A Plan to Renew the Promise of American Life, Plank 8
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Plank 8. Freeze peacetime spending
Specific Recommendations
8.1. Generate routine, modest federal budget surpluses by means of a comprehensive spending freeze enforced by means of automatic sequesters and presidential impoundments of unspent funds.
8.2. Establish a statutory cap on total federal peacetime expenditures, defined initially as a share of gross domestic product, and then, after the restoration of honest, constitutional money, as a specific number of dollars. Allow emergency spending above the cap only for a declared war.
8.3. Offset spending increases, and tax cuts, with spending cuts of equal or greater value.
8.4. Offset tax hikes with tax cuts of equal or greater value. Only increase overall tax receipts when trading up (for example, when replacing a production tax with a consumption tax) or in a true emergency like a declared war.
8.5. To make federal spending more manageable, convert the form of spending, wherever possible, from permanent to annual (in budget jargon, from ‘mandatory’ to ‘discretionary’ appropriations).
8.6. To reduce unproductive friction in the appropriation process, automatically renew each annual appropriations bill at the end of the fiscal year at, say, 99.9 percent of the previous year’s level.
8.7. Devote surpluses to devolution, debt reduction, and tax relief — never to net spending hikes.
Comments
The previous plank proposed a strong but flexible cap on government debt, as a way to rein in the size and scope of government, and suggested a mechanism to incentivize policymakers to respect such a cap (‘hit your numbers or hit the road’). In this plank, and the three that follow, I’ll try to answer the more mundane question of how we can live under it.
Mundane, yes. But not easy. At least, not at first. Indeed, this may be the toughest nut to crack in this entire plan. But crack it we should, if we want to truly limit the size and burden of government and renew the promise of American life.
As we’ve seen, the five rules of fiscal common sense are limit spending, tax lightly, borrow the minimum, maintain a surplus, and pay down debt. The first rule is ‘limit spending,’ and it’s first for a reason.
Uncle Sam does not limit spending currently — and hasn’t, for decades. Are we surprised he’s in debt?
Anyone with even half a brain spends less than he earns. A prudent person avoids deficits and deliberately seeks small surpluses as a matter of routine. Yes, he uses them to raise his standard of living, ultimately, but as a first discipline, he uses them to pay down debt. Using surpluses merely to boost spending, when you’re deep in debt, is a form of insanity, the fiscal equivalent of taking the hair of the dog. And all of this applies equally to a prudent government.
The simplest way for the government to limit spending is to freeze it — all of it. Simply impose a cap on total expenditures at their current level and manage spending as necessary under that cap. Whenever an additional dollar is needed in one place, eliminate a dollar of spending somewhere else, or, if necessary, take an additional dollar from the public in taxes.
This is pay-as-you-go, the epitome of common sense. As I say, it’s the simplest way to limit spending, the most straightforward. But is it the easiest?
I won’t pretend it’s easy. It’s hard, politically speaking. Very hard. But in the long run, it’s easier than the alternatives. The alternative is selective austerity. Politicians and the public bristle at making specific hard choices, because nobody wants to be the sacrificial lamb on the fiscal altar. But people can stomach a policy of general sacrifice. Make the belt-tightening universal, ask everyone to contribute, spare no sacred cow, protect no special interest, and the public will reluctantly go along. Reluctantly, for sure. But no one can say, ‘This is unfair, you are singling me out.’
In its ideal form, the spending cap is fixed. It doesn’t move. It doesn’t grow with inflation or population or economic output. It stays put while the natural process of economic growth increases receipts to the point where the lines cross and deficits disappear and surpluses become routine.
By a ‘freeze,’ I mean a dollar cap: total expenditures remain the same or go down from year to year in actual dollar terms and not just as a percentage of economic output (gross domestic product — a so-called share-of-GDP cap. A GDP-based spending cap is not a true spending freeze. It floats. It lets government spending grow with the economy. Plus, the definition of ‘GDP’ is easily manipulated by politicians and bureaucrats.
Alas, the political class will insist on a ‘share of GDP’ cap. Count on it. Okay, fine. Let’s start there. But let’s view it as a transitional step, and police the definition of GDP vigilantly, and keep a true dollar cap in sight as our ultimate goal.
By making this concession, we make our goal less daunting. It gives us a toehold.
Where should we set our (transitional) share-of-GDP cap? I would propose three percent of GDP. Yes, three percent. (I’ll pause here to let the reader clean up the coffee he just spewed out involuntarily.)
Why three? Because that was the peacetime average for the first century and more under the present Constitution — before the progressives went to work. Three percent is historically precedented. Therefore, no one can say it’s not doable. No one can say it is an impediment to national prosperity. It is manifestly doable and consistent with prosperity. /1
But since the current level is about 23 percent of GDP, that does seem a big cut, doesn’t it? We’re back to daunting.
Defense, all by itself, can easily cost us more than three percent of GDP. And defense is government’s main job. And things have changed since the nineteenth century. We have a coalition of free nations to lead and protect.
All right. Fair enough. Maybe three percent is too ambitious, for an initial goal. Fine. Let’s make it six. Or nine. Or something else. But let it be south of twenty-three. Well south.
The important thing is to have a target and stick to it. If we never set a target, we’ll never hit it.
By setting the cap reasonably high, the needed course corrections can be small and routine, and the number we all agree on can take on a certain sanctity. Perhaps the ideal number is ten percent. After all, God himself is content with that. /2
It also helps to make the most difficult changes early. Doing so makes a freeze policy comparatively easy to maintain thereafter.
Paradoxically, it may be necessary, at first, to increase spending. That’s right. It may be the price we have to pay to secure structural changes that ensure permanent, long-term savings. Get the structure right, and the dollars eventually take care of themselves.
Admittedly — and this is a serious challenge — the discipline of a freeze policy will be difficult in the absence of honest money. So long as Uncle Sam can print money, our beloved Congress-critters will feel little incentive to restrain anything — spending, deficits, or debt. After all, why would a politician risk being thrown out of office for spending cuts or tax hikes, which are nearly always unpopular, when the problem can be papered over with, well, paper?
Honest money, in turn, is be hard to achieve without an enforceable debt cap. And ideally, we’d have a state federalism veto, to boot.
In other words, we need to change politicians’ incentives, so they want to maintain a freeze.
Now I will confess, we have a bit of a chicken and egg problem. It’s hard to freeze spending without changing politicians’ incentives, and it’s hard to change their incentives without an enforceable spending freeze.
But let’s not despair. Let’s grant, for argument’s sake, that a freeze is impossible without the key structural constraints I just mentioned (honest money, debt cap, federalism veto). A freeze is still a good idea in principle. And we will certainly need it, once those structural constraints are in place.
So, surely the prudent course is to figure out, well in advance, how we can make a freeze work, should conditions become favorable for one. To be prepared. And to have a set of tools and rules at our fingertips, to help us get and stay there. That’s why this plank exists.
And by the way, devolving unconstitutional spending would make this whole challenge a lot easier!
Should defense be exempt from the freeze? No. It’s true, as I mentioned, that we have a coalition of free nations to lead and protect. We must maintain a military force of awesome power with an ability to project decisive force across vast distances at speed. But these are reasons to set the cap higher, not to exempt defense from it. And by the way, why not ask our allies to shoulder more of the burden? Why not ask them to contribute more to their own defense? If it makes sense for us to be devoting five percent of GDP to this, the most important of all government duties, shouldn’t they as well?
Should entitlements be exempt from the freeze? No, because that’s where the money is. Sixty percent of the budget today goes to entitlements like Social Security, Medicare, Medicaid, and health care tax breaks. Throw in debt service, and we’re at two-thirds of federal spending. This ‘untouchable’ auto-pilot spending is growing faster than receipts. Which means the budget cannot be balanced in any sustainable way absent reforms that constrain it. /3
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. We have a structural deficit, so we need structural reforms. Does that put us back at a freeze being politically impossible? No. It just means we have to be creative. /4
Before we identify creative solutions, let’s eliminate a number of suggested solutions that won’t work.
We will not be able to ‘grow’ our way out of the deficit as it is currently structured. With federal spending consistently and continuously growing faster than receipts, GDP growth is never going to be rapid enough to close the gap. Yes, we could stumble into balance on a lucky day, as we did in the late ’90s, but it wouldn’t last, as that surplus did not.
The politicians who tell us we can coast our way to surpluses are selling us a bill of goods.
Nor can we eliminate the deficit by reducing waste, fraud, and abuse, which are 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. They’re only a minuscule share of total outlays.
Nor can we can eliminate the deficit just by cutting annually appropriated spending and leaving auto-pilot spending alone. (That’s a laugh!)
Annually appropriated spending represents about one-third of the budget. About half of it goes to defense. Even if we eliminated every penny of it, including defense, the deficit would inevitably return because the growth rate of auto-pilot spending exceeds the growth rate of receipts.
The hard fact is right there in front of us: any serious freeze plan, and indeed any serious plan to reduce deficits of whatever sort, will inevitably include the ‘untouchable’ two-thirds of the budget. Entitlements cannot be kept off the table.
And yet, as I said earlier, a freeze policy has the important feature of necessarily having to be comprehensive — make exceptions and it won’t fly. In wartime, to be sure, we may have no choice but to temporarily suspend the freeze to allow the necessary spike in military expenditures. But in peacetime, defense should not be exempt from ordinary budgetary discipline.
What about the idea of automatic, across-the-board cuts (‘sequesters’)? What if, for example, at the start of every year we just trimmed every program by whatever amount is necessary to restore balance in the coming year? It’s not a bad idea in principle. It’s a good idea. But the automatic cuts would have to be small to be politically sustainable, or else the politicians would, as sure as you’re born, waive, reverse, or swiss-cheese them. Give us fiscal chastity, O Lord, but not yet. And again, even if we got into the habit of making such trims, we would still not be able to sustain the plan without permanent structural reforms.
To put it more succinctly, spending must be largely under control before sequestration can be imposed successfully. So, while it’s a great tool for enforcing a freeze, it’s not a grea tool for achieving one.
Freeze or no freeze, avoiding a debt crisis requires that we cut some programs more deeply than others, and must eliminate some programs altogether. Uncle Sam must exit whole lines of business. There is no alternative. The math is remorseless.
The first programs to go should be those that Congress should never have created in the first place, either because they’re unconstitutional, or because they don’t work, or because they’re a waste of money, or because the states and the private sector can handle them better. For starters, health, education, and welfare programs. The feds have no constitutional authority to spend on those activities, and add little value in those areas compared to states and the the private sector. So, let’s start there.
Did I mention that we need to devolve unconstitutional spending?
So, to sum up, let’s take the bull by the horns. Let’s reform entitlements to make them manageable under a comprehensive peacetime spending freeze.
Perhaps I should have called this the ‘reform entitlements’ plank.
Specific Entitlement Reforms
Okay. For the reasons stated, entitlement reform is unavoidable. Step one, then, is to reform them. And step two is to devolve them to the states, as soon as surpluses appear. (Step three is ‘Avoid creating any new ones.’) So, how should we reform them, specifically? Let’s look at each in turn.
Social Security. It will seem paradoxical, but I would not bother with such conventional ‘reforms’ as benefit cuts, tax hikes, age hikes, or — alas! — personal accounts. They are all defensible ideas, and we shouldn’t resist them when there’s momentum for them, but they are incredibly unpopular. So why would we lead with them? Frontal assaults on a fixed position are usually pointless and can be counterproductive. Instead, I think we should transform Social Security into a simple, solid, effective anti-poverty program. Focus it on keeping older people out of poverty. Specifically, means-test the benefits: deny them to those who don’t need them. That, I think, is the simplest and most effective reform, and the only realistic one, politically speaking. So let’s pick our poison and drink. At the same time, we should eliminate the payroll tax and fund Social Security entirely from consumption taxes. For three reasons. First, because the payroll tax burdens the working poor. Second, because relying on general revenues would make the program permanently solvent. And third, because eliminating the payroll tax would end the unhelpful illusion that the program is an earned benefit with a guaranteed rate of return. And oh yes, we should amend the Constitution to make the program lawful. /5 /6
Medicare. Means-test eligibility for the Medicare benefit. And ideally, cap and voucherize it to maximize individual choice and control. Eliminate the payroll tax and fund Medicare from other revenue sources. And importantly, make participation in the program truly voluntary for individuals. (For all practical purposes, Medicare is a open-air prison. Try to escape, and they take away your Social Security. There’s something profoundly un-American about this.)
Medicaid. As a first step, either block-grant it or, alternatively, assume it into the federal portfolio, relieving the states of their obligation to help fund it. The latter option may seem counterintuitive, but the current, condominium structure of the program is its fundamental flaw. To get Medicaid under somebody’s control — anyone’s — is far more important that who controls it. We can’t reform what we can’t control. If we do take the federal assumption path, Congress should cap and voucherize the benefit as well, to maximize individual choice and personal control. And as soon as conditions permit, we should devolve Medicaid to the states, where it belongs.
The Affordable Care Act. As with Medicaid, the ultimate goal with the ACA should be its total devolution to the states. Both the mandates and the subsidies. But if necessary, as a transitional first step, block-grant it. At all events, we should repeal its individual mandate, which is a true abomination. And as long as the program remains in the federal portfolio, we should cap and voucherize the subsidies to maximize individual choice and control. If we must proceed incrementally, let’s look for ways to ease the mandates — create holes in the Berlin Wall big enough for people to escape through. Eventually, the vast majority of people will have escaped, at which point the wall’s continued continued existence will seem silly.
The Tax Exclusion for Employer-Sponsored Insurance. By now, the reader should be able to guess what I’ll say: Eliminate the income tax. But until that happens, we should ideally eliminate the single biggest loophole in the income tax, which is the exclusion for employer-sponsored health insurance (ESI). That exclusion, whereby workplace health benefits are excluded from the definition of taxable income, is the root cause of our chronic health care inflation and all the downsides that come with it. But since eliminating the exclusion would be disruptive, and probably a political nonstarter (outside the context of abolishing income taxation), we should think in terms of a transition. As a first transitional step, and to maximize individual choice and control, we should convert the exclusion into a fixed-amount subsidy, a capped voucher in the form of a universally available refundable tax credit that the recipient could use to help pay for whatever form of health insurance he or she likes, and let him save any unspent funds in a tax-advantaged, Roth-style savings account. Make the credit available to everyone (don’t means-test it). Let people use it both inside and outside the workplace, as they prefer. Let those enrolled in Medicaid, Medicare, and the ACA premium tax credit program apply it toward the cost of those programs, if they wish, just as they would toward the cost of private coverage. Importantly, make it available in lieu of, not on top of, any other federal health coverage subsidy for which the recipient may be eligible, including the ESI tax exclusion. In other words, make the voucher the primary tax-based health insurance subsidy. With luck, everyone will opt for it, leaving the old legacy subsidy programs to wither on the vine. Note: I would make those who voluntarily opt into the universal fixed-amount credit permanently ineligible for the existing, poorly designed ACA percent-of-premium credit, because the latter is inflationary and wastefully enriches health insurers at taxpayer expense.
Other Income Support Programs. This category incudes Disability Insurance, Unemployment Insurance, Food Stamps, Nutrition Assistance, and similar programs. Devolve them all. As a first step, while we’re running deficits, reform them, and then, as a next step, block grant them or better yet turn them into capped vouchers. Also, while they remain in their current forms, employ such fiscal safeguards as means-testing, time limits, anti-double-dipping rules, anti-fraud protections, and lock-out periods for non-compliance with program rules. I would not waste time trying to impose work requirements, however, because work requirements are hard to enforce. They tend to become riddled with self-defeating loopholes.
Note: Federal civilian and military pensions and health benefits should not be devolved because they are earned benefits of federal employment.
Notes
1/ When I refer to the ‘peacetime’ average of federal spending, I mean when no formal congressional declaration of war is in effect. As for the term ‘declaration of war,’ it must of course include so-called ‘authorizations of military force’ (AUMFs), which are just declarations of war pretending to be something else.
2/ Surely, any figure north of single digits needs to be justified by something more persuasive than ‘It’s traditional, these days.’ One man’s tradition is another man’s historical anomaly. And viewed from the standpoint of American history, our current, high level of government spending is indeed anomalous.
3/ One-third of federal spending is appropriated on an annual basis, meaning it expires at the end of each fiscal year if Congress takes no action. This is usually referred to as ‘discretionary’ spending. The idea of permanent appropriations was anathema because it imposes burdens on future generations without their consent. Appropriations should be short-lived. Sunset clauses are as beautiful as sunsets. But wait. I endorse a form of auto-pilot in the context annually appropriated spending (continuing existing spending at, say, 99.9 percent of the current level, in the absence of a new appropriation)? Is that not a self-contradiction. Isn’t that just auto-pilot spending by another name? It’s not, because spending ‘cliffs’ favor spending hikes. Automatic continuation at a slightly reduced level shifts leverage to those who seek to hold the line on spending — and approximates a freeze.
4/ By the way, about half of entitlement spending goes to retirement programs and health care, and most of that goes to old people. So it’s technically true that ‘the U.S. government is a pension plan with an army.’
5/ Social Security benefits should be taxed as ordinary income. Money transferred to individuals by the government is income, and so long as we tax income, we should tax government transfers as such, no exceptions. Similarly, we should also count all government transfers (and taxes) in our official poverty measure, which we currently do not. By doing so, the public would be able to see, not only the true state of poverty in our country, but also the real effects, both good and bad, of our welfare state and tax structure. I suspect we’d find that, taken together, our transfer and tax systems make us the most aggressively redistributionist welfare state on earth, putting the Scandinavians and the communists to shame on that front.
6/ P.S. To help keep people out of poverty, I think we should eliminate required minimum distributions (RMDs) from tax-deferred individual retirement accounts (IRAs). Let tax-deferred investments grow throughout the IRA owner’s life and tax that money only after he dies, not before. Additionally, I’d convert all tax-deferred IRA accounts into Roth-style accounts, meaning the money that goes into the account is post-tax and the money that comes out is tax-free (as is the inside buildup). Tax-deferred accounts are problematic and subject to gaming and require arbitrary age limits and such. Roth accounts don’t need all those restrictions. They’re simple and sensible. But of course, all of this only matters while we still have an income tax.
Constitutional Amendments
This plank does not propose any constitutional amendments, but realistically, it will not be sustainable without the help of the amendments proposed in the debt-limitation, honest money, and independent agencies planks.
Benefits
Permanently reduces the size and burden of the federal establishment.
Gives Congress stronger incentives to eliminate unnecessary and unconstitutional programs and agencies.
Revised: March 4, 2018.
First published: June 21, 2013.
Author: Dean Clancy.
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