The Budget Needs to Leave Room for Emergencies

Matt Yglesias makes a very good point:

The other thing, of course, is that "stuff happens." Nobody sitting down in 1925 to write a 25-year budget forecast would have made the funds available to win World War II. It's nice to think that you have a plan that leaves headroom to engage in some deficit spending if it turns out a meteor is going to strike the earth, orJack Layton is the leading edge of a Viltrumite invasion.

I have made the point before that Americans increasingly seem to think about the budget the way that chronic overspenders think about their purchases:

It's of course totally true that we could raise taxes to support Social Security at current benefit levels. This is, in fact, true of almost any government program you can name. And if we only had one government program, that would be helpful. But we have a whole group of government programs, and only so much money to spend. Taxes raised to pay for Social Security cannot be spent to, say, provide national defense or shore up Medicare. 

Have you ever known anyone who got into trouble with credit cards? I don't mean someone who had something go wrong and ended up deep in credit card debt because they had to pay the rent somehow; I mean someone who wakes up one day with $21,000 in debt, a closet full of shoes, and no idea where the money went? 

 The way they get into that trouble is often that they don't budget. They consider each purchase in isolation: "can I afford these shoes? Can I make the payments on that television?" And in fact, they can afford each of their purchases. They just can't afford all of them. 

A lot of what I see among the commentariat makes this mistake at the federal level. They offer a menu of tax and spending solutions for a given program--but they don't consider what that does to all the other programs. As I said in my previous post, I'm afraid that's what happened with PPACA; we accidentally "spent" the cuts, and the political capital, we needed to do deficit reduction.

Looking at each program in isolation is, unsurprisingly, a favorite trick of people in budget meetings when cuts are on the table--emphasizing the downside of the cuts, while protesting that the expenditure is but a small part of the organization's overall spending. Novice financial executives who fall for this soon realize their error: almost everything is but a small part of the organization's overall spending, and yet if you don't cut some of it, you will still end up in bankruptcy.

People who think this way for very long tend to end up in, at best, the kind of trouble that takes heroic efforts to dig out of, and at worst, bankruptcy or tax prison.  We shouldn't spend up to the very limits of our capacity.  We also shouldn't borrow up to our capacity, a lesson that the GOP should pay more attention to when it talks about tax cuts.  Either way is a recipe for deep pain in the future.