At a time when the presidential campaigns seem to be about everything other than the federal budget, the latest projections from the Congressional Budget Office (CBO) serve as a stark reminder that Americans will suffer grave economic consequences if the federal government does not repair its broken fiscal practices.
It is often rightly noted that federal debt is at historic highs and threatening to grow to catastrophic levels. What is too seldom recognized is a point made by Hoover scholar Keith Hennessey (my former boss at the White House): to say we have a problem with deficits and debt is an oversimplification. What we have instead is an overspending problem, and the federal debt is essentially a symptom of that problem.
That last statement might sound to some ears like an ideological or even partisan one. It is not; it is an objective mathematical reality. The reason we are currently carrying historically high levels of debt, and are threatened by unmanageable deficits going forward, is that federal spending has grown and will grow (under current projections) faster than our Gross Domestic Product (GDP).
To solve this, future federal budgets in which spending grows as a percentage of GDP from one year to the next should require a congressional supermajority (e.g., three-fifths or two-thirds) to pass. Only if spending in the budget does not rise as a percentage of GDP from one year to the next could it be passed with a simple majority. In addition, proposals to purportedly “cut” taxes should be considered to be in order if they would not cause federal deficits to rise over time assuming a stable spending baseline.
Unlike its revenue trend, the federal government’s spending growth trend is clearly untenable and must be stopped. Reasonable people can disagree about what percentage of our economic output the government should spend. But we cannot permanently continue to allow federal spending to grow faster than America’s production.
There are both objective and subjective facets to this imperative. The objective element lies in the unavoidable fact that we must ultimately tap our output to pay for whatever government spends, whether that spending is financed directly by taxation or with debt that requires tax revenues to service. The subjective concern is that as government spending growth exceeds GDP growth, we all lose more control over our economic lives. As individuals we will have less of a say over the disposition of each dollar we earn, because the government will claim a perpetually-growing share. Though some will argue that this is satisfactory, providing the government concentrates its growing take on the undeserving rich, this bad outcome would be experienced by Americans as a whole.
Importantly, this problem cannot be solved by raising taxes. Raising taxes can constrain the size of deficits and debt in the short term, but it does not avoid the necessity of keeping spending from rising faster than our productive output. Raising taxes may even have the downside of deferring the necessary solutions on the spending side.
A stable fiscal environment would be one in which spending does not grow more rapidly than GDP (it could grow at the same rate or slower). If spending simply grows in tandem with GDP it is more than sufficient for revenues to also grow with GDP. If alternatively we succeed in cutting spending so that it grows slower than GDP that would in principle allow revenue to decline relative to GDP. As long as spending grows no faster than GDP, and revenues no slower, we will have met an essential prerequisite for fiscal stability.
Unfortunately, our federal budget processes, as well as our national policy debate, do not reflect these basic budgetary realities. The budget rules apply no procedural barriers to continuing unsustainable spending growth rates, while legislative points of order protect baseline fiscal practices in which both federal spending and revenues grow faster than the economy’s ability to keep pace.
This in turn fosters flawed analysis, in which proposals with significant fiscal effects are compared, not to the desirable norm of a stable fiscal environment, but to an untenable scenario of unconstrained spending growth. This especially distorts discussions of tax policy, because it causes proposals to stabilize the growth of federal revenue collections to wrongly appear as though they would precipitate massive deficits that are actually attributable to the rising spending baseline.
A better budget process (and analytical framework) would do the following:
1) Establish points of order against federal spending growing faster than GDP, requiring a supermajority to waive. Each year Congress should be required to vote on a total federal budget. If spending in that budget does not rise as a percentage of GDP from one year to the next, then it can be passed with a simple majority. However, a supermajority (e.g., three-fifths or two-thirds) would be required to pass a budget in which spending grows as a percentage of GDP from one year to the next. If Congress is unable to pass either form of budget, then there would be automatic sequestration of accounts that are growing faster than GDP.
2) Remove existing points of order concerning the deficit effects of revenue proposals if they do not cause federal revenues to decline as a percentage of GDP from one year to the next. A proposal to purportedly “cut” taxes should be considered to be in order if it would not cause federal deficits to rise over time assuming a stable spending baseline.
It should be recognized that some will take the position that federal spending should or must rise as a share of the economy because of the desirability of providing increased federal support to an aging population. These process reforms would still allow legislators to make that policy choice. Advocates, however, would need to achieve a supermajority to make it – a fully appropriate procedural barrier against any fiscal policy that is not ultimately sustainable.
These two proposals, taken together, could help to reorient the federal budget process in the direction of stable fiscal policy. The principles underlying them would help us to better understand the implications of various policy proposals than many methodologies now in wide circulation.
In sum, we should end the practice of pegging the policy discussion to a “norm” in which spending and revenues both perpetually absorb a rising fraction of Americans’ productivity. Only if we tie our decision-making to the principle of economic sustainability will we successfully reorient our national discussion toward sound fiscal policy.
This article was originally published in Economics 21.