How Washington learned to budget, from the 1921 act to the 1997 deal

Every budget law in American history is a confession. Each one is Congress saying, in the dry language of the statute book, "the last system did not work, and here is the new one." Read them in order and you do not find a story of wisdom piling up. You find a story of embarrassment piling up, with a fresh patch on every hole.

That is the best way to understand why today's budget fights look the way they do. The calendar, the committees, the caps, the rules about deficits and the odd phrases like "sequester" and "PAYGO" were not handed down. Each was invented to solve a specific failure, and each carries the scars of the argument that created it. Let me walk through five of those laws in order, with the dates and the people, and a line on why each mattered. Then we will see what the pattern says.

Before 1921: no budget at all

Believe it or not, the federal government had no unified budget for most of its first century and a half. Agencies sent their requests to Congress separately. The Treasury Secretary compiled them without editing them. Congress passed spending bills through whatever committee had jurisdiction. Nobody in the executive branch looked at the whole.

1865: the House creates an Appropriations Committee. The Civil War had swollen spending, and the committee that handled taxes also handled appropriations. The House split the work and gave spending its own committee. Why it mattered: it began the habit of separating the people who write the revenue bills from the people who write the spending bills, and it set up a contest between the two that continues.

1910 to 1912: Taft asks for a budget. President William Howard Taft appointed a Commission on Economy and Efficiency, which recommended that the President submit a single annual budget. Taft sent Congress a budget message in 1912. Congress ignored it. Why it mattered: it was the first serious Republican attempt at executive budgeting, and its failure shows how attached members were to the old system, where each committee dealt with each agency directly. The same Taft is profiled in William Howard Taft lost the White House and then got the job he wanted.

1921: The Budget and Accounting Act

June 4, 1920: Wilson vetoes. Congress passed a budget bill in 1920 and President Woodrow Wilson vetoed it. His objection was constitutional: the bill let Congress remove the new Comptroller General by a concurrent resolution, which does not go to the President, and Wilson said that intruded on executive power. Why it mattered: it set a pattern that has recurred ever since. Budget reforms are also contests between the branches over who controls the money.

June 10, 1921: signature. President Warren Harding signed the Budget and Accounting Act of 1921. The law required the President to submit one annual budget to Congress. It created the Bureau of the Budget, part of the Treasury Department at first and later the ancestor of the Office of Management and Budget, and it created the General Accounting Office, now the Government Accountability Office, headed by a Comptroller General, to audit spending for Congress. The removal problem Wilson had seen was fixed by requiring a joint resolution, which the President could veto, or impeachment. The first budget director was Charles Dawes, a banker who would later be Calvin Coolidge's Vice President. Why it mattered: for the first time, the executive branch had to present a coherent plan, and Congress had its own auditor. It also put a Republican President at the center of a reform that was meant to save money and make government answer for it.

The era that followed is part of why some conservatives look back fondly. Silent Cal said little and ran one of the loudest budget records in history tells how Coolidge used the new budget tools to run a famously tight ship.

1974: Congress takes the pen back

The next big failure was not about the President's budget. It was about Congress's lack of one.

July 12, 1974: the Congressional Budget and Impoundment Control Act. President Richard Nixon signed it a few weeks before he resigned. The background was a fight. Nixon had refused to spend money that Congress had appropriated, a practice called impoundment, and Congress, with no budget machinery of its own, could not answer except program by program. The 1974 law created House and Senate Budget Committees, a yearly budget resolution to set overall totals, and a Congressional Budget Office to give lawmakers their own numbers, which no longer had to come from the White House. The first CBO director was Alice Rivlin. It also created procedures for the President to propose rescissions and deferrals, and it moved the start of the fiscal year from July 1 to October 1. It also created reconciliation, a fast-track process for bringing taxes and mandatory spending into line with the budget resolution. Why it mattered: it is the architecture of the modern budget process, and almost everything in a current budget fight, from budget resolutions to reconciliation to CBO scores, traces to it. The impoundment story is told in Nixon Impounded the Money, Congress Fought Back, and the 1974 Law Still Rules.

The law had a design flaw that was obvious by the late 1970s. It created a process for setting totals, but it did not require anyone to hit them. A budget resolution was a plan, not a promise.

Consider what that meant for a member of Congress in 1979. He could vote for the budget resolution, which sounded responsible, and then vote for every spending bill that came through, which sounded generous, and nothing in the process would stop him from doing both. The law gave him a ledger. It did not give him a conscience. Voters who wonder why the same politician preaches thrift in the district and votes for the extra in Washington have been watching that design flaw at work for decades.

1985: Gramm-Rudman-Hollings

By the middle of the 1980s, the federal deficit had become a national worry. The answer from Congress was to tie its own hands.

December 12, 1985: the Balanced Budget and Emergency Deficit Control Act. Known by the names of its sponsors, Senators Phil Gramm and Warren Rudman, both Republicans, and Ernest Hollings, a Democrat, it set fixed annual deficit targets that declined to zero in fiscal year 1991. If Congress failed to meet a target, automatic across-the-board cuts, a sequester, would take effect, split between defense and non-defense spending. The idea was a threat so ugly that no one would let it happen. Why it mattered: it introduced the idea of automatic enforcement. Instead of hoping lawmakers would behave, the law attached a penalty.

July 7, 1986: the Supreme Court cuts the cord. In Bowsher v. Synar, the Court held that the law gave an officer who works for Congress, the Comptroller General, the power to decide what cuts to make, which is an executive function. The enforcement mechanism was struck down, and Congress had to repair it. Why it mattered: it was a lesson about separation of powers. Congress cannot give itself executive power, even for a good cause.

1987: a second try. Congress revised the law and pushed back the date for reaching zero. The pattern that followed is the one critics would point to for years: the targets were revised, relaxed or gamed as they approached. Why it mattered: a rule that can be rewritten by a majority is a rule only as long as the majority wants it.

1990: the Budget Enforcement Act

November 5, 1990: the Budget Enforcement Act. It was part of the Omnibus Budget Reconciliation Act of 1990, signed by President George H. W. Bush after a summer of negotiation with the Democratic Congress. The deal included tax increases, which broke the "read my lips" pledge of 1988, a political price Bush paid in 1992, as described in Read My Lips and How the 1990 Budget Deal Led to the 1992 Defeat. The Budget Enforcement Act dropped the fixed deficit targets, which had proved impossible to meet, and replaced them with two more flexible rules. First, caps on discretionary spending, set in dollar amounts for several years. Second, pay-as-you-go, or PAYGO, which said any new law that raised mandatory spending or cut taxes had to be paid for, either by offsetting cuts or offsetting revenue, or else a sequester would hit.

Why it mattered: it shifted the focus from outcomes that Congress could not control, like the total deficit in a recession, to inputs that Congress could control, like the laws it passed. That was a smarter design. The caps and PAYGO were extended in 1993 and again in 1997. Congress let both lapse in 2002. Congress revived a statutory PAYGO rule in 2010. The lesson is that rules which are allowed to expire do not hold.

A hypothetical shows how PAYGO was meant to bite. Suppose a bill would expand a benefit and add $10 billion to mandatory spending over ten years. Under PAYGO, the sponsors had to show $10 billion in offsetting savings or new revenue over the same period, tallied on a scorecard kept by the Office of Management and Budget. If the scorecard ended the year in the red, a sequester would cut certain mandatory programs to bring it back to zero. In practice, Congress often wrote its way around the scorecard by declaring some spending an emergency or by wiping the balance off the books before the cut could occur. That habit is the deeper lesson. A rule is only as hard as the exceptions in it are narrow, and Washington has an endless supply of exceptions.

1997: the Balanced Budget Act

The most successful budget deal in modern times followed the worst blow-up.

The shutdowns of 1995 and 1996, told in The 1995 and 1996 Government Shutdowns in Dated Steps and the Lessons Learned, taught both sides something. President Bill Clinton and the Republican Congress, led by Speaker Newt Gingrich and Senate Majority Leader Trent Lott, concluded they were better off bargaining than fighting.

August 5, 1997: the Balanced Budget Act and the Taxpayer Relief Act. President Clinton signed both on the same day. The spending law extended the discretionary caps and PAYGO rules and made changes to Medicare and other programs. The tax law cut the top capital gains rate from 28 percent to 20 percent and created a $500 per child tax credit, a Republican priority. Why it mattered: it paired restraint with tax relief, and it was bipartisan in a way that few budget laws are. The federal government then ran surpluses in the fiscal years 1998 through 2001. A strong economy and rising revenue did much of the work, and it would be dishonest to credit the law alone. Still, the combination of rules and a willingness to compromise is the closest thing to a recipe the modern era offers, and divided government gave us welfare reform and a balanced budget argues that divided government was part of the ingredient.

What the pattern teaches

Look at the five laws side by side and a few things become clear.

1. Every law answered the last failure. 1921 fixed the lack of a presidential budget. 1974 fixed the lack of a congressional one. 1985 and 1990 fixed the lack of enforcement. 1997 fixed the lack of agreement. Nobody ever solved everything at once.
2. Rules that can be waived or repealed by a majority are only as strong as that majority's will. Gramm-Rudman's targets were moved. The caps expired. Congress can waive its own rules, and it does.
3. The process was never the real problem. The deficit shrank in the late 1990s because the parties reached agreement and the economy grew, not because a clever mechanism forced them. Mechanisms help. Politics decides.
4. The biggest programs mostly sit outside the yearly process. The caps governed discretionary spending. Entitlements and interest were harder to reach. That explains why Why Spending Restraint Keeps Losing in Washington, Whoever Is in Charge ends where it does.

Here is the strongest objection to my view. A skeptic says: if rules cannot bind lawmakers, then no reform will ever work, and the only answer is a constitutional amendment, like a balanced budget requirement, which nobody can waive with a simple vote. That is a serious argument, and many conservatives hold it. I understand why. But an amendment also needs the political will to pass, and it needs enforcement, and the history above suggests that the will comes first. If you have the will, a statute can work for years. If you do not, an amendment will not save you.

To see the whole process in motion rather than its history, read How a budget becomes law, from the President's request to the checks. For the first-principles case behind all this, see A Balanced Budget Is a Moral Argument Before It Is an Accounting One.

The bottom line

• Washington had no unified budget until the Budget and Accounting Act of 1921, signed by a Republican President. Congress did not build its own budget machinery until the 1974 Act.
• Gramm-Rudman-Hollings in 1985 tried automatic cuts, and the Supreme Court struck down part of its enforcement. The Budget Enforcement Act of 1990 shifted to caps and pay-as-you-go.
• The Balanced Budget Act of 1997 came out of a bipartisan deal after the shutdowns, and surpluses followed in fiscal years 1998 through 2001, helped by a strong economy.
• Rules expire and get waived. The lasting lesson is that restraint needs voters who demand it.
• Ask your members of Congress a plain question: what rule will you hold yourself to, and what happens when you break it? Their answer will tell you how serious they are.