Monday, June 15, 2009

The Current PAYGO Proposal Does Not Go Far Enough

An editorial in the June 12, 2009 edition of The Washington Post says President Obama´s pay-as-you-go (PAYGO) proposal does not go far enough. According to "The Obama Diet - It's not going to slim down the federal budget anytime soon,":
IMAGINE GOING on a diet in which you figure out how many calories a day you eat and pledge to make up for any amount beyond that with vigorous exercise. Except that your regular consumption includes four gooey slices of chocolate cake daily -- which you have no intention of giving up. You might not put on weight as quickly, but you're not likely to slim down, either. This is about what President Obama proposed this week with new legislation to codify congressional pay-as-you-go rules. "The 'pay-as-you-go rule' is very simple," the president said. "Congress can only spend a dollar if it saves a dollar elsewhere."

Well, not exactly. First, as under existing House and Senate rules, what is known as the PAYGO law would not apply to discretionary spending programs, which account for about 40 percent of the federal budget; these programs, which Congress reviews and funds yearly, could continue to grow without corresponding cuts or new revenue. Only extra spending for mandatory programs (Medicare, Social Security and the like) and tax provisions would be covered. Second, Mr. Obama would write into the law four whopping exceptions to the pay-as-you-go rule: extending most of the Bush tax cuts, keeping the estate tax at its current level, preventing the alternative minimum tax from hitting more taxpayers and increasing Medicare payments to doctors. This adds up to a $2.8 trillion loophole over 10 years.

What to make of this move? Well, it's better than nothing, and if implemented it would improve on the record of Mr. Obama's predecessor, who -- with plenty of Democratic encouragement -- dug the entitlement hole even deeper with the creation of a Medicare prescription drug plan that was not paid for. By contrast, Mr. Obama vows that his health-care reform will have to be financed with spending cuts or tax increases. That is important under the current budgetary circumstances, and to the extent that pay-as-you-go legislation would make it more difficult for lawmakers to get around their self-imposed rules simply by voting to ignore them, all the better.

But the president's self-congratulatory back-patting about fiscal rectitude is more than a bit hard to take in light of the huge exceptions he would grant. Yes, the president inherited a budget in arrears, an economy in tatters and a tax system that is unsustainable as written. It was necessary to add to the deficit in the short term to jolt the economy back to life. The House has these four exemptions in its pay-as-you-go rule; even without the Obama exceptions, there was no reasonable hope that these costs would be paid for.

Yet Mr. Obama's professions of being willing to make hard choices are belied by his failure to adjust his spending plans to budgetary reality. Something will need to give -- either raising significantly more revenue or dramatically scaling back government. He doesn't deserve much credit for a pay-as-you-go proposal that elides this reality instead of confronting it.
At least the Obama administration is making an effort to be more fiscally responsible, even if political opposition makes it difficult to go further. After the election of President George W. Bush in 2000, the PAYGO rules were allowed to lapse in the House of Representatives and watered down in the Senate to facilitate the passage of tax cuts and the Medicare prescription drug plan, which former U.S. Comptroller General David Walker called "...probably the most fiscally irresponsible piece of legislation since the 1960s... because we promise way more than we can afford to keep." There was a subsequent dramatic increase in the U.S. public debt.

See "The U.S. Public Debt Since 1940 - Adjusted for Inflation".

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