August Budget Agreement Is Already Out Of Date

When we last left the federal budget debate in early August, the Budget Control Act — the agreement to raise the federal debt ceiling and reduce the deficit — had been enacted into law and Wall Street and the rest of the country were supposedly breathing a deep sigh of relief because, at least as far as spending and taxing was concerned, life was good.

Except that it wasn’t and isn’t. 

Think about what’s happened in the slightly more than four weeks since the agreement was signed.

An earthquake occurred on the East Coast that damaged a number of federal and other facilities that will need to be fixed. The costs might not be large, but they weren’t anticipated. As a result, the August budget agreement is no longer exactly on point or precisely relevant.

Hurricane Irene did major damage and had a huge effect on people’s lives from North Carolina to Maine. The full extent of the damage is not yet known. We do know, however, that, like the earthquake, this storm wasn’t anticipated when the budget deal was put together and the resources to deal with it don’t exist without changes to what was decided in August.

Federal Reserve Board Chairman Ben Bernanke made it clear at the Fed’s annual conference in Jackson Hole, Wyo., that the economic recovery was not proceeding as expected and that Congress and the White House would have to use the budget to deal with it. Deficit reduction is still important, he said, as long as it it’s done when economically appropriate rather than immediately for political reasons.

There are lots of reasons to disapprove of the budget deal, but none of this is meant as a criticism. Although natural disasters happen frequently and the cost of dealing with them should always be built in to the forecast, at least two of these three events could not be and were not specifically anticipated to occur immediately after the law was enacted. The third — Bernanke’s statement — was far more direct than anything he had said before the agreement was negotiated or signed.

But these changes do point out yet again what policymakers and those who observe them always seem to forget: All budget deals and agreements, indeed all federal budgets, basically are only good until what should now be the accepted definition of “long term” when it comes to federal policymaking — lunchtime tomorrow.

In fact, history shows that federal budget agreements such as the one enacted in August are almost always changed, revised, ignored or abandoned soon after they’re put in place.

Long before the current versions of the House and Senate Budget committees were created in 1974, a joint committee on the budget was created with much promise in 1949. But despite the fanfare that accompanied its creation, that high-profile panel quickly faded into what is now obvious obscurity when almost no one in the House or Senate wanted to serve on it.

The 1974 Congressional Budget and Impoundment Control Act failed to have its promised effect when major provisions were routinely ignored or implemented very differently from what had been expected when the law was adopted.

The Balanced Budget and Emergency Deficit Control Act, better known as  Gramm-Rudman-Hollings, replaced the Congressional Budget Act in 1985. It was revised two years later by the Balanced Budget and Emergency Deficit Control Reaffirmation Act — Gramm-Rudman-Hollings 2 — when GRH-1 proved to be unworkable. Three years later, the Budget Enforcement Act supplanted GRH-2.

That law also didn’t live up to expectations and, after many of its provisions stopped being implemented informally, was replaced in 1997 by the Balanced Budget Act. Major portions of the BBA were then completely ignored when the deficit unexpectedly turned into a surplus in 1998 and (absolutely contrary to what the law actually stated) key Members of Congress no longer thought that act should continue to be implemented.

This brief history shows that it is not safe to assume that budget agreements like the new Budget Control Act will stay in place and be implemented as planned for the 10 years the law is supposed to be in effect.

The more correct assumption is that the agreement will be in place for a short time because of a number of factors, including the natural catastrophes that have already occurred since the measure was signed, changing economic conditions like those discussed by Bernanke and man-made disasters such as terrorist attacks and military situations that these days always seem to be around the corner.

In this case, the August budget agreement isn’t likely to remain in place or accomplish what was expected for two basic reasons.

First, hurricanes and floods will continue to bring demands for additional spending or tax breaks that aren’t allowed or are close to impossible to implement under the Budget Control Act. These demands will intensify and become harder for Congress not to do as these things happen closer to the 2012 elections.

Second, public attitudes toward deficit reduction versus job creation are much more likely to change as the elections get closer. This means the deficit outlook will change compared with what was projected in the August agreement because some new jobs or stimulus program will be enacted. It also means that the across-the-board spending cuts that are supposed to happen in January 2013 if the Joint Committee on Deficit Reduction can’t agree on anything or if what it proposes isn’t enacted have to be considered especially vulnerable to changes.

In other words, the federal budget world that seemed so at peace with itself on Aug. 3 is really in a great deal of turmoil, and like all the budget deals that have come before it, this one is already on the skids even if it’s not immediately obvious.

[Cross-posted at Capital Gains & Games]