What Are the Goals of Congressional Budgeting? (with Paul Winfree)

Understanding Congress

The subject of this episode is, “What are the goals of congressional budgeting?”

My guest is Paul Winfree. He is a distinguished fellow in economic policy and public leadership at the Heritage Foundation. Importantly for today’s discussion, Paul has a great deal of knowledge about congressional budgeting. He has had stints both in the White House and in the Senate, where he worked on budgeting firsthand. Paul also is the author of the book The History (and Future) of the Budget Process in the United States: Budget by Fire (Palgrave Macmillan, 2019). So I’m very excited to be here with Paul Winfree.

Kevin Kosar:

Welcome to Understanding Congress, a podcast about the first branch of government. Congress is a notoriously complex institution, and few Americans think well of it, but Congress is essential to our republic. It’s a place where our pluralistic society is supposed to work out its differences and come to agreement about what our laws should be. And that is why we are here: to discuss our national legislature and to think about ways to upgrade it so it can better serve our nation.

I’m your host, Kevin Kosar, and I’m a resident scholar at the American Enterprise Institute, a think tank in Washington, DC.

Paul, welcome to the podcast.

Paul Winfree:

Thanks so much, Kevin. Really happy to be speaking with you today.

Kevin Kosar:

My sense is that if we asked Americans, “What are the goals of budget policy?” they likely would say something along the lines of, “It involves the government figuring out what to spend money on—like defense, for example—and how to pay for this spending. Budget balance is the goal of budgeting.” While that's true, what your fine book shows is that our government has had a variety of goals for budgeting over the past two centuries, correct?

Paul Winfree:

That's exactly right. One of the reasons why I wrote this book in the first place was that there's this narrative amongst budget experts in Washington, DC, these days that the budget process is broken. What I wanted to do is start to unwind that and ask both, "Well, why is the budget process broken?” but also, “How did we get to where we are today?" It might be my own bias on how I approach problems, but one of the things that helps me understand current mechanisms is also understanding how we got to those current mechanisms, rather than approaching the current problem sets as if they happened exogenously and were not predetermined by other things that have happened throughout our history.

So, what I do in this book is go back all the way to the very beginning and start with colonial America, and then walk us up to today. What you find throughout our history, in looking at both budget policy but also the formation of economic policy more broadly, is that there were lots of different goals, from debt eradication, to sending signals to European debt markets that we were a viable nation that they should take seriously, to macroeconomic management. The goals today are in some ways different than the goals 250 years ago, but in other ways similar. I think we'll probably talk about that a little bit in the next half hour.

Kevin Kosar:

All right. Well, let's start at the very beginning, which, as a wise person once sang, is a very good place to start. When the founders bargained out the U.S. Constitution, they had objectives for budgeting, didn't they?

Paul Winfree:

That's right. The founding generation was very practical in a sense, and they had to be. They were involved at the beginning of a new country, and like many founders of companies today, they didn't have a lot of time to prove to the world that their model was viable. Therefore, they tried some things such as the Articles of Confederation, which permitted the federal government to borrow money. But since the Articles didn't provide Congress with the power to raise revenue, they would apportion the cost of loans to the states based on their property values. This implicitly gave the states a veto over the terms of the loan agreements. Therefore, as a practical matter, you had officers of the federal government who had very limited power in negotiating the terms of these loans in Europe on behalf of the states, during a period when it took a typical mail ship one month to cross the Atlantic. Often, the state legislatures would have actually adjourned for the season by the time that the details of these agreements came back home for ratification. It's no wonder that James Madison wrote his friend Edmund Randolph saying that this created a bit of a struggle.

These first trials, though, were a reaction to the world that they had been attached to. This is partially a level of the perceived tyranny of the British crown. The press at the time had done a really good job fostering such sentiment. It was also partially a derivative of colonial governing bodies, cultures, and practical issues like physical distance and poor internal infrastructure that had fostered this decentralized mindset. But they had a serious problem, ultimately, with securing credit and managing debt payments. And to get other nations to take the newly created United States seriously, which was a prerequisite to life, liberty, the pursuit of happiness, and all of that, they needed to get their finances in order. So they changed things up rather quickly. As Alexander Hamilton famously wrote, "Debt…was the price of liberty,” and more important than any natural resource in maintaining the nation's security. Interestingly, and contrary to what you may hear from many protectionists today, Hamilton, the practical treasury secretary, preferred relatively modest and flat tariffs so as not to spook international markets and get into trading wars for this very reason.

But there was another goal that I talk about less in my book that I've become very persuaded by, primarily by the work of a guy at the University of Maryland named John Wallis, among others: that the avoidance of public corruption was also important for the founding, and also subsequent generations. This is because new Americans had witnessed instances where Parliament had provided special benefits to their political coalition, such as limiting market access through protected economic status in exchange for political support. This systemic corruption was in a sense intolerable, and would ultimately influence many of the budgeting reforms over our history. I think that this is something that may not make Americans different, but it is a characteristic of Americans. That is, for the entire existence of our country, there has generally been this populist intolerance to public corruption in a way that you don't see in other places such as China or Russia today. Public corruption seems to challenge the cultural notions of fairness and threaten virtues that are important to Americans, like liberty and freedom. This is also something that they would have learned from Adam Smith, who wrote about this very issue in particular in The Wealth of Nations, first published in 1776, that we know influenced the founding generation.

Kevin Kosar:

When I think about our Constitution, you won't find a section that says, "Here is the budget process and here are the objectives." Yet built into there, it seems to me, there's at least one objective, which is that the executive should not have independent authority to raise revenue, because the bad old kings of Europe did that and often started wars. I guess a second thing that's in there is the idea of revenue-raising—it should be done by the people in the government closest to the people. Therefore, revenue bills are supposed to start in the House, right?

Paul Winfree:

That's right. That was something that was learned and ultimately borrowed from the way that Parliament is structured in the British government. One of the issues that came about during the English Civil War was the king, King Charles at the time, was unilaterally executing his power as the monarch to raise taxes based on this threat of war. Ultimately, that upset people, led in part to the English Civil War. So when they went to go about putting things back together again during the Glorious Revolution, they made sure that essentially two things happened. The first thing that happened is that the Parliament had unilateral control over raising and lowering revenues—controlling revenues. The second thing is that they put that power with the House of Commons. That was adopted by the British colonists when they came to America, and ultimately was probably considered a truth when they went to go put together the Constitution. Of course this is the way we go about doing things.

Kevin, I'm no expert in British history, and especially British parliamentary history. But one of the other interesting things that seems to be an American institution is this one of advice and consent, which actually also has to do with budgeting powers. One of the things that you saw within the colonial governments was this issue where oftentimes the governor, who was a royal appointee, would want to do something. And the local legislatures, made up of British, directly elected representatives within the British colonies, would say, "Okay, we will support you in going about and doing something. We will raise revenue to go do that thing. But at the end of the day, we want to make sure that we have some say in who's ultimately going to be appointed to do whatever it is that you want to do." Hence, advice and consent. So again, they had this long, long history of this dynamic, that ultimately when they went to go put things together in the Constitution were probably just things that they took for granted. Well, of course this is the way that we go about doing things.

Kevin Kosar:

There was an element of a principal agent-relationship with the Congress, the elected officials being the principal, and the executive being the agent who is to carry out what the principals wanted. I should also mention before I move on to my next question that when it comes to raising revenue, Congress has to do it every year. You can't just say, "We're going to raise this revenue, and it's going to be spent this particular way in appropriations bills for the next hundred years." So they have go back and do this democratic exercise each year.

As America grew across the North American continent over the nineteenth century and had to contend with the Civil War and all sorts of other stuff, just for the sake of helping viewers get a sense of the breadth, how did the nation's budget objectives change?

Paul Winfree:

Well, now we're going to begin talking about one of my favorite periods in history, so you may have to bear with me here for a moment. During and immediately after the war, this objective transitions from becoming a viable nation to staying viable. And this wasn't so easy. The country's finances during the Civil War were often overlooked, which is understandable, as you mentioned, given the turbulence that was going on during the period. But the country didn't have sound financial footing heading into the war. In 1857, the federal government had reduced tariff rates at the same time that the country had to contend with this recession. What Congress did to deal with this is that they authorized a series of loans, but the government had a difficult time securing them because President Buchanan’s secretary of the treasury, a guy named Howell Cobb, was viewed as a Southern sympathizer. So in essence here, banks thought that if they gave him the money, then Cobb would run off with it. And they weren't exactly wrong; Cobb was an advocate for secession. He would go on to become the president of the Confederate Provisional Congress.

So Congress dealt with the budget deficit by increasing tariffs, which ended up being prohibitively high and reduced tariff revenue—because this is where they were on the Laffer curve, so to speak—by about 40 percent. One of the things that you begin to see during this period is that protectionism and trade policy begins to increase the volatility in government revenues, which causes policymakers to start to look for other ways to get cash. And when the war begins in April of 1861, the federal government had already been using loans to pay for about three-quarters of its spending. But within days of Confederate artillery firing on Fort Sumter on April 12th, they would exhaust all of the revenue that they would've pulled over the course of the year, and they turned entirely to borrowing.

On July 4th, 1861, Congress meets in this special session to provide for Lincoln's request for 400,000 troops and $400 million, which is about $12 billion in today's money. This begins a series of financial innovations from greenbacks to the federal income tax that are used to fund the war effort. At the time, all of these things were considered temporary, but we think of these things today as essentially standard tools in public finance. During the decade of the 1850s, customs duties accounted for about nine of every ten cents that the government collected. But after the conclusion of the war in 1865, customs duties would never account for more than 60 percent of total revenue again. So you really start to see a shift in reliance away from tariffs. We can also look to the war effort for this creation of institutions that, again, we think of today as part of the normal process. This includes things like the IRS and also the committees on appropriations.

Two of the biggest financial heroes of the Civil War that I write about it little bit in the book were Lincoln's secretary of the treasury, Chase, and Thaddeus Stevens, who was the chairman of the Ways and Means Committee. Like so many of the war's heroes, like Grant and even Lincoln himself, this wasn't exactly predictable. One of Chase's friends would later write, and I'm just going to read this quote because it's so good: "Had Mr. Lincoln known of the war that would follow his inauguration, it is not likely that he would have selected a man so ignorant of finance." So this is who Lincoln is picking as his treasury secretary. In fact, Lincoln himself didn't like dealing with the financial aspects of the government. When visitors would come to the White House and ask him about these matters, he would say, "Go see Secretary Chase, for he is managing my finances."

But ultimately Chase and Stevens were successful. This is I think in part because they were friends before the war. It was their close relationship that helped them get done what needed to get done. (Chase, as you likely know as a native from Ohio, was also from Ohio.) I also think that their relative inexperience with the way the government finances were supposed to work allowed them to have an open mind about what needed to be done in order to essentially make the government's ends meet. It's not like they didn't use experts; that's not what I'm saying at all here. As a matter of fact, Chase had a friend, who I talk a little bit about in the book, who had been a banker before the war, who he employed at the Treasury Department literally to advise him on how finance worked. But what was required during the war was an innovative approach to a really, really difficult problem, and generally a time period. And that's what transpired, I think in part because innovation had been a normal part of the budget process all the way from the beginning.

Kevin Kosar:

In your book, you note that “between 1789 and 1932, the annual budget of the U.S. had been balanced 66 percent of the time, or 80 percent of the time when excluding periods of major wars and economic recessions." That is an impressive achievement. And again, it's not something that's stipulated in the Constitution. How did the country do that? How did the legislative branch and the executive get together and make that happen so consistently?

Paul Winfree:

It's a difficult question. I think that it had something to do with persistence, necessity, and luck. In 1883, William Holman, who was a progressive economist, wrote that “in the early years of our history there were high motives for frugal government…to present a contrast between a free people administering their own affairs and the impoverished governments of Europe." That was also the case with President Jackson, who had balanced the budget and paid off the national debt during his tenure—as a signal more than anything else.

Debt retirement was also generally seen as a core component of public finance. This wasn't a new thing. This was, again, something that was inherited going all the way back to David Hume, who saw debt as a form of regressive redistribution. The cycle went something like this: war necessitated government debt, which was purchased by the wealthy, and then taxes were raised on the most productive members of society to finance that debt. Hume called this “the great encouragement of a useless and inactive life."

This rationale was not all that different than the populist resentment towards war profiteering during the Civil War and World War I. In fact, socialists early in the twentieth century were against government debt for the very same reasons that were articulated by Hume. Debt was also seen as a form of corruption. It was empowering of the powerful and the well-connected. Finally, and this is a critical bit here, it's important to remember that the U.S. didn't become the world's producer of safe assets until after World War I, and whoever is the world's producer of safe assets ultimately benefits from having low debt costs. So before World War I, it was the UK; since World War I, it's been the U.S. But if the U.S. loses this status, I think the fiscal situation could get worse very quickly.

So it goes back to some of the old questions about politics, really. Conservatives generally have a good appreciation for how culture affects politics. And in the case of debt, culturally, philosophically, and practically, debt retirement was just something that you did. So all of those channels drove the politics of debt retirement....