8. Freeze Peacetime Spending

A Plan to Renew the Promise of American Life, Plank 8

Plank 7     Contents     Plank 9

Plank 8. Freeze peacetime spending.


Specific Recommendations

8.1. Generate routine, modest surpluses by means of an enforceable spending freeze. Devote surpluses first to debt reduction, then to tax relief.

8.2. Establish, by statute, a cap on total federal peacetime outlays, defined initially as a share of GDP and then, after the restoration of sound money, as a specific number of dollars.

8.3. Enforce the statutory outlay cap by means of automatic sequesters and mandatory presidential impoundments of unspent funds.

8.4. Prevent net spending increases by offsetting spending increases (and tax cuts) with spending cuts of equal or greater value.

8.5. Prevent net tax hikes by offsetting tax hikes with tax cuts of equal or greater value. Never “pay for” tax cuts with tax hikes.

8.6. To make federal spending more manageable, convert the form of spending, wherever possible, from permanent to annual (that is, from “mandatory” to “discretionary” appropriations).

8.7. To reduce unproductive friction in the appropriation process, send the president five or six dozen appropriation bills each year instead of the traditional dozen or so.


Explanation

The five rules of fiscal common sense are: limit spending, tax lightly, borrow the minimum, maintain a surplus, and pay down debt. Currently our federal government does none of these things. That’s why we run deficits instead of surpluses and have such a gigantic national debt.

The main culprit is spending. It is too high and growing too fast. It is eroding our country’s political strength and independence. If not slowed, it will eventually (further) diminish our prosperity and freedom.

So what should we do?

The simplest way to limit spending is to freeze it at its current level and then let the growth of the economy increase receipts to a point where the lines cross and the deficit disappears naturally.

The practical way to make that happen is to follow a policy of “pay as you go,” which means that, whenever we create a new dollar of spending, we must eliminate at least one dollar of spending, somewhere else, to keep the overall number from growing.

Tax cuts should always be offset, not with tax hikes, but rather with spending cuts, because politicians invariably spend every additional dollar of receipts, even if there is no actual need for the additional spending. By the same principle, tax hikes should always be offset with tax cuts, in order to keep the pool of available receipts to a minimum.

In short: 1) Never raise more money in taxes than you actually need. 2) Always return a surplus to the taxpayers. 3) All other things being equal, reducing debt takes priority over cutting taxes.

Admittedly, it may be impossible for Congress to muster the necessary discipline to stick to a freeze policy absent sound money, that is, a limited money supply. But here we are focused on how a freeze policy would work, separate and apart from whether or not Congress has access to an ATM via the Fed.

By a “freeze,” I mean a hard cap. Total outlays remain the same or go down from year to year. It’s cheating to define a “freeze” in terms of the size of the economy—a so-called GDP cap. That is not a true freeze, because it allows government spending to grow with the economy. And the definition of “GDP” can be manipulated by politicians and bureaucrats.

Now, to be sure, a GDP cap is better than nothing. But anyone who is serious about really moving from chronic deficits to routine surpluses has to admit we need a true freeze enforced by a hard cap on spending, and that a spending cap needs to be defined in terms of a specific number of dollars.

If we do end up going with a “share of GDP” approach, and I suspect the political class will insist on it, I think we should retain a goal of converting to a dollar-cap as soon as feasible—that is, once we have actually reestablished sound money.

We should set the outlay cap low, say, three percent of GDP, with a phase-in. We would lower the cap, gradually, from today’s historically very high level of 23 percent down to three. Why three? Because it’s the nineteenth-century peacetime average. Which means we know it’s doable. Now, to be sure, it would take a long time to get there. But we need a goal that is at once sound, clear, and attainable. And three percent is all of those things.

Admittedly, freezing spending is easier said than done.

The structure of today’s budget creates a serious obstacle. Only one-third of federal spending is appropriated on an annual basis, meaning it can be allowed to expire at the end of the year, if Congress takes no action. Two-thirds of spending, by contrast, is in the form of permanent appropriations, which means it goes on forever until Congress intervenes to change it. Permanent appropriations mostly take the form of income-transfers (so-called entitlements) and interest payments on the national debt. They are all basically on auto-pilot. And they’re growing faster than receipts. Which means, in short, the budget can never be balanced absent structural reforms that reduce auto-pilot spending.

An aside. In the old days, all appropriations were temporary, and usually annual in duration. The idea of permanent appropriations was regarded as foreign to the spirit of a republic because it amounts to imposing burdens on future generations without their consent. Our ancestors thought all appropriations should be temporary. They were right. Sunset clauses are as beautiful as sunsets.

To make a freeze policy work, auto-pilot spending need to be converted into annually appropriated spending, and annually appropriated spending needs to be frozen. And the freeze needs to cover everything, including the largest annually appropriated account, national defense. In wartime, defense spending will of course spike, in which case the freeze policy may need to be temporarily suspended. But in peacetime, defense should not be exempted from ordinary budgetary discipline.

Defense consumes about 15 percent of the budget. The auto-pilot income-transfer programs, which include Social Security and Medicare, represent more than 50 percent. Throw in interest payments on the national debt, which currently consume 3 or 4 percent of spending, and you’re at two-thirds.

The old joke that Uncle Sam is “a pension plan with an army” is not inaccurate!

Complicating our challenge is the fact that the two-thirds of the budget that is on auto-pilot is also regarded as politically “untouchable.” And yet we have to freeze everything. What to do?

So long as the “untouchable” two-thirds of spending is growing faster than receipts, we will always be bumping up against the ceiling. Routine surpluses will be structurally impossible.

Obviously, we have a structural problem. Therefore, we need a structural solution.

Before we identify specific solutions, let’s take off the table a number of suggested solutions that won’t work. Many of the most popular ideas for balancing the budget are doomed to failure.

We cannot “grow” our way out of the deficit. Faster economic growth is certainly necessary and welcome, and would undoubtedly ease the fiscal challenge, since a lot of income-transfer spending is “countercyclical,” meaning it tends to go up during a bust and down again during the subsequent boom. But growth by itself cannot increase receipts fast enough to overcome the growth of spending.

Nor can we eliminate the deficit by reducing waste, fraud, and abuse, which is difficult to identify and well-nigh impossible to remove surgically.

Nor can we eliminate the deficit by reducing foreign aid or welfare for illegal immigrants, both of which are minuscule.

Nor can we eliminate the deficit by cutting the one-third of the budget that is annually appropriated. That share of the pie is too small. Even if we eliminated all such spending tomorrow, the deficit would return rapidly because the growth rate of auto-pilot spending exceeds the growth rate of receipts.

So the tough choices are unavoidable. We have to tackle the “untouchable” two-thirds of the budget, head-on. Which means we have to find ways to achieve serious, sustainable reductions in spending on entitlements.

And incidentally defense needs to be part of the discipline as well. It needs to receive adequate funding, but we can’t, in peacetime, afford to have any sacred cows.

What about automatic, across-the-board cuts? What if, for example, at the start of every year we just sliced every program by whatever amount would be necessary to restore balance in the coming year? This concept sometimes goes by the term of “sequestration.” The answer is: It is not a bad idea in principle, and indeed should be part of enforcing a freeze, but it is only sustainable so long as the underlying structure of spending is amenable to frequent, automatic reductions. In other words, spending has to be basically already under control before sequestration can be imposed successfully. That is to say, permanent appropriations have to be a small share of the budget and very slow-growing. To be clear, sequestration in some form is a valuable tool—and certainly the easiest approach for politicians, since it involves minimizing the number of tough choices—it does not by itself solve the basic problem, which is that when some programs are growing more quickly than receipts, other programs need to be growing more slowly than receipts, to maintain an overall freeze. Eternal vigilance is the price of balance.

We cannot avoid the tough choices. We must reduce the growth rate of spending. Which means we must cut some programs more deeply than others and eliminate some programs altogether. Indeed, we must get the federal government completely out of whole lines of business. There is no other way to balance the budget and keep it balanced, consistent with low taxes and a healthy economy.

The upside of a freeze policy is that it enables politicians to avoid making more than a minimal number of tough choices at any given moment in time. They can apply a nip here and a tuck there, and things should go smoothly, all other things being equal. But, as we’ve seen, that comparatively pleasant job can only exist so long as the overall structure of spending is right. Every part of the budget has to be under control. And getting every piece under control is hard. But it’s our only hope.

Which lines of business will Uncle Sam need to exit? Two kinds. First, those it should never have gotten into in the first place, because they’re unconstitutional. Second, those it can’t handle as well as the states or the private sector.

Get out of those, and our structural problem is solved.

And this is where devolution comes in. “Devolution” means transferring an entire program to the states, both the money and the rules that go along with it. Eliminate the program at the federal level and also reduce federal taxes at the same time, by the same amount. That way, states have the money they need to continue the program, if they wish to do so. Devolution is the easiest, most painless way to get out of a line of business. But to make it work, we realistically need to be in surplus. Devolution is much harder to pull off when we’re in deficit. More on this in the devolution plank.

Ultimately, a huge chunk of the federal budget will need to be devolved or eliminated. There are more than 2,200 current federal programs, projects, and activities. We need to identify every single one that is unconstitutional, unnecessary, or unaffordable, and shut it down or hand it off to the states or the private sector as rapidly as we can.

Admittedly, our representatives will always be reluctant to do this. They will always hesitate to prioritize. They will always drag their feet on cutting spending. They will always procrastinate. That is why we need to change their incentives, permanently. In addition to sound money, we need a formal debt-limitation constitutional amendment—a basic, well-designed structural reform that places a permanent, motivating fire under our elected representatives.

By the term “peacetime” I mean “when no formal congressional declaration of war is in effect.” When we are at war, a spending freeze is hard to maintain. If it’s a defensive war, a freeze policy is potentially dangerous. So there needs to be some kind of flexibility. (Thankfully, a good debt limitation amendment can be structured to have that flexibility, without loopholes.) Within the term “declaration of war,” I believe we should include so-called “authorizations of military force,” which are basically declarations of war by another name. The basic rule should be, “When in doubt, assume we are in peacetime and that the freeze policy is in effect.”

Having laid out the basic principles, we can now take a closer look at specifics.

1. Enforcement

The first step in enforcing a sustainable freeze is to revive two traditional mechanisms of fiscal control: 1) automatic sequesters (across-the-board trims) and 2) mandatory impoundments (presidential decisions to refrain from disbursing appropriated funds).

It would help greatly in our task here to amend the Constitution in two ways: 1) to enable a majority of the states to repeal any federal law or regulation (an idea proposed in the independent agencies plank) and 2) to give states a veto over any increase in the national debt (an idea proposed in the debt-limitation plank). Together, these two reforms would enable politicians, both state and federal, to overcome their natural reluctance to phase out unaffordable spending.

2. Entitlements

We must reduce the growth rate of entitlements, so they grow no faster than the growth in receipts. To do that, we must either eliminate or (more realistically) devolve all open-ended entitlement programs, and at a minimum slow their growth rates. When a program cannot be devolved for some reason, we should still take it off of auto-pilot (i.e., transform it from permanently to annually appropriated) and, as a transitional step, block-grant it to the states (meaning a simple, lump-sum grant each year for a particular purpose, one, ideally, that does not grow with population or inflation but remains flat over time).

The three main kinds of entitlements crying out for reform are: 1) health care entitlements; 2) Social Security; and 3) other federal income support programs.

Medicare, Medicaid, and Obamacare together constitute about 25 percent of total federal outlays. Social Security adds another 20 percent. Other income support programs add another 15 percent. That adds up to 60 percent of the budget. As Willy Sutton would say, that’s where the money is.

One last thought. No more new, open-ended entitlement promises! Instead of making new promises, we should be honorably retiring old ones.

Social Security

How should Social Security contribute to a peacetime spending freeze? The program is too popular to cut or even to devolve outright. That means we need to stop thinking in terms of such conventional “reforms” as benefit cuts, tax hikes, a higher retirement age, or even personal accounts—ideas that are going nowhere. Means-testing—allocating benefits based on financial need—is the fairest and most sensible way to keep Social Security outlays within budget. But I believe means-testing can only become feasible after the public has come to see that Social Security is not an “earned” benefit or a forced savings program but rather an income-transfer program.

That necessity dictates the first step toward reform: eliminate the payroll tax. The payroll tax creates a powerful illusion that Social Security is “earned,” and meaningful reform is impossible while that illusion persists. The tax itself is not essential to the system. It is ornamental. Despite what people assume, the amount of one’s monthly Social Security benefit in retirement has no connection to how much one paid in, in payroll taxes, over the years. Rather, the key data point in calculating one’s benefit amount is how much money one earned during one’s working years. We could keep tracking people’s earning, and calculating their benefits, as under current law, without actually collecting the tax. Benefits would go on being funded, from general revenues. All that would change is the funding source. Breaking the link between Social Security and the payroll tax would make it politically feasible to means-test the benefit. Social Security could then evolve into a more traditional, voluntary, means-tested income-support program, which, ultimately, is the only kind that is fiscally sustainable. In short, eliminating the payroll tax is the indispensable first step to Social Security reform.

One nice side-benefit of this approach is that it would enable us to make Social Security optional, without threatening the program’s solvency or political viability. Individuals would have the freedom to opt out of having their wages tracked, on condition they voluntarily agree to an irrevocable renunciation of eligibility for benefits. I suspect a lot of Americans would take that option, especially younger ones. Instead of relying on Social Security, these individuals, in their later years, would rely on a combination of personal savings and traditional safety-net programs, which, thanks to this and the other planks of this plan, would be more dependable and perhaps more generous than they are today.

Medicare

Medicare is a perfect candidate for devolution to the states and private sector. Since that’s not yet politically possible, and means-testing the benefit, while desirable, isn’t essential, the most practical approach for now is to focus on giving seniors more choices and let them reform the program themselves by voting with their feet.

First, make participation in the Medicare benefit voluntary. Medicare benefits are mandatory right now, as I explain in the unconstitutional spending plank. Second, beef up the competitive Medicare Advantage option within Medicare and make Medicare Advantage the default option rather than Old Medicare (i.e., the 1960s fee-for-service program), while allowing seniors to opt into Old Medicare, if they want. And then just stand back and watch as Old Medicare naturally fades away as seniors vote with their feet.

Under a choice-based approach, there is no need to cut benefits, raise the retirement age, or completely overhaul Medicare with a “premium support” model—ideas for which there is little public support.

At the same time, we should repeal the Medicare rationing board known as the Independent Advisory Payment Board (IPAB), which is authorized, in effect, to ration seniors’ health care via meat-ax reimbursement cuts and is structured to be independent of all three branches of the federal government, making it especially unconstitutional.

Obamacare

Obamacare’s individual mandate to purchase health insurance should be repealed, and the rest of Obamacare should be repealed and its various subsidies devolved to the states or the private sector. If necessary, the subsidies could be block-granted to the states, as a transitional step. If necessary, the block grant could be made optional for states. But all of the law’s regulations, mandates, and price controls should go away, permanently, everywhere. Properly structured, a transitional block grant would be accepted by most states. Once about forty states have opted in, devolution will probably become inevitable.

Medicaid

Medicaid, too, is a perfect candidate for devolution. Short of that, we should block-grant it to the states. There is no need for Congress to cut Medicaid benefits. The current structure, under which the federal and state governments both pay for Medicaid but neither reaps the full costs of anyone’s poor policy choices, is perfectly geared to encourage waste, fraud, and abuse. As a result, Medicaid is one of the largest and fastest-growing federal programs and yet pays physicians more poorly than any other insurance program and has the worst record in terms of patient access and health outcomes. Some studies have found that it is better for a patient’s health to be uninsured than to be on Medicaid! By devolving or block-granting this troubled program, we would give states powerful incentives to adopt sensible eligibility rules and benefit levels.*

Income Support Programs

The “income support” category of spending includes Disability Insurance, Unemployment Insurance, Food Stamps, Nutrition Assistance, and similar programs—all natural candidates for devolution. If we cannot immediately devolve these programs, we should reform them to make to make them more rational and more easily block-granted in the future. Specifically, we should adopt: sensible means-testing, time limits, work requirements, anti-fraud protections, and anti-double-dipping rules. Where feasible, we should rely on in-kind help instead of cash assistance (for example, actual food instead of food stamps).

As with a Medicaid block grant, income-support block grants would give states every reason to focus their limited funds on the truly needy, since expanding the welfare rolls would no longer increase the amount of money received from Washington. Freedom would facilitate creativity, and necessity would spur common sense, and everyone, especially welfare recipients, would be better off. We know this model works, because we’ve done it before. The Welfare Reform Act of 1996, which block-granted the old AFDC cash-welfare entitlement, not only shrank the welfare rolls and saved taxpayers money, it also helped produce significant declines in poverty, including child poverty.

But note: We should not devolve federal civilian and military pensions and health care benefits, since they really are earned benefits. But where possible we should reform them, to reduce outlays, going forward.

3. Appropriations and Government Shutdowns

This point is of secondary importance, but it’s not unimportant. To reduce unproductive friction in the annual appropriation process, Congress should send the president five or six dozen appropriations bills each year instead of the traditional dozen or so, with the most popular items going to his desk first. That way, he can’t so easily, in order to force up spending elsewhere, take hostage such popular programs as troop pay, national parks, vaccine research, and cancer-drug trials for children.

4. Other Budget Process Reforms

The attentive reader will note that I have avoided mention of such popular budget reform ideas as “zero-based budgeting” and the like. While often sensible, such ideas are not likely to work, absent an effective, enforceable debt-limitation amendment. Let’s first get a good amendment in place, and then we will find that the necessary enforcement rules tend to take care of themselves.

And again, it will greatly help if we also limit the money supply.


NOTES

* Instead of Medicaid block grants, some people prefer a “per capita cap,” which is basically a block grant for each eligible individual, administered by the state. Under a per capita cap, the amount received by the state would not be fixed and predictable, as it would under a block grant. Instead, the amount received by the state would go up and down with the Medicaid rolls. The idea is to make Medicaid spending countercyclical—higher in bad times and lower in good times. But would it really be lower in good times? I doubt it. A per capita cap encourages the state to enroll as many people as it can, regardless of economic conditions, because that means more “free” money from Washington. Remember, under the proposed system, the state has maximum flexibility to alter eligibility and benefits. Politicians are vote-buyers. A politician who seeks to increase revenues, facing a choice between raising taxes on his state’s citizens by X dollars and amending his state’s Medicaid program to produce higher enrollment and thereby increase his state’s check from Washington by X (federal) dollars, will surely prefer the latter, because the latter entails less political risk. A block grant, by contrast, encourages the state to target assistance to those who are permanently and profoundly needy, while offering maximal flexibility to expand the rolls during a downturn temporarily. When it comes to block grants, accept no substitutes! Eschew per capita caps and similar schemes.


Constitutional Amendments

This plank does not require any constitutional amendments per se, but realistically requires the help of the amendments proposed in the debt-limitation and sound money planks to be sustainable. The amendment proposed in the regulation plank would also be helpful.


Benefits

Will permanently reduce the size and burden of the federal establishment.

Will give Congress greater incentive eliminate popular but unnecessary or unconstitutional programs and agencies.


Summary

Plank 7     Contents     Plank 9

Revised: July 30, 2015.

First published: June 21, 2013.

Author: Dean Clancy.

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