Some Observations on Current Trends in Public Policy & Budgeting

1. Some Observations on Current Trends in Public Policy & Budgeting Barry Anderson Deputy Director National Governors Association bba@nga.org March 13, 2012 1

2. My Goal Today • Discuss a series of observations on current trends in public policy and budgeting • These observations are not intended to be definitive or all inclusive, but I hope they will be thought-provoking, or at least entertaining 2

3. Some Observations • The period of American economic dominance may be ending—but so what? • And it is not at all clear that State Capitalism will dominate in the long run. • Adaptability may be our most valuable asset. • Our inherent ability to think strategically, which may be a product of our political system(!), is also an asset. • Speaking of our political system, some good news: more competitive House races. • A positive budget trend: long-term budget projections. • As to the budget caps: what’s wrong with what works? • In fact, the Europeans should learn from us: shuck their GRH & adopt a BEA. • With respect to tax reform, could there be agreement on “broaden the base & lower the rates”? • But isn’t the budget process broken beyond repair? • A final word on What We Will See in the Year Ahead.

4. About Me—Experience • 30+ Years in Federal Budgeting • GAO • OMB: Senior Career Civil Servant • CBO: Acting & Deputy Director • FASAB • IMF in Washington • OECD in Paris • Independent Consultant • National Governors Ass’n 4

5. About Me—Personal • Not an ‘R’ or a ‘D’, but an SOB! • An “Card-Carrying Middle of the Roader” 5

6. The period of American economic dominance may be ending—but so what?:Shares of World GDP, 1600-2006 Source: Angus Maddison, The World Economy: Historical Statistics (2003) Table B-20; www.ggdc.net/maddison

7. And it is not at all clear that State Capitalism will dominate in the long run • State Owned Enterprises (SOEs, including sovereign funds, Chinese banks, State-controlled energy companies) have advantages • Mimic the market • Import Western ideas • Impose some discipline • But their disadvantages—especially in the areas of liberty & scrutiny—outweigh their pros • Can states regulate the companies that they run? • Can SOEs stop throwing good money after bad—no market discipline? • Can SOEs innovate when innovation requires freedom to experiment? • Can effective oversight be provided by politicians? • Can SOEs operate efficiently with both commercial & social missions? • Can SOEs institute effective cost controls to inform stakeholders and discourage corruption?

8. Adaptability may be our most valuable asset—the view from Sacre Couer

9. Our inherent ability to think strategically, which may be a product of our political system(!), is also an asset

10. Speaking of our political system, some good news: more competitive House racesSource: The Cook Political Report, 3/6/12

11. A positive (?) budget trend: long-term budget projections(As a % of GDP)

12. As to the budget caps: what’s wrong with what works?The most important recent trend in government budgeting internationally has been the shift to performance budgeting; why not us too? • Away from “Budgeting for Inputs” • “How much money can I get?” • Towards “Budgeting for Measurable Results” • “What can I achieve with this money? See: Performance Budgeting in OECD Countries, OECD, September, 2007.

14. Life expectancy at birth & total expenditures on health/person, 2008

15. Health Expenditures, 2007(% GDP) Source: OECD Factbook 2010

16. US National Health Expenditures (as a % of GDP) Source: Sean Keehan (CMS), et al., “National Health Spending Through 2020: Economic Recovery & Reform Drive Faster Spending Growth”, Health Affairs, August 2011.

17. In fact, the Europeans should learn from us: shuck their GRH & adopt a BEA(General Government Gross Debt as a %/GDP) 17 Source: IMF Fiscal Monitor, Sept 2011

18. With respect to tax reform, could there be agreement on “broaden the base & lower the rates”?(Percentage of households whose payroll taxes exceed income taxes; Source: CBO)

19. Marginal Federal Income Tax Rates

20. Effective Tax Rates & Shares by Quintiles, 2007(Source: CBO)

21. Average Incomes & Shares by Quintiles, 2007 ($ in thousands. Source: CBO)

22. Average Social Insurance Tax Rates By Quintiles(Source: CBO)

23. The Laffer Curve

24. The Neo-Laffer Curve 24

25. But Isn’t the Budget Process Broken Beyond Repair? • Long-term sustainability is the major issue, not short-term borrowing ability—see payroll holiday pay-fors • Improvements can be made • BRAC • More and better credit reform • Insurance programs • Administrative costs • Market rates • But not: • Line Item veto [Enhanced recession better] • Biennial budgeting • But in sum, the process is not the problem; the problem is the problem

26. A Final Word on What We Will See in the Year Ahead • A BudgetaryPerfect Storm at the end of the year: • Expiration of tax cuts & payroll tax holiday • Expiration of additional unemployment benefits; TANF; R&E & other tax expenditures • Then there is the sequester, debt limit, & CR • The states will be in a Big Squeeze • And finally there’s China

27. In conclusion, in the future—even more than in the past—it is good to remember: “Sunshine is the best disinfectant.” Supreme Court Justice Louis Brandeis (1856-1941) 27