Why I Hate Budget Caps

By :: May 3rd, 2011

I hate budget caps.

They are arbitrary and beg to be gamed. It is irresponsible to make one that is absolutely unbreakable, even in the face of an economic depression or other national catastrophe. Yet even the most well-intended exception will open the door to wholesale abuse.

Caps--and the triggers needed to enforce them-- are supposed to be a last resort for legislators. Yet, they perversely encourage stalemate by providing an easy fallback in the face of gridlock. By mindlessly but automatically slashing spending or raising taxes across-the-board, they permit Congress to avoid setting national priorities though, last I looked, this is why lawmakers are here.    

Mostly though, caps only work during those rare moments when Congress wants to be fiscally responsible. When Congress prefers profligacy—which is most of the time—they become little more than an inconvenience. And it is never good for democracy when lawmakers routinely ignore the law.

Supporters argue that these process reforms at least slow Congress’ mania to spend too much and tax too little. Maybe. But it won’t take long before the next set of caps-and-triggers joins paygo and Gramm Rudman Hollings on the ash heap of failed schemes aimed at saving Congress from itself.

All that said, when Congress and President Obama finally reach a debt limit deal sometime this summer, some form of cap probably will be included in the package. So, we are left with the question: What kind?

My least favorite is a ceiling on spending only, such as the one proposed by senators Bob Corker (R-TN) and Claire McCaskill (D-MO). They’d cap all federal spending at 20.6 percent of Gross Domestic Product. It is, they say, the average level of outlays over the past 40 years. What’s magic about 40 years? Beats me. Why do they assume that the level of spending over the past four decades is also correct for the next four? Who knows?

Their cap would cover all spending, including Medicare, Medicaid, and Social Security. So, if outlays exceeded 20.6 percent of GDP, Social Security checks would shrink and doctors who treat the poor or the elderly would see their pay cut. Paradoxically, as the population ages and demand for these programs increases, the Corker-McCacskill cap would force ever-deeper cuts.

However, because the cap is on spending only, the $1 trillion in government subsidies administered through the tax code would be untouched. While Social Security benefits are reduced, top-bracket taxpayers would continue to enjoy a full tax deduction for the mortgage on their $950,000 home.   

Obama, Senate Democratic Leader Harry Reid, and Senate Finance Committee Chairman Max Baucus have another idea: They’d put a cap on the deficit, not just on spending. In their design, if the deficit ceiling is breached, Congress would automatically slash spending and raise taxes. In theory, at least, this makes more sense since it recognizes that budget cutting needs to include both revenues and spending.  

Yet, the Obama version (he calls it a “debt failsafe trigger”) has its own flaws. While Corker-McCaskill would exempt revenues, Obama would protect Medicare, Social Security, and most low-income benefit programs from automatic cuts if the deficit exceeds agree-upon limits. He’d put most of the burden on military spending and taxes, which is just as foolish as protecting tax subsidies.

There are plenty of other variations on the theme—some better than these two, some worse. The Concord Coalition has a nice summary here.  The Bipartisan Fiscal Commission proposed its version last year, so did the chairs of Obama’s fiscal panel. The budget resolution passed by the House last month included one too.  

The game here is pretty obvious. Both political parties are using the debate over caps as yet another proxy for a fundamental philosophical disagreement: Is the current fiscal challenge an excessive deficit or a bloated government? I’d just as soon Congress use its energies to actually cut spending and raise taxes rather than waste time arguing over a budget process it is likely to ignore anyway.

11Comments

  1. Günstige Kosmetik  ::  2:54 pm on May 3rd, 2011:

    i hat it, too.

  2. Michael Bindner  ::  3:16 pm on May 3rd, 2011:

    If you had regional VAT and Business Income Taxes with balanced budget requirements and tax increase/budget cut triggers, discipline is possible – however enacting both the automatics and the region specific rates would require a constitutional amendment, since currently excises must be uniform.

  3. Sid F  ::  7:13 pm on May 3rd, 2011:

    The reasons for the proposals discusssed in this post and other proposals to fix the deficit related to the fact that occasionally in life there are questions for which there is no answer.

    In this case, the question is

    “What set of fiscal measures (tax changes and spending cuts) will result in a significant reduction of the deficit and be politically acceptable to at least the minimum number of Representatives and Senators necessary to pass legislation implementing the measures?”

    Today the answer to this question is “No such set exists”. Tomorrow don’t look so good either.

    There will be an answer when either (A) a fiscal crisis forces a feasible set of measures or (B) Conservatives Republicans take control of the Senate (60 votes) and the Presidency (to go along with their control of the House)occurs.Until then, proposals like the ones discussed and the ones forthcoming like the “Gang of Six” will just be fodder for the commentary cannon.

  4. Michael Bindner  ::  12:01 am on May 4th, 2011:

    Tommorrow is very promising, especially if gridlock is in full swing, since the Bush/Obama cuts expire automatically. As long as Obama does not blink first and promises that the middle class will get no tax increase, he can pretty much get a $4 trillion tax increase with no spending cuts. Once he realizes this is the last thing the GOP wants, his bargaining position improves greatly – an now that Larry Summers is out of government, there is a chance he will get some good economic advice.

  5. Sid F  ::  9:40 am on May 4th, 2011:

    We have an interesting division of opinions here about the political aspects of tax increases, tax reform (which is tax increases) and government spending.

    One position is that the President is in a strong political position because he can allow the Bush tax cuts to expire on all tax payers, thus creating the pressure on Conservatives to agree to the bi-partisan tax reform/tax increase package necessary to bring the budget under control. Such a package could include VAT and BRT. The key to this happening, is

    “As long as Obama does not blink first and promises that the middle class will get no tax increase, he can pretty much get a $4 trillion tax increase with no spending cuts.”

    This first position is conditionally correct.

    (However, the statement “Once he realizes this is the last thing the GOP wants, his bargaining position improves greatly” is not correct. Republicans can live very nicely with a $4 trillion tax increase if it is blamed on Obama and the Democrats, because it would set them up for a massive electoral victory in 2014 and 2016. We need to look beyond just the next election)

    The other position is that Obama will indeed blink first and promise that the middle class will not get a tax increase. He will have to take this position on the expiring tax cuts in the 2012 campaign. This position is critical for the re-election of the President. Without it, he cannot get a second term, and as a result at the end of 2012 or the beginning of 2013 the President will find himself in the same position that he was in December 2010. The Congress will send him a bill extending the Bush tax cuts for all for either a limited period, or more likely will send him a bill making the Bush tax cuts permanent. Having campaigned on the promise of no tax increases for low and middle income families, Obama will sign the bill. This will leave massive spending cuts as the only alternative for decreasing the deficit.

    This second position is realistically correct and why tomorrow don’t look so good.

    Of course, in 2013 we will know the answer. It is also important to note that the 2012 election and its issues will be based on unknown events which have yet to happen.

  6. SteveinCH  ::  1:33 pm on May 4th, 2011:

    Odd that you find a 20.6% cap arbitrary but an unlimited cap on spending acceptable. The President’s deficit cap is no cap at all, it’s a financing mechanism, one that theoretically allows for spending at 30 or 40 or 50 percent of GDP.

    Watch how it works. The Congress passes a budget that spending 26 percent of GDP but only passes taxes for 20 percent. The cap puts both numbers at 23. Next year they put spending at 29 percent and leave taxes unchanged. Presto changeo, spending is now 26 percent of GDP.

    On and on the dance goes. There is no such thing as a deficit cap. Since spending needs are conceptually infinite, a deficit cap is no cap at all.

  7. Around The Dial – 5/4/11  ::  3:01 pm on May 4th, 2011:

    […] TaxVox really hates budget gaps. […]

  8. Curly  ::  3:46 pm on May 4th, 2011:

    Any place for budget caps?

    How about spending caps. Spending should be capped at 10% below expected revenues. If revenues are less than expected then spending would have to be cut again to be 10% below what is coming in.

  9. SteveinCH  ::  12:13 pm on May 5th, 2011:

    Ummm….did you read Obama’s 2012 budget submission. He’s already promised that “middle class” taxes won’t go up.

    He’s said it a large number of times. If you think he’s going to allow those taxes to go up in an election cycle conversation, well, let’s just say I don’t think much of your powers of political analysis.

  10. Michael Bindner  ::  2:17 pm on May 6th, 2011:

    Actually, if he does promise to hold the middle class harmless, many of us won’t vote for him. What will really determine whether he wins or not is whether the economy comes back or not is the economy (jobs, housing prices, gas prices), not tax policy. Sadly, his chance for forcing money out of the savings sector and into consumption may have been lost by not letting the Bush cuts expire.

  11. Michael Bindner  ::  3:16 pm on May 6th, 2011:

    Spending caps don’t appy to entitlements, unless you have an automatic mechanism to cut individual payments to providers and retirees.

    That won’t happen.