Budget Metrics and the Cheating Clotheshorse

Suppose your goal is to lose some weight. No, I’m not saying you’re overweight; you look marvelous! But use your imagination.

To lose weight, you might reduce your calorie intake, or increase your activity, or most likely some combination of both. Your first step would probably be to weigh yourself. Why? Because you want to measure your progress, and weighing yourself on a regular basis provides feedback on the effectiveness of your weight loss program.

This is an example of choosing the proper metric to help achieve the desired goal.

Now suppose you are the President of the United States and you are serious about reducing the budget deficit. What do you do? You need to cut spending, increase revenue, or some combination of both. After you set your goal, say cutting the budget deficit in half over a certain period, then you have to pick the proper budget metric to measure your progress.

Is the Unified Budget deficit the proper measure? The short answer is no.

First, what is the Unified Budget? The Unified Budget is “a measure in which every function and activity of government [is] added together to assess the government’s fiscal position.” (Definition from SSA: Budget Treatment)

The Unified Budget deficit provides a good estimate of the amount of borrowing required from “individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government” to fund the US Government. (See Treasury for descriptions of Debt Held by the Public and Intragovernmental Holdings). Economists use the Unified Budget deficit to estimate the “crowding out” impact of government borrowing. Crowding out occurs when government borrowing leads to higher interest rates and induces a reduction in private sector investment expenditures.

But remember our goal: to reduce the budget deficit. And the Unified Budget is a flawed tool to measure the effectiveness of the President in achieving this goal.

Let’s reconsider your weight loss program. On the first day of your program, before you weigh yourself, you put on all of your clothes. On each succeeding day, you put on one pound less of clothes before your weigh-in. If you are a real clotheshorse, this charade can continue for some time and obviously renders the metric useless for measuring your progress; you’ve only cheated yourself. To be a useful measurement tool, at your regular weigh-in you should wear a similar amount of clothes, and probably weigh yourself at the same time.

The Unified Budget has a similar problem as the cheating clotheshorse above; in this case, it’s the impact of the Social Security Trust Fund. But what about the other trust funds? There are over 150 Trust Funds in the US Government budget. Most of these funds, like the Highway Trust Fund, Black Lung Disability Trust Fund, Civil Service Retirement, Military Retirement, etc., are credited with a stable or steadily increasing amount of assets. So it doesn’t really matter if we include these funds in a measurement tool to evaluate the effectiveness of the President to achieve his goal.

When we weigh ourselves, we are interested in our relative weight, day to day. So it doesn’t matter if we weigh ourselves fully clothed or naked, as long as we are consistent. The same is true with most of these trust funds. If we include them, we are fully dressed. If we exclude the trust funds, we are naked. It doesn’t matter as long as we are consistent.

But it does matter for Social Security since the SS trust fund behaves differently from the other funds. The SS Trust Fund was specifically designed by Alan Greenspan and the Greenspan Commission to run ever increasing annual surpluses until the Baby Boomers start to retire. Then the annual surpluses will start to decrease, and eventually the trust fund will start running annual deficits. Since we know this behavior in advance, and this is a separate program outside the year to year purview of the President, we can exclude the SS Trust Fund from the metric used to evaluate the performance of the President in achieving his goal.

The good news is the Greenspan Commission recognized this issue. As part of the 1983 law signed by President Reagan, the Government was required to report the General Fund deficit, not the Unified Budget Deficit, starting in 1993. Originally the General Fund excluded the Social Security and Medicare Trust Funds, and the operation of the Post Office. Medicare was subsequently moved back on-budget (another issue for another day). The amounts for the Post Office are negligible.

So the best metric available today to measure the President’s progress in reducing the budget deficit is the General Fund deficit. Not only is the General Fund the proper measurement tool to evaluate the performance of the President on deficit reduction, reporting the General Fund deficit is also the law!

Unfortunately Mr. Bush has made no progress, and the General Fund deficit will be close to $600 Billion again in fiscal 2006.

As pgl noted, some administration apologists are trying to mislead the American public by using the Unified Budget deficit. I suppose, when these people try to lose weight, they bundle up the first day and weigh themselves – and then weigh themselves naked the following day – and declare victory.

Like the cheating clotheshorse, these apologists are only cheating themselves and misleading their readers. In reality, Bush has made no progress on the budget deficit.

UPDATE: Reader Steve points out that the most recent MTS data shows a small improvement in the General Fund deficit, whereas the annual increase in the National Debt shows no progress. So the last sentence should read “Bush has made little or no progress on the budget deficit”.

Best Regards, CR Calculated Risk