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From borrow-and-spend, to tax-and-spend

House Majority Leader Steny Hoyer and Rep. George Miller, Chairman of the House Democratic Policy Committee, write in today’s Wall Street Journal that “Congress Must Pay for What It Spends,” subtitled “Democrats won’t be the party of deficits.” They argue in favor of their pay-as-you-go, aka “paygo” rule. I have a different perspective and offer it here in response.

The paygo rule is a self-imposed Congressional rule designed to make it harder to enact legislation that violates certain budgetary conditions. There are two variants, known as two-sided paygo (favored by most Democrats, including Leader Hoyer and Chairman Miller), and one-sided paygo (favored by most Republicans, including me).

  • two-sided paygo makes it harder to enact legislation that increases the federal budget deficit, whether as a result of increased spending or lower taxes;
  • one-sided paygo makes it harder to enact legislation that increases the federal budget deficit as a result of increased spending (only). One-sided paygo does not raise procedural barriers to cutting taxes.

Both versions have common features:

  • They are rule changes specific to each body (the House and Senate) that can we waived with a simple majority in the House, and with 60 votes in the Senate.
  • They do not by themselves reduce the deficit.
  • They do not prevent government from getting bigger, if spending increases are accompanied by tax increases of the same size.
  • They do not prevent the deficit from going up due to external factors like a recession or an increase in inflation. They only inhibit new deficit-increasing laws.

There used to be a stronger version of statutory paygo that included the Executive Branch. This version has fallen out of favor.


Since these points are somewhat disjoint, and since the blogosphere seems to love a numbered list, here are my thoughts in response to Leader Hoyer and Chairman Miller.

  1. After enacting a stimulus law that increased future deficits by $787 billion directly, Leader Hoyer and Chairman Miller argue for Congress to act responsibly. They begin by blaming the Bush Administration for the current budget deficit, but ignore their actions of the past five months that have made future deficits significantly larger. Now that the horses are all out of the barn, they argue we should lock the door tight. (A friend points out that most of the stimulus bill was discretionary spending which would not have been covered by any paygo rule. I guess the pigs, too, have left the barn.)
  2. In effect, they are arguing that Congress should shift from the borrow-and-spend regime of the past five months to a new tax-and-spend regime. While paygo makes it harder to increase the deficit, it does not limit expansions in government as long as they are accompanied by tax increases. Spending $1.6 trillion on health care is OK under two-sided paygo, if it’s offset by the same amount of tax increases. Similarly, a massive expansion of government through the impending cap-and-trade bill does not violate their two-sided paygo rule since it raises power costs by imposing new taxes on power producers.
    In contrast, I care about budget deficits and about the size of government. On the whole government allocates resources less efficiently than the private sector, so when government expands at the expense of the private sector, we make the total American pie smaller. That’s a key reason why I’m a small government guy, and why I tend to oppose most expansions of government spending, even when their deficit impact is offset by higher taxes. Just because it’s “paid for” doesn’t mean the government should do it.
  3. While their op-ed is written as Democrat v. Republican, an intraparty subtext is evident. Since the House can waive any paygo rule with 218 votes, the rule they advocate places no practical limit on their majority party if that party is united. Paygo rules matter much more in the Senate. Instead, this rule provides rhetorical leverage when the House leaders and committee chairmen are meeting in Speaker Pelosi’s office, debating whether a big new spending bill needs to be offset. Paygo is a useful tool for Mr. Hoyer and Mr. Miller behind those closed doors when they want to argue in favor of a tax-and-spend approach, in contrast to their borrow-and-spend Democratic colleagues (who tend to be farther Left).
  4. More broadly, fiscal policy is far more complex than the simple partisan split suggested by Messrs Hoyer and Miller. The makeup of both parties has changed over the past 15 years that I have been in Washington. There are no more tax-cutting Democrats in Congress: Sen. Breaux and Sen. Torricelli used to cause their party no end of heartburn by working with Republicans to cut taxes. There is also no viable Democratic Congressional faction to actually reduce the debt. Budget Chairmen Spratt and Conrad argue the case, and are routinely overruled by their colleagues who want to use all tax increases to offset new spending priorities. On the Republican side, more Republicans have been captured by spending constituencies, and for almost any spending bill there is a natural Republican constituency who will work with Democrats to increase spending without offsetting spending reductions (e.g., agriculture, highways, health research, border security).
  5. Two-sided paygo focuses on deficits. One-sided paygo focuses on deficits caused by increased spending. I believe our most serious deficit challenge is the long-term problem, driven by the growth rate of entitlement spending. I therefore want to make it harder for Congress to exacerbate this specific problem, and thus I favor one-sided paygo.
  6. If you think of tax cuts as “the government giving up revenue,” this naturally leads you to two-sided paygo. If instead you think of tax cuts as “preventing the government from taking money from the people who earned it,” this leads you to one-sided paygo. I don’t think of tax cuts as something that the government must “pay for.” I don’t want to make it harder for the government to take less money from the people who earn it. This is a philosophical difference: advocates of two-sided paygo often use “we” to refer to the government and its deficits. Advocates of one-sided paygo generally use “we” to refer to taxpayers.
  7. I believe that Leader Hoyer is one of only a handful of powerful Democrats who would like to reform our entitlement programs to address our Nation’s long-term spending challenge. I believe he would be a leader on bipartisan Social Security reform, if Speaker Pelosi did not prevent him from doing so. My private sources confirm recent press reports that the White House quietly reached out to Democratic Congressional leaders to explore the possibility of working on Social Security reform, only to be shut down by Speaker Pelosi. Similarly, in 2005 when we in the Bush White House quietly approached certain Senate Democrats to see if they would enter into negotiations with us over Social Security reform, we were told repeatedly that Leader Reid forbade them from negotiating with us.
  8. Leader Hoyer will soon confront a difficult situation in which his paygo rules will not help. House Democrats will produce a health care bill which will contain the largest expansion of entitlement spending since the creation of Medicare and Medicaid in 1965. I assume they will comply with the paygo rules by slowing the growth of Medicare and Medicaid spending, and/or increasing taxes, so that the bill does not increase the deficit over the next 10 years. But because health spending grows faster than the economy, and taxes grow at the same rate as the economy, it is highly likely that such a bill will make our Nation’s long-term deficit situation even more bleak than it is today. It will also substitute a new politically popular entitlement for the least popular Medicare and Medicaid spending, making it more difficult to bring the spending growth of those programs down to address future deficits. Leader Hoyer will then be called upon by the Speaker and the President not only to vote for such a bill, but to help round up the votes to pass it, and to place his credibility on fiscal policy at risk by arguing that this massive new deficit-exploding entitlement expansion is fiscally responsible because it complies with his short-term paygo rules.

A wise man once said to me in a paygo discussion, “The problem isn’t the process. The problem is the problem.” Elected officials have spent countless hours debating one-sided vs. two-sided paygo, in large part because it’s an easy and theoretical fight. Nobody’s ox is directly gored when the paygo rule is being voted upon. Actual legislating to slow the growth of Social Security, Medicare, or Medicaid spending involves real pain to real people who complain loudly. Unfortunately, that’s what must happen to prevent eventual budgetary collapse. Trumpeting process changes is a poor substitute for making the necessary and difficult legislative changes to slow the growth of the entitlement programs that constitute America’s long-term deficit problem.

(photo credit: Piggy savings bank by alancleaver_2000)

By | 2017-05-23T19:06:41+00:00 Thursday, 25 June 2009|