion. But, here we go none the less.
Mancur Olson liked to emphasize the role of concentrated benefits and diffused costs in political decision making. Economists point to it and explain the billion-dollar federal subsidies that go to interest groups. A favorite example is Sugar subsidies. As of 2018 there were $4 billion in subsidies and sugar growers earned $200k on average. The typical family of four pays about $50 more in subsidies each year as a result. The additional tax burden of higher sugar prices is also relatively small. Therefore, says the economist, the few sugar beet and sugar cane farmers have a large incentive to ensure the subsidy’s survival while others pay a relatively small cost to maintain it. That small cost means that there is little money saved and little gain for any individual who might try to fight the applicable legislation.
That’s the standard story. But it’s so much worse than a story of concentrated benefits and diffused costs. The laity don’t know how the world works in two important ways. First, many people will simply say that they are happy to protect American producers for an additional $50 per year. That’s a small price to pay for ensuring the employment and production of our fellow Americans, they say. An economist might reply, in a manner that so automatic that it appears smug, that that $50 would instead go to producers of other goods and that our economy would be more productive if the sugar-producing resources were diverted elsewhere. This is Bastiat’s seen and unseen. Honestly, I suspect that neither economists nor non-economists can adopt the idea without a little bit of faith.
Secondly, people don’t know what causes a particular price to change. Hayek painted this characteristic as a feature of the price system. We are able to communicate information about value and scarcity without evaluating the values of others or the actual quantity of an available resource. However, lacking causal knowledge of prices makes for some bad policies. Say that the subsidies and protections subsided and the price of US sugar declined. The consumer would likely not know anything about the subsidies in the first place, much less that they were rescinded. Further, the world is a complicated place and people are apt to thank/blame irrelevant causes otherwise (corporate greed, anyone?).
When economists blame concentrated benefits and diffused costs, they often assume that there is perfect information. THERE ISN’T. People don’t know how the world works well enough to predict with confidence what will happen in an alternate version of reality without subsidies. Nor do they understand the particular determinants of prices in our current world. Half the battle is a lack of knowledge about the functioning of the world – not just that the costs and benefits fail to provide a strong enough incentive for legislative change.