A Plan to Renew the Promise of American Life, Plank 8
Plank 8. Freeze peacetime spending
8.1. Generate routine, modest federal budget surpluses by means of a comprehensive, enforceable spending freeze.
8.2. Establish a statutory cap on total federal peacetime outlays, defined initially as a share of gross domestic product, and then, after the restoration of honest, constitutional 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 each new spending increase (or tax cut) with a spending cut of equal or greater value.
8.5. Prevent net tax hikes by offsetting each new tax hike with a tax cut of equal or greater value. Never pay for tax cuts with tax hikes, except when replacing an inferior tax with a superior one (for example, when replacing a production tax with a consumption tax).
8.6. To make federal spending more manageable, convert the form of spending, wherever possible, from permanent to annual (in budgetary jargon, from ‘mandatory’ to ‘discretionary’ appropriations).
8.7. 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.
8.8. Devote surpluses to devolution, debt reduction, and tax relief — and never to net spending hikes.
At the risk of being repetitive, the five rules of fiscal common sense are limit spending, tax lightly, borrow the minimum, maintain a surplus, and pay down debt. And currently our federal government follows none of those rules. This is why we routinely run deficits instead of surpluses. The main cause is excessive spending, relative to income. Uncle Sam is consistently spending more than he earns.
A government with even half a brain spends less than it earns. A fiscally prudent government runs surpluses rather than deficits and turns those surpluses into debt reduction and tax relief, not more spending.
The simplest way to limit spending is to freeze it — all of it. Simply impose a cap on total outlays at their current level and shift funds as necessary under that cap. Do not grow the cap with inflation or population or anything else. Then, let economic growth increase receipts to the point where the lines cross and deficits disappear.
This is pay-as-you-go in its ideal form. Whenever the government needs to spend an additional dollar, it either takes an additional dollar from the public in taxes or it eliminates a dollar of spending elsewhere.
Dollar in, dollar out. Keep spending flat.
A freeze policy is not a politically easy one, to be sure. But in the long run it’s easier than the alternatives. Politicians bristle at making specific hard choices, but they can stomach general ones. Make the belt-tightening universal, ask everyone to contribute, spare no sacred cow or special interest, and the public will consent to needed course corrections. Especially if those corrections are small and routine, rather than rare and disruptive.
Make the most difficult changes early, and the freeze policy will be comparatively easy to maintain thereafter.
Admittedly, the discipline of a freeze policy is hard to maintain in the absence of honest money. So long as Uncle Sam can print money, Congress-critters will feel little incentive to restrain spending, deficits, or debt. Indeed, they will almost certainly remain addicted to all three.
But a freeze policy is still a good idea in principle, and therefore it is still worth attempting.
By a ‘freeze,’ I mean a hard cap. Total outlays remain the same or go down from year to year, in real dollar terms, and not just as a share of economic output (gross domestic product) — a so-called GDP cap. The latter is not a true freeze, because it allows government spending to grow with the economy. Plus, the definition of ‘GDP’ is easily manipulated by politicians and bureaucrats.
But I’m not naive. I expect the political class will prefer a ‘share of GDP’ approach. And frankly that is something we can swallow, so long as our ultimate goal remains a true dollar cap. We should certainly establish a dollar cap with the restoration of honest money.
What percentage of GDP? I would propose three percent. Yes, three. Why? Because that was the nineteenth-century peacetime average. Three percent is demonstrably doable and clearly not an impediment to national prosperity.
But of course we would not start there. We would have to phase it in. I would start at the current federal outlay level (which, as of this writing, is about 23 percent of GDP), and then I would reduce it gradually, year by year, to 3 percent of GDP. This process would take a long time to complete.
Now, the knowledgeable reader will realize the current structure of the budget is also an impediment to a freeze. Two-thirds of federal spending is devoted to welfare programs and income transfers — entitlements like Social Security, Medicare, and Medicaid. And those programs have built-in inflation escalators and the like. Doesn’t that create a problem for a freeze policy? Yes, it does. But does mean a freeze is impossible? No. It just means that we have to be creative.
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. The other two-thirds of spending is in the form of permanent appropriations, which means it goes on forever until Congress intervenes to change it.
In the old days, all appropriations were temporary, and usually annual in duration. The idea of permanent appropriations (entitlements, or mandatory spending) was regarded as foreign to the spirit of a republic because it amounts to imposing burdens on future generations without their consent. Appropriations should be short-lived. Sunset clauses are as beautiful as sunsets. But wait. Why, then, do I endorse a form of auto-pilot in the context of so-called discretionary spending (annually appropriated spending)? Specifically, the idea of automatically renewing such spending each fiscal year at, say, 99.9 percent of the previous year’s level? Because big spending ‘cliffs’ (the current model) tend to favor those who wish to increase spending, while small spending ‘cliffs’ (the model I’m proposing) shifts leverage to those who wish to hold the line on spending.
These days permanent appropriations primarily take two forms: income-transfers and interest payments on the national debt. These streams are on auto-pilot and growing faster than receipts. Which means, in short, the budget can never be balanced absent reforms that permanently constrain auto-pilot spending. We have a structural deficit, and therefore we need structural reforms.
Again, a freeze policy must be comprehensive — no sacred cows. Even the largest annually appropriated accounts, Social Security, Medicare, Medicaid, and national defense, must be included. In wartime, to be sure, a freeze policy may need to be temporarily suspended to permit the unavoidable spike in military outlays. But in peacetime, defense should never be exempted from ordinary budgetary discipline. /1
Defense currently consumes about 15 percent of the budget. The income-transfer programs, led by 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 we’re at two-thirds.
Uncle Sam is basically a pension plan with an army.
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. What to do? Before we identify specific solutions, let’s take off the table a number of suggested solutions that won’t work.
We cannot ‘grow’ our way out of the deficit. A rising per-capita GDP level is certainly 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 a boom. But economic growth by itself cannot increase receipts fast enough to overcome spending growth.
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 (‘discretionary’). That share of the pie is too small, only about 8 percent. 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. Which means we have to find ways to achieve serious, sustainable reductions in spending on, yes, entitlements.
What about the idea of automatic, across-the-board cuts (‘sequesters’)? 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? While this is not a bad idea in principle, and indeed should be an element of enforcing a freeze, the automatic cuts must be small to be politically tolerable and will never be sustainable without the structural reform I’m urging. Paradoxically, spending has to be largely under control before sequestration can be imposed successfully.
Freeze or no freeze, it is an unavoidable fact that we must 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. Which lines of business? Those that Congress should never have gotten into in the first place, either because they’re unconstitutional or because the states and the private sector can handle them better. For example, health, education, and welfare.
Which brings us to devolution.
What is devolution? It means the transfer of entire programs to the states (and in some cases to the private sector). When you devolve a program, you eliminate all of the program’s spending and associated rules at the federal level while reducing federal tax receipts by roughly the same amount. This, in effect, transfers the affected program to the states or to the private sector.
Devolution is the easiest and most painless way for us to get out of a whole line of business. But to make it work, we need to be in surplus. Do not attempt devolution during a time of large and chronic deficits!
Now, admittedly this is a Catch-22. We need devolution to eliminate deficits, and we need to eliminate deficits to engage in devolution.
What’s the answer? Generate surpluses. How? By eliminating some spending programs without cutting taxes, and by reducing spending on the remaining programs, until surpluses appear. This is not easy politically, especially in downturns, but it is doable, and not really avoidable. We are going to do it eventually. Better sooner than later.
There are more than 2,200 current federal programs, projects, and activities. Let’s identify every single one that is unconstitutional, unnecessary, or unaffordable, and shut it down as rapidly as we can or at least put it into ‘freeze/reduction’ mode until we can hand it off to the states via devolution.
More on all this in the devolution plank.
Did I mention this would be hard? Realistically, politicians will not be able to maintain the necessary discipline absent structural changes that change their incentives (such as honest money, a debt-limitation constitutional amendment, and the state-veto constitutional amendment proposed in the independent agencies plank).
Okay. Having laid out the basic principles, we can now take a closer look at the specifics of our proposed freeze.
The first step in enforcing a sustainable freeze is to revive two traditional mechanisms of fiscal control: 1) sequesters (automatic, across-the-board trims) and 2) mandatory impoundments (presidential decisions to refrain from disbursing appropriated funds).
Next, reform entitlements, and in times of surplus, devolve them to the states, and don’t create any new ones.
When a program cannot be devolved for some reason, take it off of auto-pilot (transform it from permanently appropriated spending to annually appropriated spending) and if possible, as a first, transitional step, block-grant it to the states.
What’s a block grant? A simple, annual, lump-sum for a particular purpose. Ideally, the grant does not grow with population or inflation but remains flat over time. This ensures the money is spent efficiently.
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.
Today 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. Altogether, that’s 60 percent of the budget. That is where the money is. That is where the reforms must happen.
How should Social Security contribute to a peacetime spending freeze? On the one hand, it is an ideal candidate for devolution, since the Constitution confers no power on Congress to operate such a program. On the other hand, we are in a time of deficits (which makes devolution politically impracticable) and everyone knows the program is too popular to touch (the ‘third rail’ of politics).
And voters clearly do want a universal safety net. Despite its flaws, the current, national annuity program for the aged, the disabled, widows, and orphans is hard to beat, as safety-net programs go. Necessary reforms of the program must be gentle, moderate, and nonpartisan.
The conventional Social Security reform proposals focus on benefit cuts and tax hikes and/or a higher retirement age (which is a bit of both). None of these ideas is going anywhere. The public does not want them. (And there’s no market for personal accounts, either, much as I like the idea.) Repeat, the public does not want these things.
There is, however, one reform that can pass the political smell test: means-testing. Allocate benefits based on financial need. The real purpose of Social Security is to keep people out of poverty. Rich people do not need Social Security, by definition. Direct means-testing of benefits is the simplest and most equitable way to keep Social Security or any anti-poverty program within a budget. And the public can accept means-testing, so long as we do not take the idea too far. This is the ‘least worst’ option, politically speaking, and the only, as I say, that can pass. /2
And by the way, it is inevitable. The math is undeniable. Social Security has a funding shortfall running into the tens of trillions of dollars over the coming century. This program is broke — insolvent — and headed toward bankruptcy.
Congress cannot keep Social Security’s current promises without major harm to our economy (tax hikes) or major harm to beneficiaries (benefit cuts). These are facts.
‘Always take the sharp tool by the smooth handle.’ Instead of cutting benefits, our first step to means-testing Social Security (and thus to making it sustainable) should be to change how it is funded. We should eliminate the payroll tax and fund the benefits from general revenues.
The payroll tax creates a powerful illusion that Social Security is ‘earned,’ but it is not. It is a welfare program that has been made to look like a pension. The payroll tax is meant to suggest a ‘premium.’ It is even labeled an ‘insurance contribution’ in federal law. But this is, as I say, an illusion. And meaningful reform is almost certainly impossible while this illusion persists.
The tax itself is not essential to the system. Despite what people assume, the amount of one’s monthly Social Security benefit in retirement has no connection whatever 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 on average during one’s working years. We can easily continue to track that amount, as we do under current law, without collecting the tax. Benefits would go on being paid, just as now. All that would change is the funding source. We could then begin gradually applying means-testing while actually increasing benefits for the truly needy. The only people would who ‘lose’ something in this reform would be the rich. And they do not need Social Security.
P.S. In doing this, we could and should discontinue the taxation of Social Security benefits, which is unnecessary and deeply frustrating to retirees.
Means-testing would not spell the end of this immensely popular program. It would make it sustainable. Social Security would become a universal minimum guarantee for all who are eligible — widows, orphans, and those who are old, blind, or disabled — that they will always have enough income to stay out of poverty. It will be a welfare program, as it has been from the beginning, but it will for the first time be an honest welfare program, and, incidentally, one with no work requirement. It will be a true safety net.
Welfare is an essentially local activity, best carried out locally. Social Security, along with many other programs, belongs in principle with the states. But I have no illusions about how easy it would be to transfer it to them. And I am not urging any politician to sacrifice himself in the attempt. (Another problem: it’s unconstitutional. Personally, I would support a constitutional amendment authorizing Congress to administer it, provided the amendment reflected the basic principles of this plank.)
In sum, reforming Social Security is mathematically unavoidable, the best and simplest reform is means-testing, and means-testing is easier to achieve if we first eliminate the payroll tax.
Medicare is a perfect candidate for devolution. But since that’s politically impracticable in a time of large and chronic deficits, and because means-testing the Medicare benefit, while desirable, is not essential, the most practical approach for now is to focus on giving seniors more choices. Let them reform the program themselves by voting with their feet.
- First, make participation Medicare participation voluntary for patients. Medicare is a compulsory entitlement under current law, as I explain in the unconstitutional spending plank. That’s un-American.
- Second, beef up the competitive Medicare Advantage option within Medicare. It is less expensive and more patient-friendly than Old Medicare (i.e., the 1960s fee-for-service program) because it is more competitive and less bureaucratic. It is not perfect, just better.
- Also, make Medicare Advantage the default option when people first enroll in Medicare, allowing them, of course, to opt into Old Medicare if they want. (Today, Old Medicare is the default.)
- And then stand back and watch as seniors vote with their feet.
Under a choice-based approach, there is no need to cut Medicare benefits, or raise the retirement age, or completely overhaul the program with a controversial ‘premium support’ model — ideas that may be sensible in the abstract but for which there is little public support.
Obamacare’s individual mandate to purchase health insurance should be repealed. /3
Likewise, 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. Also if necessary, the block grant could be made optional for states, so some could take over the program while others left it in federal hands. Properly structured, a transitional block grant would be accepted by most states. Once about forty states opt in, I would predict, total devolution becomes more or less inevitable.
Separate and apart from Obamacare, the larger policy goal should be to transfer all federal health insurance regulations and mandates permanently back to the states and to end all government price controls and unnecessary restrictions on the interactions of patients and doctors.
Health care markets work when we let them. Health insurance markets work when we let them. Obamacare does not let them.
Medicaid, too, is a perfect candidate for devolution. But again, devolution won’t be possible till the return of surpluses. Until then, as a transitional step, we should block-grant it to the states.
There is no need for Congress to cut Medicaid benefits. If anything, reimbursement rates to doctors and hospitals should be increased, to improve quality and access for patients.
The current structure of Medicaid, under which the federal and state governments both pay for it but neither party reaps the full costs of anyone’s poor policy choices, is perfectly geared to encourage waste and poor results. 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, with respect to certain diagnoses, 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. /5
Income Support Programs
The ‘income support’ category of spending includes Disability Insurance, Unemployment Insurance, Food Stamps, Nutrition Assistance, and similar programs. Again, all are natural candidates for devolution, and again, that will only happen after we restore surpluses. /5
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. And where feasible, we should rely on in-kind help instead of cash assistance (for example, actual food in lieu 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. Necessity would be the mother of 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, but it also helped produce significant declines in both adult and child poverty.
Many legitimate federal functions can be privatized or voucherized. For example, it’s better to give veterans cash to use at any hospital of their choice, rather than build costly, mediocre government hospitals.
3. Appropriations and Government Shutdowns
This point is of secondary importance, but it’s still important. To reduce unproductive friction in the annual appropriations process, Congress should provide in permanent law that annually appropriated spending renews automatically at the end of each fiscal year at, say, 99.9 percent of the previous year’s level. This will shift leverage to those who want less spending instead more.
4. Other Budget Process Reforms
Attentive readers will notice 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. Get a good amendment in place, and the necessary enforcement rules will come into being more or less automatically.
1/ By the term ‘peacetime’ I mean ‘when no formal congressional declaration of war is in effect.’ And within the term ‘declaration of war,’ I believe we should include so-called ‘authorizations of military force’ (AUMFs), which are basically declarations of war by another name. The basic rule should be, ‘When in doubt, assume we are in peacetime.’
2/ Some people mistakenly think Social Security is already means-tested, or that proposals to slow the growth of future benefits for wealthier retirees is a form of means-testing. Incorrect. Means-testing means limiting eligibility for benefits based on the applicant’s means (income and assets). Slowing the growth of future benefits for rich retirees may be a good idea, but it is not means-testing. It is a benefit cut. Likewise, taxing the Social Security benefits of higher-income retirees is not means-testing. It is a backdoor benefit cut.
3/ Update: Congress zeroed out the penalty tax associated with Obamacare’s individual mandate in 2017. The change will take effect on January 1, 2019. The penalty tax itself remains on the books, but will now be set at zero dollars.
4/ Two additional thoughts on Medicaid. First. When we block-grant it, we may for practical political reasons have to split it into multiple block grants, reflecting its three main sub-populations: the disabled, the elderly, and young families with children. Each of these populations has its own distinct needs and growth rate. Second. True Medicaid block grants are vastly superior to so-called ‘per capita caps’ (which might be thought of as per-person block-grants, administered collectively). That said, per-capita caps might be acceptable, provided nothing about them prevents us from ultimately achieving the optimal policy goal of devolution and the interim step of block grants.
5/ Federal civilian and military pensions and health benefits should not be devolved because they are earned benefits of federal employment.
This plank does not propose or require any constitutional amendments, but it realistically will not be sustained without the help of the amendments proposed in the debt-limitation, honest money, and regulation planks.
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.