8. Freeze Peacetime Spending

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, enforceable spending freeze.

8.2. Establish a statutory cap on total federal peacetime outlays, defined initially as a share of GDP 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 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, except when replacing an inferior tax with a superior one.

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 one dozen or so.

8.8. Devote surpluses to devolution, debt reduction, and tax relief — never to net spending increases.


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 routinely run deficits instead of surpluses and have a gigantic and economically burdensome national debt.

The main culprit? Excessive government spending. It is too high, and growing too fast.

A fiscally prudent government would run surpluses rather than deficits and return surpluses to taxpayers in the form of debt reduction and tax relief, preferably in that order. A fiscally prudent government would limit spending.

The simplest way to limit spending is to freeze it — all of it. Simply cap total outlays at their current level and shift funds as necessary under the cap. And let the growth of the economy increase receipts to a point where the lines cross and deficits disappear altogether, naturally and permanently.

This means, of course, ‘pay as you go’: whenever the government needs to spend an additional dollar, it must take an additional dollar from the public in taxes or else (and preferably) eliminate a dollar of spending elsewhere.

A freeze policy is not a politically easy one, but 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 accept needed course corrections.

Make the most difficult changes early, and the freeze policy will be comparatively easy to maintain.

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, the Congress-critters will feel little incentive to restrain spending, deficits, or debt. In fact, they’ll be addicted to all three.

But a freeze policy is still a good idea in principle, and 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 — 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’s tolerable, so long as our ultimate goal remains a true dollar cap, which can and should be reestablished soon after the restoration of honest money.

What percentage of GDP? I propose three percent. Yes, three. We wouldn’t start there, of course. We’d set the cap at an extremely high level (currently 23 percent of GDP), and reduce it gradually to three percent over a period of several decades. Why three? Because that was the nineteenth-century peacetime average. Three percent is demonstrably doable and clearly not an impediment to national prosperity.

Ah, but what about the structure of the budget? It’s mostly entitlements. Doesn’t that create a huge political obstacle to a freeze policy? Yes, yes, it does. But that does not mean a freeze is impossible. It just means that it isn’t easy. But hey, we already knew that. /1

One-third of federal spending is appropriated on an annual basis, meaning it will expire at the end of the 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.

These days permanent appropriations primarily take two forms: 1) income-transfers (entitlements) and 2) 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, 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 national defense outlays. But in peacetime, defense should never be exempted from ordinary budgetary discipline. /2

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.

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

But this brings us back to our structural problem. 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 simply will not 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 the subsequent 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. 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 part of enforcing a freeze, it will never be sustainable so long as the underlying structure of spending is massively tilted toward fast-growing entitlements and income-support programs. Spending has to be basically already 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 other way, consistent with economic health, to right the fiscal ship. Which lines of business? Those that Congress should never have gotten into in the first place, because they’re unconstitutional, and those that Washington can’t handle as well as the states or the private sector. Get out of those lines of business (primarily, health, education, and welfare) — send them back to the states and the private sector — and our structural problem will be largely solved.

Which brings us to devolution.

What is that? It means the transfer of entire programs to the states (and in some cases 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 the same amount. This, in effect, transfers to the states (or the private sector) the money needed to continue those functions.

Devolution is the easiest and most painless way to get out of a whole line of business. But to make it work, you first need to be in surplus. I do not recommend attempting devolution during a time of large and chronic deficits.

Now, I have to admit this creates a Catch-22. We need devolution to eliminate deficits, and we need to eliminate deficits to engage in devolution! What’s the solution? Eliminate some spending programs without cutting taxes, and reduce spending on the remaining programs, until surpluses appear. This of course is not easy politically, especially in downturns, but it is not avoidable.

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 as rapidly as we can (or alternatively 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 won’t be able to maintain the necessary discipline. So we need more than just willpower. We need structural reforms that permanently change incentives for the better. In addition to honest money, we need a formal debt-limitation constitutional amendment — a basic, well-designed structural reform that places a permanent, motivating fire under the seats of our elected representatives.

Okay. Having laid out the basic principles, we can now take a closer look at the specifics of our proposed freeze.

1. Enforcement

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).

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

As we’ve seen, we have no choice but to reform entitlements, and in times of surplus, we should devolve entitlements to the states. At a minimum, outlays should grow no faster than receipts. To get there, we need to impose enforceable caps on obligations that are currently open-ended. And instead of making new promises, we should be honorably retiring old ones.

When a program cannot be devolved for some reason, we should take it off of auto-pilot — transform it from permanently to annually appropriated — and if possible, as a transitional step, block-grant it to the states.

What’s a block grant? It’s a simple, annual, lump-sum for a particular purpose. Ideally, it 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. So altogether, that’s 60 percent of the budget. As Willy Sutton would say, that’s where the money is.

Social Security

How should Social Security contribute to a peacetime spending freeze? On the one hand, the program 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 (making devolution impracticable) and the program is too popular to touch.

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 things like benefit cuts, tax hikes, and a higher retirement age. None of these ideas is going anywhere. The public doesn’t want them. And there’s frankly no market for personal accounts, either.

There is only one reform that can pass the political smell test, in my opinion, and that is means-testing: allocating benefits based on financial need. Rich people don’t need Social Security. Direct means-testing of benefits is the simplest and most equitable way to keep Social Security or any anti-poverty program within budget. And the public can accept it, so long as it doesn’t go too far. Means-testing is the ‘least worst’ option, politically speaking. /3

It is also inevitable, as a matter of simple math. Social Security has a funding shortfall running into the tens of trillions of dollars over the coming century. It’s broke — insolvent — 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). This is simply a fact.

As an old saying has it, ‘The pain is mandatory, the suffering is optional.’ Ultimately, a means-tested anti-poverty program is the only kind that is fiscally sustainable. It is going to happen, sooner or later. So why not embrace the future and apply means-testing now, in the most gentle, sensible, and compassionate way we can?

To be sure, means-testing may not become politically feasible until after the public has come to see that Social Security is not an ‘earned’ benefit or even a forced savings program but is rather an ordinary income-transfer program (yes, a welfare program) that must inevitably change. Possibly, this unwelcome realization will not crystallize until the ‘trust’ fund is about to be exhausted and a sudden benefit reduction or tax hike is imminent, which under current projections will happen around the year 2035. But it would be irresponsible for us to wait until then to begin alerting people to the danger.

‘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

Medicare is a perfect candidate for devolution. But since that’s politically impossible in a time of deficits, and because means-testing the Medicare benefit, while desirable, isn’t 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 in the Medicare benefit voluntary. Medicare benefits are mandatory right now, as I explain in the unconstitutional spending plank. /4
  • Second, beef up the competitive Medicare Advantage option within Medicare. It is less expensive than Old Medicare (i.e., the 1960s fee-for-service program, which has never been modernized), because it is more competitive and less bureaucratic — and lot more patient-friendly.
  • 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, the default favors Old Medicare.)
  • And then stand back and watch as (inferior) Old Medicare naturally fades away as seniors vote with their feet in favor of (superior, and less costly) Medicare Advantage.

Under a choice-based approach, there is no need to cut Medicare benefits, raise the retirement age, or completely overhaul the program 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. /5

Obamacare

Obamacare’s individual mandate to purchase health insurance should be repealed. /6

Likewise, the rest of Obamacare should be repealed, and its various subsidies devolved to the states or the private sector. /7

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. Properly structured, a transitional block grant would be accepted by most states. Once about forty states opt in, I would predict, total devolution becomes 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 can work just fine, if allowed to function as markets. Similarly, health insurance markets can work just fine, if insurance is allowed to function as true insurance, under reasonable state-level regulations.

Medicaid

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, benefits should be made more generous, in the sense of increasing reimbursement rates to doctors and hospitals.

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, fraud, abuse, and error. 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. /8

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. /9

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, it also helped produce significant declines in both adult and child poverty.

Privatization

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, than to build costly, mediocre veterans 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 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 drive up spending elsewhere), take hostages (think: soldiers’ pay, national parks, vaccine research, cancer-drug trials for children, and the like).

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.


Notes

1/ An aside on auto-pilot spending. 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 rightly assumed all appropriations can and should be temporary. Sunset clauses are as beautiful as sunsets.

2/ 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.’

3/ 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. Not so. Means-testing means limiting eligibility for benefits, based on the applicant’s means (his income and assets). Slowing the growth of future benefits for rich retirees is not means-testing but rather a benefit cut. Likewise, taxing the Social Security benefits of higher-income retirees is really just a benefit cut (Uncle Sam taking back with one hand what he has just given with the other).

4/ On October 3, 2019, President Trump ended Medicare’s individual mandate by executive order. He directed the relevant agencies to implement the change by April 1, 2020.

5/ Update: Congress repealed IPAB in 2017.

6/ Update: Congress zeroed out the penalty tax associated with Obamacare’s individual mandate in 2017, with the change to take effect on January 1, 2019. The penalty tax remains on the books, set at zero dollars.

7/ In October 2019, a prominent group of House Republicans proposed a health reform plan that largely follows the recommendations of this section.

8/ Two additional thoughts on Medicaid. First, when we block-grant it, we may for practical political reasons have to split it into three distinct 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, while 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), per-capita caps could be acceptable, so long as nothing about them prevented us from ultimately achieving the optimal policy goals: block grants and devolution.

9/ Federal civilian and military pensions and health care benefits programs are not income-support programs and should not be devolved. They are earned benefits of federal employment.


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 honest 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 to eliminate unnecessary and unconstitutional programs and agencies.


Revised: March 4, 2018.

First published: June 21, 2013.

Author: Dean Clancy.

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