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".

Obama pitches pay-as-you-go plan for Congress: The Return of PAYGO?

On June 9, 2009, President Barack Obama made a public appeal for the return to fiscal responsibility in the form of pay-as-you-go (PAYGO) rules for Congress. PAYGO rules were in effect from fiscal year 1991 (which began October 1, 1990) through fiscal year 2002 (which ended September 30, 2002) and are credited with reducing and eventually eliminating budget deficits over that period.

According to Associated Press writer Ben Feller:

WASHINGTON – President Barack Obama on Tuesday challenged Congress to force itself to pay for new spending as it goes rather than sink the nation deeper into a debt, calling it a matter of public responsibility. Republicans lashed back that Obama is no voice of fiscal restraint as the deficit soars.
The president's plan would require Congress to pay for new increases to federal benefit programs such as health care by raising taxes or coming up with budget cuts — a "pay-as-you-go" system that would have the force of law. Under the proposal, if new spending or tax reductions are not offset, there would be automatic cuts in so-called mandatory programs — although Social Security payments and some other programs would be exempt.
Not noted by the president: Tuesday's plan is a watered-down version of the so-called "PAYGO" rules proposed just last month in his own budget plan.
That version would have required, on average, all affected legislation to be paid for in the very first year. The new plan only requires such legislation to be financed over the coming decade. That mirrors congressional rules and reflects the likelihood that health care reform will add to the deficit in the early years.
Obama said the principle is simple: Congress can only spend a dollar if it saves a dollar somewhere else.
"It is no coincidence that this rule was in place when we moved from record deficits to record surpluses in the 1990s — and that when this rule was abandoned, we returned to record deficits that doubled the national debt," Obama said, flanked at the White House by supportive Democratic lawmakers.
"Entitlement increases and tax cuts need to be paid for," he said. "They're not free, and borrowing to finance them is not a sustainable long-term policy."
Republican leaders, critical of the Obama-championed $787 billion stimulus package and other deficit spending, called the president disingenuous.
"It's as if the administration and these Democrat leaders are living in an alternate universe," said House Republican Whip Eric Cantor of Virginia. "The quickest way to save money is to stop recklessly spending it."
Obama's call for binding legislation comes as a reward to moderate-to-conservative "Blue Dog" Democrats who are big believers in pay-as-you go. Their votes were crucial to passing a congressional budget blueprint that generally follows Obama's budget.
The House and Senate already have their own PAYGO rules, but have routinely found ways around them. For example, a bill to effectively double GI Bill education benefits was enacted last year because of a loophole in congressional rules.
Obama's "PAYGO" plan would also require future tax cuts to be financed by tax increases elsewhere in the code, though exceptions are made for extending President George W. Bush's 2001 and 2003 tax cuts, as well as other tax cuts that are scheduled to expire.
The federal deficit is on pace to explode past $1.8 trillion this year, more than four times last year's all-time high.
The deficit figures flow from the deep recession, the Wall Street bailout and the cost of the economic stimulus bill. Obama has defended the massive stimulus plan as essential to helping pump some life back in the economy, one that is still shedding jobs but showing more signs of life in recent weeks.
"The fact is, there are few who aren't distressed by deficits," Obama said. He said restoring a pay-as-you-go method under law would force lawmakers to deal not just with the politics and crises of the day, but also remain fixed on the nation's long-term financial health.

U.S. Public Debt Since 1940 - Adjusted for Inflation

Here is the U.S. public debt since 1940 adjusted for inflation:

Adjusting the public debt for inflation provides a good account of federal government borrowing. The public debt increased in the 1940s to finance World War II. The public debt remained fairly constant from the late 1940s through 1981. This means the U.S. was reasonably responsible with its finances, collecting sufficient revenues to pay for government services. There is a slight increase in the 1970s. With the exception of a few years in the late 1990s, the U.S. government has increased its debt every year since 1981. Revenues have been insufficient to cover expenditures because government revenues have been reduced by tax cuts, but government spending has continued to increase. Most analysts attribute the reduction in the public debt in the late 1990s to the Congressional adoption of pay-as-you-go (PAYGO) rules. PAYGO required increases in discretionary spending to be accompanied by either tax increases or equivalent reductions in other government spending. 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 also the "U.S. Public Debt Since 1940" and "U.S. Public Debt as a Percentage of Gross Domestic Product (GDP)".