This book tells the story of the budget process in the United States. The language, policy, and power of government is money. And the United States has a unique, but ever evolving, system for determining how money is spent when compared to other modern governments. Through the course of this book we will seek to understand the budget process and how it is central to understanding how the federal government functions.
The powers of the purse granted to the Congress are enumerated under the Constitution. The lack of a legal guide for exactly how to delegate the powers, and under what conditions, has led to a budget process marked by power struggles over the last 230 years. This book covers the transformation of American government through the lens of shifting power over who controls what flows in, and out of, the purse of government.1
Additionally, the history of the budget process is also about the people who have influenced the evolution of the budget system; their individual histories, personalities, relationships, strengths, weaknesses, conflicts, victories, and tragedies. This book tells the story of a process that was constantly evolving, the people who had the most influence over it, and where it is today.
It could be easy to dismiss most action that took place before the enactment of the Congressional Budget Act of 1974, establishing the modern budget process, since before that there at first appears little consistency. On close investigation, there are themes that cycle throughout our budget history. Certain issues have always been controversial. For instance, debt has always been a contentious political issueāeither on the periphery or at the epicenter. The size and purpose of the federal government was debated from the very beginning. Taxes have always been politically unpopular and a subject of great debate. And the use of tariffs and taxes beyond revenue generation has always been a point of contention. However, the specific circumstances of different periods have shaped the ideas regarding each issue. Although general controversy around debt or taxes may be timeless, many of the arguments developed during the different periods are difficult to generalize to our current or future circumstances. All of these issues are addressed within their temporal context; they influence the future, but are difficult to generalize.
One theme that applies to the US government in general, and budgeting specifically, was conflict and ambiguity built into the system from the beginning. In order for the process to succeed in achieving a desired end, whether it was to provide money for the government or increase the nationās creditworthiness, the system requires cooperation between equal branches who are constantly vying for power. Often times the budget process gets caught between disagreements of competing parties.
Other times, such as during national crises, there has been a tendency to consolidate power, usually in the presidency, to streamline budgeting decisions. But there are also many examples of Congress taking back power based on what they considered to be overreach based on those past actions, regardless of how necessary at the time.
The history of the budget process reflects a combination of electoral politics as well as micro- and macroeconomic policy. It involves decisions about spending, taxes, tariffs, and debt management. It is also impossible to tell a history of the budget process without monetary policy which has had a significant influence on fiscal policy in every period.
There already exists a significant literature on the history of the budget process. Aaron Wildavskyās formative work The Politics of the Budgetary Process (1964) suggests that the budget process is best understood as a development around political rather than simply economic determinations.2 Practitioners have argued something similar, such as David Stockman, Reaganās Director of the Office of Management and Budget, who claimed in Triumph of Politics (1986) that budgeting decisions and politics are inseparable.3 Both Wildavsky (1964) and Lindblom (1959) argue that the budget process developed incrementally in response to events of the time.4
The intrinsic political struggle can be broken down into what Schick (1980) has described as the āparts against the wholeā or what Stewart (1989) has called ādistributionalā versus āaggregationalā problems.5 Distributional problems are, essentially, electoral and result in the determination of āwho gets what.ā Aggregational are āwhat happens when all the budgetary pieces are added together.ā
Throughout much of our early history, spending bills were just an accumulation of the resolution of distributional problems. However, most budget process reforms since 1921 can be seen as an attempt to resolve aggregational with distributional problems. Stewart (1989) suggests that the budgetary conflicts can be interpreted as rising from the tension this resolution has created. In this book, aggregational problems include debt management and macroeconomic policy.
Wildavsky (1988) suggests that budget outcomes are a compromise between groups with different preferences, including preferences toward debt. Over time, these preferences have shifted. This includes the evolution of macroeconomic policy itself. Prior to the 1960s, presidents and Congress could generally agree. Therefore, adjustments to spending, revenue, and overall macroeconomic policy were made on the margin to meet some end.
Savage (1988) suggests that budget policy setting is symbolic. This has driven the political pursuit of balanced budgets from Presidents Washington to Reagan. However, as this book will argue, this pursuit has also been economic. Prior to the 1930s and the influence of John Maynard Keynes on macroeconomic policy, balanced budgets were seen as an effective debt management tool, especially in world where seigniorage was not always an option. Thus, spending and tax policy often influenced one another; although this relationship has broken down since the 1960s with deficits now playing a larger role.
In fact, we find ourselves in a period where persistent deficits may not be as economically destructive as implicitly assumed. Blanchard (2019) has suggested that when rates at which the government borrows money are lower than the rate of economic growth, as they have been for considerable periods of time in the United States, we might not need to worry so much about deficit financing because debt can be rolled over. To the extent that a gap between real and potential output exists, the negative effects of debt on welfare may be limited.6 In fact, the concept of rolling over debt as a beneficial strategy is not new to American fiscal policy. Alexander Hamilton suggested rollover as an effective debt management strategy in the 1790s.
At the same time, there is a growing literature suggesting the fiscal austerity (i.e., deficit reduction strategies) may result in positive economic growth. Alesina, Favero, and Giavazzi (2018) and Giavazzi and Pagano (1990) both argue that large decreases in government spending can and have increased economic growth as they can be accompanied by market liberalization, debt stabilization, as well as other factors.7 These differing analyses highlight only one divergence in the economic literature that might affect a prescribed economic policy path.
This book suggests that both politics and economics have been critical to determining the evolution of the budget process. John Neville Keynes (1917), the father of John Maynard Keynes, suggested that economic events help shape economic theory.8 There is an interdependence between theoretical positions guiding policy and historical events. The same is true for understanding the historical arch of the budget process which has been driven simultaneously by politics, economic events, and economic theory. Similar to Wildavsky, Lindblom, and many others this book suggests that incremental development is mainly responsible for the development of the process although some events (World War I and the Great Depression, for instance) have led to substantial changes. However, budgetary outcomes may not be as incremental as experienced through the extensive growth in the federal government during the twentieth century.9
When the budget process has been successful, the structure does not have material effects on the actual outcomes. As many budget analysts have said over a long time, process does not guarantee outcomes. The structure itself is endogenous to the institutions, personalities involved, the time period, the various economic theories, and exogenous factors. Historically, the budget process has evolved quickly to deal with challenges of the day, whether war or economic crises, but it is not very effective in helping to resolve fundamental disagreements whether they are political or economic. At this point, the budget process breaks down and itās no longer helpful to policymakers in helping focus their cumulative attention on goal setting and execution.
Rivlin wrote: āThere will be little progress in reducing the complexity of the budgeting process until Congress realizes that it can contribute more to changing the future of the nation by directing overall policy, than by controlling details.ā10 But this sadly ignores the history of the process. Congress has almost never ignored the details. Asking them to change their ways is probably too much. The part must come before the whole.
Today, there are many disagreements on both the distributional and the aggregational levels. As the nationās goals have become more complicated, as the government has grown in size and scope, and as the federal budget has evolved to symbolize additi...