Tuesday, October 14, 2008

The Twenty Percent Solution

Harold. A. Black

April 2007


There is a Tennessee Congressman who is proposing a balanced budget amendment. The effort is obviously to constrain government spending but a balanced budget is a bad idea. Why? Because it does not explicitly limit spending. A budget can be balanced either by reducing spending or by increasing taxes. Which one do you think politicians would prefer? Congress would increase taxes, which would slow economic growth, increase unemployment and increase dependency on government programs. I have always found it amusing that when government screws up the economy, we hear additional pleas to increase government dependency.


To date all proposals bandied around to limit government spending simply won’t work. The last really serious Congressional effort was the Gramm-Rudman bill of 1987 - Phil Gramm the Texas senator who was the chief sponsor of the bill was my economics tutor at the University of Georgia. Gramm-Rudman attacked the largest - at the time - budget deficit in US history. It called for automatic spending cuts (sequesters) when the deficit exceeded certain targets. However, Harold Black's first law is that "Any law worth circumventing will be." Not surprising, despite Gramm-Rudman, Congress managed to both evade the act and then to raise the targets. Lastly, the act was found unconstitutional.


Now under the current administration, discretionary spending has increased 49 percent and entitlement programs make up 11 percent of GDP. We have talked before in this space about the crisis looming in 2050. Again what is that crisis? Historically, the government spends around 20 percent of GDP. By 2050, the big three entitlement programs - Social Security, Medicare and Medicaid – will take up 20 percent all by themselves.


What can be done? Obviously, it is very difficult if not impossible to garner support for cuts in any government program much less the big three. Try it and get attacked. When the Administration proposed cutting $77 billion in Medicaid growth, the press was replete with articles describing the irreparable harm to seniors and to the poor.  This so-called “cut” results in Medicaid growing at a 6.5 percent rate.


Some have proposed linking government spending to population growth and the consumer price index. This is known as the Tax Payers Bill of Rights. It has appeared on the ballot in 20 states. It was enacted in Colorado and subsequently repealed. The reason for failure is that what states spend money on (education and medical care) are components of the CPI but typically grow at a rate less than the CPI causing severe underfunding in schools and medical programs.


Thus, all previous budget debates are framed in such a way that it is doomed to fail. The argument should be over the size of government. Then the components of government spending can be addressed. I have a modest proposal. Let us cap the current government spending at 20 percent of last year’s GDP and then let the politicians earn their money by arguing over the components. We can have a provision that would allow a one year increase over that percentage if the President declares a national emergency and if it is passed by a supermajority (66 percent) in both Houses of Congress. So, proposal this solution, Mr. Congressman if you want no more budget crises, fewer threats to our economic well-being, and less government intrusion in our lives.


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