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 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.
8.3. Enforce the statutory expenditure cap by means of automatic sequesters and 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 — 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. In this plank, and the three that follow, I’ll try to answer the more mundane question of how we can live under it.
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.’ Uncle Sam doesn’t — and hasn’t, for decades. Are we surprised he’s in debt?
A government with even half a brain spends less than it earns. A prudent government avoids deficits and deliberately seeks small surpluses as a matter of routine. And importantly, it uses those surpluses, not to boost spending, but rather to reduce debt and taxes. Using surpluses to boost spending is a form of madness, the fiscal equivalent of the drunkard’s ‘hair of the dog.’
The simplest way 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. 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.
Now, to be sure, pay-as-you-go is hard, politically speaking, but in the long run it’s easier than the alternative. The alternative is targeted reductions. Politicians and the public bristle at making specific hard choices, because nobody wants to be the sacrificial lamb at 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 go along. Reluctantly, perhaps. But no one can say, ‘This is unfair, you’re singling me out.’
It helps, of course, to set the cap reasonably high, so needed course corrections will be small and routine, rather than rare and disruptive.
It also helps to make the most difficult changes early. Doing so makes a freeze policy comparatively easy to maintain thereafter.
It may even be necessary, at first, to increase spending. That is, a temporary rise in spending 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 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?
And honest money will also be hard to achieve without an enforceable debt cap. And ideally, we’d have a state federalism veto, to boot.
No, realistically, politicians will not be able to maintain the necessary discipline absent reforms that change their incentives.
So, we have a bit of a chicken and egg problem, I must confess.
But let’s not despair. Let’s grant, for argument’s sake, that a freeze policy is impossible without those key structural constraints. It’s still a good idea in principle. And we will definitely need it, once those constraints are in place. Therefore, we should try to figure out how we might make the freeze work, in anticipation of future, favorable conditions.
Incidentally, by a ‘freeze,’ I mean a dollar cap: total expenditures remain the same or go down from year to year, in 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.
Unfortunately, I assume the political class will insist on a ‘share of GDP’ cap. And frankly I think we can tolerate that, as a transitional step, so long as we taxpayers, for our part, insist on a fixed, not-easily-gamed definition of ‘GDP’ and keep a true dollar cap in sight as our ultimate goal. The good news is a compromise along these lines may make a spending freeze policy feasible, even in the absence of honest money and a true debt cap.
Okay, so where should we set our share-of-GDP cap? I would propose three percent of GDP. Yes, three percent. Why? 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. It’s doable. It’s clearly not an impediment to national prosperity. /1
But wait, you may ask, what about national security? Good question. It’s true we weren’t a superpower before the mid-twentieth century. Now we have a coalition of free nations to protect, and must maintain a military force of awesome power, with an ability to project decisive force across vast distances at speed. But why not ask our allies to shoulder more of the burden? Why not ask them to contribute more to their own defense?
If the reader believes three percent is too low, fine. Make it six. Make it nine. The idea is still sound. /2
In any event, progress toward the GDP cap would obviously have to be gradual. The current federal expenditure level, as of this writing, is about 23 percent of GDP. To get it below single digits overnight would be economically disruptive and a political nonstarter. It wouldn’t be prudent. Realistically, we must proceed gradually. Shrink the federal footprint bit by bit over time, and make necessary tradeoff choices along the way.
The greatest challenge will be what to do about entitlements. Because that’s where the money is. Sixty percent of the budget goes to entitlements. Throw in debt service, and we’re at two-thirds. This ‘untouchable’ spending includes the three biggies: Social Security, Medicare, and Medicaid.
The majority of spending is on auto-pilot and typically grows faster than receipts. Which means the budget cannot be balanced in any sustainable way absent reforms that constrain auto-pilot spending. /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 mean a freeze is impossible? No. It just means we have to be creative. /4
What to do? Before we identify solutions, let’s take off the table 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. In a budget where spending consistently and continuously grows faster than receipts, GDP growth is never going to be rapid enough to close the gap. Yes, we might stumble into balance on a lucky day, as we did in the late ’90s, but it won’t last. We can’t coast our way to easy street.
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 minuscule.
Nor can we eliminate the deficit by cutting the one-third of spending that is annually appropriated. About half this amount is national defense, which is obviously hard to cut. And even if we eliminated every penny of discretionary spending, including defense, the deficit would inevitably return because the growth rate of auto-pilot spending exceeds the growth rate of receipts.
Any serious freeze plan will freeze the ‘untouchable’ two-thirds of the budget. And that means entitlements.
As I said earlier, a freeze policy be comprehensive — no exceptions, no sacred cows. Even the largest annually appropriated accounts, Social Security, Medicare, Medicaid, and national defense, must be included. 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 be subject to ordinary budgetary discipline.
All right. 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. In fact, it’s a good idea. But the automatic cuts would have to be small to be politically sustainable, or else the politicians would waive or reverse them. And even if we got into the habit of making such trims, we would still not be able to sustain the plan without serious structural reforms. Paradoxically, spending has to be largely under control before sequestration can be imposed successfully. It’s a tool for enforcing a freeze, that’s all.
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.
Which lines of business? Obviously, those that Congress should never have gotten into in the first place, either because they’re unconstitutional or because they don’t work or because the states and the private sector can handle them better. For starters, health, education, and welfare.
Which brings us to devolution. It is the remedy for most of our federal fiscal ills. But since I discuss that tool in detail in the devolution plank, I won’t spend time on it here.
Attentive readers will notice that I’ve avoided mention of such popular ideas as ‘zero-based budgeting’ (sunsetting every program annually, and continuing only those that make sense) and the so-called ‘penny plan’ (cutting everything by one percent annually, until balance is achieved). While appealing on paper, these ideas, like the freeze policy I’m proposing, are probably not going to be sustainable absent serious entitlement reforms. So do that first. (Again, maybe I should have called this the ‘reform entitlements’ plank.)
Did I mention this policy would be hard? Yes, it will. But it’s not impossible, not if we’re serious and patient and take the long view.
Specific Entitlement Reforms
This, again, is step one. Entitlements must be reformed. After we’ve reformed them, in a time of surplus, we should devolve them to the states. And of course, not create any new ones. (Perhaps I should have called this the ‘reform entitlements’ plank.)
When an entitlement cannot be devolved for some reason, we should take it off auto-pilot, that is, transform it from permanently to annually appropriated spending. And if necessary, as a first transitional step, we should block-grant it to the states. In most if not all cases, it will help to means-test and/or voucherize it as well.
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. But even a block grant that grows with population and inflation is better than an open-ended entitlement.
In the remainder of this discussion, I’ll offer my thoughts for how we should reform specific entitlements.
Social Security. We shouldn’t bother with such conventional but unpopular ‘reforms’ as benefit cuts, tax hikes, age hikes, or alas! personal accounts. Instead, we should transform it into a solid anti-poverty program. Means-test eligibility for benefits — focus them on keeping people out of poverty. And eliminate the payroll tax and fund it from consumption taxes. And oh yes, amend the Constitution to make it lawful.
Until we abolish income taxation, we should repeal the existing taxation of Social Security benefits (and make those benefits part of ordinary taxable income for future retirees). In principle, money given to individuals by the government is income and, so long as we tax income, it should be taxed as such. By the way, official poverty measures should count all government income transfers as income. To keep people out of poverty, we should eliminate required minimum distributions (RMDs) from tax-advantaged retirement and savings accounts. Incidentally, I think the Roth-style investment account is best: let people put after-tax dollars into the account, let the money grow untaxed, and then don’t tax the money when people spend it.
Medicare. Means-test eligibility for benefits. Ideally, cap and voucherize the benefit to maximize individual choice and control. Eliminate the payroll tax and fund Medicare from other revenue sources. And importantly, make participation in it truly voluntary for individuals. (For all practical purposes, Medicare is a prison.)
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 so maddeningly flawed that getting it under somebody’s control — anyone’s — is more important that who controls it, at first. We can’t reform what we can’t control. Now, if we take the assumption path, Congress should cap and voucherize the benefit to maximize individual choice and control. As soon as conditions permit, we should devolve Medicaid to the states, where it belongs.
The Affordable Care Act. Devolve it, both the mandates and the subsidies. If necessary, as a transitional first step, block-grant it. At all events, repeal its individual mandate, which is a true abomination. And so long as this program remains in the federal portfolio, we should cap and voucherize the subsidies to maximize individual choice and control. Now, with such a politically charged scheme, it may be necessary to proceed incrementally, even haltingly. Look for ways to weaken it — create holes in the Berlin Wall big enough for people to escape through. Eventually, the vast majority of people will escape, and the wall’s continued presence will be questioned. However we proceed, the ultimate goal, again, should be to devolve the whole thing.
The Tax Exclusion for Employer-Sponsored Insurance. Eliminate the income tax. Until that happens, we should ideally eliminate the biggest loophole, the income-tax exclusion for employer-sponsored health insurance. But since that would be disruptive, and thus a political nonstarter, as a transitional step we should convert the exclusion into a fixed-amount subsidy, to maximize individual choice and control. And we should allow people to use this subsidy either inside or outside the workplace. Make it available to individuals in lieu of the current, open-ended exclusion (and any other federal health coverage subsidy for which they may be eligible). Let it take the form of an optional, fixed-amount, refundable tax credit that the participant may use for whatever form of health insurance he likes. Let him save any unspent funds in a tax-advantaged Roth style health savings account. Note: To maximize competition and avoid needless complexity, I would not means-test this credit. And I would make those who voluntarily opt into it permanently ineligible for the existing ACA percent-of-premium credit. The fixed-amount model is far superior.
Other Income Support Programs. I’m referring here to Disability Insurance, Unemployment Insurance, Food Stamps, Nutrition Assistance, and similar programs. Ultimately, we should devolve them all. As a first step, we should reform and then block grant them. Specific reforms include means-testing, time limits, work requirements, anti-double-dipping rules, anti-fraud protections, and lock-out periods for non-compliance with program rules. Also, where necessary, wait lists.
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 of course must include the so-called ‘authorization of military force’ (AUMF), which is simply a declaration of war by another name.
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 in the whole stretch of American history, our current, high level of government spending is surely 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. It used to be, and should be, the norm. 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. Appropriations should be short-lived. Sunset clauses are as beautiful as sunsets. Why, then, do 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)? Because spending ‘cliffs’ (the current model) create needless drama and tend to favor those who wish to increase spending. But automatic continuation at a slightly reduced level shifts leverage to those who wish to hold the line on spending. The continuation model is less optimal than universal, annual sunsets — but more fiscally prudent.
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 the joke is true: Uncle Sam is ‘a pension plan with an army.’
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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