The Pain of Drunken Spending

By Steve Kopperud, Policy Directions, Inc.

No matter how the November elections turn out, the national GOP and Democrat political machines are already implementing their respective approaches to 2012 and the presidential election, and if there’s one given on both sides of the aisle, it’s that federal spending is going to be slashed as a demonstration to the voting public that fiscal responsibility rules.

Such a move makes incumbents exceedingly nervous, as the ability to bring home the federal bacon, so to speak, always yields physical proof the members are looking out for the folks back home. But the anti-Congress, anti-incumbent juggernaut apparent in the run-up to this November is predicated in large part on a weak economy, lost jobs, and a fear the future will not be as rosy as the past, and much of the blame goes to the spendthrift behavior of both parties going back at least four, if not six years.

As I write this, the federal deficit is rapidly heading north of $13.4 trillion, compared to $407 billion in 2008, and an almost paltry $161 billion in 2007. And let us not forget this “debt” carries interest due. The biggest contributors to this deep ocean of red ink are the last two economic “stimulus” packages in 2008 and 2009 and the massive health care reform law, all piled on top of heavy general federal spending by the last two Congresses. Now, layer on a significant drop in federal tax income from both corporations and individuals as victims of the recession everyone hopes is over. Remembering the federal government has no money per se, but spends those dollars Americans pay in taxes, coupled with massive borrowing, and you get the picture.

President Barack Obama has already signaled his new-found fiscal conservatism with his first and second federal budgets, both of which were pretty much flat in spending overall, but which reflected his agenda through the reallocation of federal monies to his program priorities. He’s also told federal departments and agencies they can look forward to a five percent overall cut over the next two years, and he wants those folks to show him how they plan to do it. Now, while this may appear enlightened, there’s really only so much any White House can do as the president’s budget is generally viewed by Capitol Hill as nothing more than recommendations, and more often than not, the appropriators on both sides of the hill ignore White House recommendations.

Enter “earmarks” and “pay-go.” Earmarks are those personal line items in the various appropriations bills that designate quite specifically how monies will be spent. In years past, members didn’t even try to hide earmarks, and it was common to see specific institutions or state or local governments designated as the recipients of big pots of money to further one project or another, all championed by their “folks in DC.” Today, earmarks must be revealed on a member-by-member basis, but make no mistake, they’re alive and well. Both parties are currently challenged to denounce earmarking, publicly avowing they will cease and desist forevermore. However, clever wording of public state-ments to the contrary, neither party has actually said it will walk away from the goose that lays the golden federal egg.

Then there is pay-go, a budget mechanism actually pretty elegant in its simplicity. The rule says you cannot spend “new” money on either existing or proposed programs unless you can find a way to pay for it, hence “pay as you go,” or pay-go. There are two ways to pay for spending under pay-go – either cut existing programs or charge fees for new programs to offset the costs so that the overall budget is unchanged.

If you’ve been following some of the pay-go controversy recently, then you know Congress didn’t even pass a fiscal year 2011 budget, so that complicates the process just a bit. However, when there is a budget, the most popular way of paying for a new or existing program is to whack one of the thousands of arcane federal tax breaks enjoyed by various parts of the corporate world.

The second most popular method – and it’s a seriously distant second – is through imposition of user fees. The overall industry philosophy is this: If a federal program is imposed on industry and the benefits of the program accrue to the broad public good, then the U.S. Treasury should pay for the program. If a new program carries particular industry-only benefit, then user fees may be appropriate. User fees generally only come into play when the regulated industry agrees to them up front in exchange for a benefit. A good example is the Food and Drug Administration (FDA) drug approval user fees designed to speed the approval process of new human and animal drugs.

To bring this home to renderers, at least those involved in biodiesel, renewable diesel, or taking advantage of the alternative fuel mixture tax credit, these federal tax incentives were set to be extended handily six months ago. The Senate Finance Committee and the House Ways and Means Committee found a tax benefit used by foreign-based parent companies of U.S. operations, and by tinkering with that tax item and tacking on a couple of other minor tax manipulations, paid the $30 billion or so price tag for biofuels and about 1,000 other federal tax incentives that expired at the end of 2009. However, House Speaker Nancy Pelosi (D-CA) ordered her tax gurus to find “offsets” to the cost of the very expensive and very controversial health care reform package, so bye-bye tax credit extension offsets. The squabbling over how to pay for the package has continued ever since.

While fiscal conservatism is everyone’s priority right now, flat spending, combined with paying down the deficit, means at least the next two years are going to be challenging for lawmakers, bureaucrats, and industry.

FDA is going to be given significant new food safety authority if Congress gets around to passing food safety legislation before the end of the year. Part of the $1.5 billion price tag for the Senate version of this legislation is offset by new user fees for registered companies – and renderers will be registered companies – on the cost of reinspections, mandated recalls, export certifications, and a voluntary import certification program. The House bill carries a much heftier price tag, but offsets that spending by also charging a fee to register to be regulated. The Senate bill does not charge a registration fee. Right now, the bill is hung up because Senator Tom Coburn (R-OK), the self-appointed GOP deficit watchdog, wants all the costs of the new food safety regime offset. Industry is seriously nervous that this means to get food safety legislation to the president’s desk, it will have to eat heavy registration fees, as well as the other fees authorized in the food safety package.

House Agriculture Committee Chair Collin Peterson (D-MN) has been warning farmers and ranchers all summer long the deficit and spending freezes mean the baseline for the 2012 farm bill – the pot of federal money available for all discretionary programs, including direct payment programs – is going to be a whole lot smaller during farm bill deliberations than in past farm program go-rounds.

Peterson has pushed hard for beneficiaries of such programs, including corn, soybean, wheat, cotton, rice, sugar, and dairy producers, to get creative and come forward with recommendations to modify their programs that will allow his committee – if it is his committee next Congress – to maintain the so-called “income safety net” for producers, while trimming overall federal outlays.

Peterson has dangled the notion of a whole farm revenue “assurance” program, a spin on traditional crop insurance, that would provide income support to farmers when prices fall, based on each producer’s overall farm input costs. Some of the producer groups are taking Peterson at his word, while others are telling him his idea stinks. And shock waves rolled through the heartland in mid-September when the Iowa Farm Bureau, fresh off its annual policy conference, publicly called for killing direct payment programs in exchange for a program much like what Peterson has suggested. This means the traditional regional battles – pretty much Midwest versus Deep South – over direct payments, payment limitations, and so forth just got a whole lot nastier a whole lot earlier.

So, it appears all will feel the pain of trying to undo what Congress has done over the last six years, namely spend like a drunken sailor. The key will be to ensure Congress comes at spending in a surgical way, reviewing and allocating funding based on priorities and available dollars, not by simply whacking everyone with a deficit reduction hammer.

View from Washington – October 2010 RENDER | back