Earmark Reform Doesn’t Equal Economic Policy

McCain's economic speech last week both gets the facts wrong and fails to address the most urgent economic issues of today.

"The issue of economics is not something I’ve understood as well as I should, was the remarkable confession made by Sen. John McCain (R-AZ) to reporters in New Hampshire last December. More recently he traveled to Pittsburgh to give a speech to demonstrate that he was developing a capacity to handle that important but troublesome topic. But McCain’s performance in Pennsylvania, and the subsequent explanations by him and his staff, seemed to simply underscore his earlier confession.

Perhaps the most immediately notable aspect of the speech was the absence of any real analysis of the economic problems currently vexing business leaders, regulators, and policy analysts on the major topics dominating the financial pages right now. McCain gave almost no indication of his perspectives on:

  • The central factors driving the dramatic increases in fuel prices and what steps the government should take to bring greater long-term stability to energy markets.
  • The causes and consequences of the decline in the dollar and what policies he favors that would strengthen it.
  • Whether he believes that consumer demand is the key to reversing the current economic decline, and if so, what steps would he take to strengthen the balance sheet and improve the purchasing power of ordinary workers.
  • Whether the lack of transparency in new financial products such as Structured Investment Vehicles has reduced confidence in U.S. markets and created long-term barriers to attracting needed capital from investors here and overseas and what specific regulatory changes he would make to give investors greater confidence in those products.
  • Whether the highly expansionary monetary policy now being pursued by the Federal Reserve is placing the United States at significant risk of broad-scale inflation, or whether we are at such serious risk of recession and deflation that inflation is not a significant hazard.

By excluding less familiar and more nettlesome topics, McCain, as Newsweek noted, was able to "talk with confidence about broad themes he actually is fluent on: his war against pork barrel spending, his push to control excessive government spending. But his fluency on even those topics was, as it turned out, not based on much real knowledge. At the heart of his speech was the following statement:

The great goal is to get the American economy running at full strength again, creating the opportunities Americans expect and the jobs Americans need. And one very direct way to achieve that is by taking the savings from earmark, program review, and other budget reforms—on the order of $100 billion dollars annually—and use those savings to lower the business income tax for every employer that pays it.

McCain and his staff later explained that the $100 billion savings would come from eliminating earmarks. In a "McCain Press Call, Douglas Holtz-Eakin, his senior economic advisor, said, "Let me explain the potential for savings from earmarks in the federal budget Ö you could, as of 2006, find in the baseline $60 billion in spending that got introduced as earmarks and exists because of that.

When asked about the discrepancy between McCain’s estimate of the cost of earmarks and significantly lower estimates from other sources, Holtz-Eakin responded, "These are figures that have been developed over the years with the Senate and the Congressional Research Service. We think they are solid numbers.

The CRS analysis actually identified only $52 billion in earmarks rather than the $65 claimed by McCain or the $60 claimed by Holtz-Eakin. Far more importantly, a very large portion of the funding identified as earmarks was spending that McCain has, over the years, strongly supported, including aid to Israel and military family housing.

After three days of explanations, Holtz-Eakin conceded to Politico "by the ëMcCain definition’ there are between $16 billion and $18 billion in ëearmarks’ in the current budget. In only three days, they had trimmed their major proposed savings by 75 percent.

Equally remarkable was an additional claim by McCain and Holtz-Eakin about where the remaining $35 billion in savings would come from to round out the $100 billion. The most complete version of this argument was included in the previously mentioned telephone press briefing with Holtz-Eakin.

In the federal budget if you provide an earmark, that money gets spent. In the way the baseline is constructed, it stays in there forever. It goes up at the rate of inflation. So you could, as of 2006, find in the baseline $60 billion in spending that got introduced as earmarks and exists because of that. In the years since, there have been an additional $35 billion in earmarks. So we are now at the point, if you stare at a federal discretionary spending budget, you find a $100 billion that wouldn’t be there if it wasn’t for earmarks. Those are by definition dollars that are fair game if you want to focus on genuine national priorities and not have a budget that is a reflection service to special interests.

I have contacted numerous colleagues who follow appropriation and budget issues and have thus far found no one who can make sense out of this argument. If you accept CRS’ definition that Israel is an earmark, and you find that the U.S. payment to Israel in 2005 was about $3 billion, as it has been for many years, and that the payment in 2008 was also about $3 billion, is there $3 billion or $6 billion in the 2008 budget for the Israel earmark?

Another example might be earmarks in the Energy and Water bill, long a source of contention between Congress and the executive branch. Each year the president proposes cutting the bill by about $1 billion, and each year Congress adds back about the same amount, largely for earmarked water projects. Does this tug of war cause the budget to grow by more than the amount Congress restores in any given year? The answer is clearly no. Whether you agree with congressional priorities in funding water projects, the amount that could be saved in any given year by eliminating them is no larger than the amount contained in that year’s appropriation.

The fact is that discretionary spending is out of control, but that is largely attributable to the one area of spending that McCain has been most vocal in supporting—the Iraq war. If defense, foreign aid, and homeland security are taken out of the discretionary budget, we were spending about $374 billion in 2001 if adjusted to today dollars. On a per capita basis that amounts to about $1,325 per citizen. The bills that the president signed last November would amount to $1,336 per citizen. Domestic discretionary spending as a percentage of GDP has fallen from 3.1 percent to 2.9 percent. Earmarks have not driven the domestic budget out of control; it is barely keeping up with inflation and population growth.

One might argue, as many past presidents have, that the executive branch can make better decisions about how and where this money is to be spent, but McCain’s argument is that each year the level of overall spending gets bigger because of the annual earmarking. That argument is simply counterfactual. Of McCain’s $100 billion in spending cuts, the $65 billion portion of his proposal is by his campaign’s own admission only $16 billion to $18 billion, and the remaining $35 billion is non-existent.

Despite strong evidence that his $100 billion savings is almost entirely fantasy, and including confirmation from his campaign that at least $47 billion of his claimed $65 billion in direct earmark spending is non-existent, McCain continues traveling the country and repeating the erroneous numbers. On National Public Radio on April 23, for example, McCain said, "I can identify billions and billions and billions of dollars. As I said, I mentioned $35 billion; I mentioned another $65 billion that’s been made part of the baseline of the budget, which has contributed to the largest expansion in government since the Great Society.

I have written repeatedly over the past five years about the excessive growth of earmarks and the corrosive effect that the practice has had on the legislative process. Congress has the constitutional authority to designate in very precise terms where funds should be directed. It is central to the separation of powers and the ability of Congress to hold the executive branch accountable. But having the constitutional authority to earmark does not mean you have the right to use that authority foolishly—and that has obviously been the case on all too many occasions in recent years.

Having said that, earmarks account for only about 0.6 percent of government spending and 0.1 percent of GDP. Some are actually very good investments such as the directives in the defense bill in 1990 to proceed with the development of the "Predator unmanned aerial vehicle while others fund projects that are less than high priority. But their retention or elimination will have little effect on the number of houses that go into foreclosure in the coming months, lending institutions’ ability to preserve their capital, consumers’ ability to return to car lots and shopping malls, or the continuing erosion of national employment levels.

Whatever one might say about earmarks, their elimination does not constitute an economic policy, and John McCain does himself and the country a disservice by attempting to represent them as such.

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Scott Lilly

Senior Fellow