From borrow-and-spend, to tax-and-spend
25 June
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.
- 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.)
- 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.
- 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).
- 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).
- 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.
- 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.
- 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.
- 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)
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I find it awfully hard to believe the government can’t find any way to pay for health care reform in the current budget. They can’t find $150BN a year in a budget which exceeds $3T per year? If health care reform is going to save us so much money…why should it cost any additional money?
I have a health care proposal. Show “us” (taxpayers) “you” (government) can cut current Medicare spending…then “we” (taxpayers and government) can talk about additional reform.
“After enacting a stimulus law that increased future deficits by $787 billion directly,”
I stopped here. There was an additional $750 billion stimulus to the banks under Bush, and a tax rebate stimulus, making the totl about 2 trillion.
“…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.”
I’m all for lower taxes, but it is plainly false that lowering taxes while increasing deficits is really lowering taxes. It only defers taxes until some later date. Sadly, that is about the best Republicans do anymore: make the problem 3,000x worse and hope no one notices the bill is still due. Democrats? they make it 33,000x worse and then blame the Republicans.
“I’m all for lower taxes, but it is plainly false that lowering taxes while increasing deficits is really lowering taxes. It only defers taxes until some later date. Sadly, that is about the best Republicans do anymore: make the problem 3,000x worse and hope no one notices the bill is still due. Democrats? they make it 33,000x worse and then blame the Republicans.”
Cutting taxes and running deficits may be the only way to restrain future government spending. While left leaning pundits criticize “starve the beast” on the grounds that it ONLY creates bigger deficits while failing to reduce spending, I think the evidence shows that tax cuts during the Reagan administration slowed Clinton spending (a Republican Congress certainly didn’t hurt as well). I also believe tax cuts during the Bush administration will slow Obama’s spending.
http://gregmankiw.blogspot.com/2008/06/starve-beast.html
Thanks for the clarification on paygo. The one sided/two sided explanation is helpful. I had always assumed that paygo only referred to increases in taxes and/or spending cuts to pay for new spending the one way option is very interesting. The fact that the Bush admin deficits were falling through 2007 (without paygo) before the credit crisis hit shows that if we return to trend growth after 2012 the budget deficit ex Obama increases will continue to fall. We have to remember that simply reducing the deficit, ex-growth induced declines, is net contractionary. On the flip side if deficits are net expansionary then budget surpluses are net contractionary. This is why I had always favored tax cuts to spur growth and restrain deficits over the long term as they have the most positive impact on the economy. On the negative side these same tax cuts during a recession will increase the budget deficit (less tax revenue) which is what we are now seeing. Unlike the Bush tax cuts which have been a stabilizer in this recession the Obama deficits might have the effect of crowding out not domestic invesment but foreign direct investment which will be net contractionary.
I take issue with this comment “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.” Restraining allocations to Medicare will only cost shift onto the private insurance market. Without care rationing to the elderly (is this even politically possible) how can Medicare spending be constrained? Medicare eligible insureds are at an age where genetic predispotions and unhealthy habits have already done their damage and to deny coverage or ration care seems a rather harsh treatment. Nothing less than a complete overhaul of our healthcare delivery system is required. Obama pays lip service to that as do the democrats and the republicans in congress but no one wants to point the finger at providers. Healthcare providers are monopolists and like good monopolists they can charge what the market can bear and they do. An individual’s demand for healthcare is almost infinitely price inelastic or we wouldn’t have people willing to go into bankruptcy to get treatment. When you couple monopoly power with price inelastic demand you have the perfect storm.
The provision of healthcare is almost artisinal, labor using and time intensive, only one other industry in modern socities is structured in a similar way, the luxury goods industry. But does healthcare delivery have to have the same structure as making a luxury automobile or yacht? Aren’t there better ways of delivering service? Do we need to break the monopoly of doctors and hospitals? Can Artificial Intelligence and Robots possibly do a better job at surgery and diagnosis? We need to answer these fundamental questions first.
This might be as good a place as any to put forward an idea. It is generally easier to govern in a crisis than in good economic times. Everyone says that Obama has a tough job in this crisis I would say he has an easy job. The heavy lifting of the bank bailout was done by the prior admin and the tax cuts that Bush II pushed through has cushioned the blow to the economy from this severe recession.
Everyone agrees that something must be done in a crisis, there is consensus and political will. In good times it is very difficult to govern well because it is in the best times when taxes must be raised if there is a structural deficit emerging. Both Reagan and Bush, Sr. raised taxes in good times and those revenues grew to a surplus under Clinton. A budget surplus as I mentioned above is net contractionary and that is the main economic reason for the Bush II tax cuts. If we had continued to run surpluses we would have been exporting capital to pay down foreign holders of our debt. What might be good for an individual’s balance sheet is disastorous for a nation. Persistent surpluses cause aggregate demand to fall. The Bush II deficits were not structural in the main part (except for Medicare Part D) but cyclical and defense related that is why in 2007 we saw the deficit shrink. But Obama has proposed that we must create a structural deficit because the Bush II tax cuts caused it but that is not cause and effect that is the effect acting as the cause because without the new entitlements the strutural deficit would not begin to grow until the baby boomers retire in large numbers. Now we have 2 structural deficits to worry about, one that Obama has created and blamed on Bush II and one that we engineered in 1933 and 1965 and 2002.
Steven Hales
“The provision of healthcare is almost artisinal, labor using and time intensive, only one other industry in modern societies is structured in a similar way, the luxury goods industry. But does healthcare delivery have to have the same structure as making a luxury automobile or yacht? Aren’t there better ways of delivering service? Do we need to break the monopoly of doctors and hospitals? Can Artificial Intelligence and Robots possibly do a better job at surgery and diagnosis? We need to answer these fundamental questions first.”
Hear, Hear
Except
No robots
No AI
Just a different way of thinking. Competition. People looking for a better way. Current medicine grossly fails the back-of-the-envelope test. If we spend 3 trillion a year on healthcare and there are 300 million Americans (very rough numbers) then we are spending $10K per year per person. Does this seem reasonable?
Lets imagine a surgeon averages one surgery a day and gets $4000 for his skilled work. He grosses $1M a year. Seems like he/she would be happy. Double the cost for assistants. Throw in an operating theater which is basically a room with some equipment that is capitalized over many years. After the surgery you have to spend time in the hospital which is basically a room with a staff of people ($80K/year?) that take care of lots of patients. What does it seem like this experience should cost, perhaps $15K? $20K? Nope, it costs $80K- $100K. Why?
Lets stop spending time trying figure out how to pay for the $80k-$100K and instead ask ho we can get costs down to $10K.
Per the WSJ, cardiac surgery overseas at a first class hospital with US trained surgeons costs $10K vs $100K in the US
@NormD –
Norm, Robots here http://healthcare.zdnet.com/?cat=34
@NormD –
Norm, Robots here http://www.msnbc.msn.com/id/31552262/ns/technology_and_science-science/
Where robots go so goes AI
@NormD –
My 90 year old mother in law was in the hospital for fairly routine kidney surgery and her chargemaster charges were 75k and to give her her regular meds they charged 7k a 2000% mark up. Room and Board was over 8k for a 6 day stay. I agree Houston we have a problem. Medicare picked up only a fraction of these costs, something like 40% and supplemental insurance another 20%. The sobering factotum is that a person without insurance would be billed at the full chargemaster rate.
@MattyougI stopped reading at “….under Bush…” Bush didn’t enact the laws that gave the banks the money…Congress did. The stimulus recommended by Bush and passed by Congress was a trifling amount of money per person (and only about $150B in total), but it did put the funds in the hands of the citizens for them to use as they saw fit, and it hit the system (in the form of savings or lowered credit card balances) almost immediately.