The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

« The Housing Market Shows Signs Of Life -- Except Where I Live | Main | Market-Based Inflation »

June 21, 2006

What Is The Right Road To Budget Discipline?

New Hampshire Senator Judd Gregg (in the words of Brad DeLong) is suggesting a return to something like the Gramm-Rudman-Hollings Act of the 1980s. From the WCAX-TV (Vermont) website:

Senator Judd Gregg is leading a move to force cuts in the spiraling growth of federal benefit programs.By twelve to ten vote yesterday, the Senate Budget committee approved a bill written by Gregg, the committee's chairman. It would force mandatory cuts to the deficit, enforced by across-the-board cuts to programs like Medicare, Medicaid and unemployment insurance if Congress can't meet deficit targets on its own.

The bill also revives the idea of the line-item veto which would allow the president to single out wasteful items contained in bills he signs into law, and it would require Congress to vote on those items again.

Says Brad:

The problem with Judd Gregg's proposal is that Gramm-Rudman didn't work when we tried it in the 1980s. It, I think, made matters worse--members of congress became more eager to vote for budget-busting measures when they could claim that Gramm-Rudman placed a cap on the total deficit, and then the congress was unwilling to apply the cap medicine when the dose turned out to be unexpectedly high, and so the process died.

The Budget Enforcement Act framework seemed to work much better in the 1990s than Gramm-Rudman worked in the 1980s.

To be fair to the proponents of Senator Gregg's proposal (who may not be legion), the new variant of GRH seems to address some of the perceived weaknesses of GRH itself -- specifically the inclusion of a presidential line-item veto and the removal of shelter for entitlement expenditures.  And at least in implicit in the Gregg plan is a pay-as-you go feature that was central to the Budget Enforcement Act (as enacted under G.H.W. Bush and extended during the Clinton administration). 

The editorial writers at the Wall Street Journal are skeptical:

Democrats in Congress unveiled their 2006 campaign agenda last week, laying claim to the mantle of "fiscal responsibility." The GOP's spendthrifts have handed them this political opening, which makes it all the more disappointing that Democrats are falling back on an old confidence trick.

Their ruse goes by the name of "pay-as-you-go" budgeting, which has the political virtue of sounding as if spending won't be able to exceed revenue...

That's because paygo rules apply only to new or expanded entitlement programs, not to those that already exist and grow automatically with user demand. Thus spending for Medicare, growing this year at an astounding 15% annual rate, would continue to run on autopilot. Ditto for Medicaid. So-called "discretionary" programs (education, Defense) that Congress approves each year are also exempt. Democrats somehow forget to disclose that those notorious "earmarks" stuffed into spending bills are also exempt from paygo.

Well, OK, but I'm with Brad, on the paygo issue and his broader support for the mechanisms of the Budget Enforcement Act.  In my opinion, the fundamental problem with the GRH approach to budget arose from its focus on the deficit per se.  To me, fiscal policy boils down to answering a few simple questions.  How much do we want to spend, and what do we want to spend it on?  Having answered that question, it is beyond obvious that revenues have to pay for that spending in the long run.  The only remaining question, then, is how those revenues should be raised (that is, who and what do we want to tax).

I am not presuming to answer these questions.  In particular, I am not suggesting that correct answer is to raise revenues to match projected spending, anymore than I am suggesting the correct answer is to lower projected spending to match revenues.  What I am suggesting is that an institutional process that puts the focus squarely on the trade-off between a dollar spent on one type of government spending versus another, a dollar spent in the public sector versus one spent in the private sector, and one type of taxation versus another, is the right way to go.  The Budget Enforcement Act had the great virtue of requiring explicit decisions about new spending (for the discretionary part of the budget and new entitlement programs) and forcing explicit consideration of the inevitable trade-offs when anyone wanted to deviate from the program.    

I'll close with an appeal to higher authority:

... For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act helped the Congress establish a better fiscal balance...

Reinstating a structure like the one formerly provided by the Budget Enforcement Act of 1990 would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. Such a step would be even more meaningful if it were coupled with the adoption of provisions for dealing with unanticipated budget outcomes. As you are well aware, budget outcomes have often deviated from projections--in some cases, significantly--and they will continue to do so. Accordingly, well-designed mechanisms that facilitate midcourse corrections would ease the task of bringing the budget back into line when it goes awry. In particular, the Congress might want to require that existing programs be assessed regularly to verify that they continue to meet their stated purposes and cost projections. Measures that automatically take effect when a particular spending program or tax provision exceeds a specified threshold may prove useful as well. The original design of the Budget Enforcement Act could also be enhanced by addressing how the strictures might evolve if and when reasonable fiscal balance came into view.

I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of budgeting rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age.


June 21, 2006 in Deficits | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference What Is The Right Road To Budget Discipline? :


I think that your sarcasm is correct, along with the WSJ skepticism. Politicos are like unrestrained kids in candy stores when it comes to spending money. Neither the Dems nor the Reps have had enough discipline to cut unnecessary government programs, or are willing to take the heat to end programs that exist purely for political means. Until there is a political revolution in either party, or outrage enought to start and fund a fiscally conservative party, the budget will continue to grow.

It is so bad, even programs with a sunset provision defy nature, the sun never sets.

Posted by: jeff | June 26, 2006 at 05:26 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

Google Search

Recent Posts



Powered by TypePad