Still a work in progress.

Photographer: Andrew Harrer/Bloomberg

Don't Get Too Excited About the Budget Deal

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.
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Thanks to the spending bill that House and Senate leaders have negotiated, the federal government will avoid a shutdown. And that's great. Unfortunately, though, that’s the highest praise that can be attached to the deal.

Indeed, the agreement highlights three fundamental problems.

First, it continues down a path for cutting discretionary spending over the coming years that will become harder and harder to follow. Non-defense discretionary spending in 2015, for example, is set to be lower, in inflation-adjusted terms, than it was in 2014. Measured relative to the economy, the decline is even more dramatic.

Non-defense discretionary spending -- which covers domestic security, justice, law enforcement, education, housing assistance, medical research and environmental protection, among many other categories -- will amount to 3.3 percent of gross domestic product in 2015. Then in 2016 it is scheduled to decline to 3.1 percent, which will equal the lowest level on record since the comparable data began in 1962. And the decline is scheduled to continue thereafter, so that by 2022 we will be well below the smallest share, relative to the economy, in modern history. With each passing year, it will be increasingly challenging for Congress to abide by the spending caps. And it will be increasingly undesirable, too, because hitting the caps will require cutting back too much on research and other core functions of government. This year’s example involves the Internal Revenue Service; a penny-wise, pound-foolish approach reduces enforcement funding at the agency by 5 percent (in inflation-adjusted terms) despite an increasing burden placed on it.

The second problem with this kind of cutting is that it is indiscriminate. With budgetary resources diminishing, it is more important than ever that we measure and evaluate government programs rigorously, and commit ourselves to expanding those that are effective and cutting those that aren’t. Yet a recent study by the Government Accountability Office found that only 37 percent of government managers reported “an evaluation had been completed within the past 5 years of any program, operation, or project they were involved in.” Another 40 percent reported that they didn't know whether an evaluation had been conducted -- suggesting that if one were done, they didn’t use it. It’s as if we're flying through a blizzard but have skimped on the navigational equipment that could tell us where we’re headed.

The story of Youth Opportunity grants demonstrates the risks involved in indiscriminate cutting. The grants were administered, starting in 2000, by the Department of Labor and focused on three dozen disadvantaged communities. An evaluation of the program by Decision Information Resources, Inc., found that it increased educational attainment and work. Unfortunately, though, this evaluation was done only after the program had been discontinued. That is the type of mistake we can little afford as we come under increasingly tight budget constraints.

A recent book I co-edited with Jim Nussle, who was President George W. Bush’s budget director, lays out what we need to do to boost evaluation efforts in government -- so that we cut what doesn’t work but retain and even expand what does. "Moneyball for Government" suggests a simple formula: Devote 1 percent of discretionary spending to evaluating the other 99 percent.

The final problem with this week’s agreement is that it is only one of many that will need to happen over the coming months to keep the government from harming the economy. At some point, the tension between rank-and-file Republicans (who are more inclined to fight) and the party leadership (who for now seem more inclined to govern) may spill out in an unhelpful manner. At the moment, this risk seems minimal, but the world may look different next year. If the early votes on the spending legislation and the tax-extenders bill use up the good will in the party, then more consequential votes, such as the one next year to raise the debt limit, may become more contentious. In that unlikely but not impossible scenario, even the shining accomplishment of this spending bill -- avoiding an immediate shutdown -- will turn out to be a Pyrrhic victory.

To contact the author on this story:
Peter Orszag at porszag3@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net