American Medium-Term Fiscal Policy Going Forward: Insist on Real PAYGO

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Includes: DIA, SPY
by: Brad DeLong

Bob Williams writes:

TaxVox: the Tax Policy Center blog: Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases.... But what about the spending side of the budget?... [C]utting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes. Let’s... concentrate once again on 2012, the budget-window year with the smallest deficit--a mere $633 billion. The Congressional Budget Office’s baseline projects total 2012 spending of $3.4 trillion: $1.9 trillion mandatory, $1.2 trillion discretionary, and $300 billion in interest paid to the public.... [B]alancing the 2012 budget would require cutting a third of all mandatory spending or more than half of discretionary outlays. That’s a tall order in the best of times....

[M]andatory spending... 40 percent pays Social Security benefits and another 30 percent covers Medicare. If you protect them, you could zero out the rest--Medicaid, military and federal retirement, and income support programs like unemployment compensation and Supplemental Security Income--and just about balance the budget in 2012. You might squeeze some cost savings out of Medicare, but just stop by your congressman’s town meeting to see how easy that would be. Big cuts in Social Security benefits won’t happen either.

Cutting on the discretionary side... is unlikely to be any easier....

So let’s review the bidding. Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.

I am having a hard time figuring out in which direction Mr. Williams is going. "Tapping new revenue sources" sounds to me a lot like plain-old "tax increases" which are, he says, not "politically feasible." Perhaps he means: "getting members of congress to vote for tax-law changes that cut taxes on some of their constituents and raise taxes on others who don't notice until it is too late"? Seems to me that that is not a recipe for good tax policy--that that is a recipe for raising taxes on (politically) weak claimants.

And I have a hard time figuring out what Mr. Williams's destination is. Yes, I think that balancing the (nominal) budget is a good thing--hell, I think balancing the ex-Social Security budget is a good thing. You plan to balance the ex-Social Security budget and you are making (some) provision for the aging of America while still setting the rest of the budget on a downward debt-to-GDP path which leaves the government some fiscal headroom to deal with emergencies, and there will always be emergencies.

But experience has taught us all that balancing the budget merely provides Republicans with an opportunity to further unbalance the income distribution and widen inequality by enacting tax cuts for the rich whenever they take power--and Republicans will take power again. As long as the opposition to the Democratic Party is the current Republican Party, balancing the (nominal) budget is an inappropriate goal. The appropriate goal for the budget is stabilizing the debt-to-GDP ratio. Stabilizing the debt-to-GDP ratio requires running a primary surplus--a surplus of taxes over non-interest spending--equal to:

PS = (r-g)(D/Y)

where r is the rate of interest on government bonds, g is the growth rate of the economy, and D/Y is the debt to GDP ratio.

And while Bob Williams is right that we can't balance the budget over 2012-2015 with "politically palatable" tax increases and spending cuts, we can stabilize the debt-to-GDP ratio--indeed, we do stabilize the debt-to-GDP if Congress is willing to lock itself into the box and enforce PAYGO on all deviations from the CBO baseline:

http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf

For the next decade, perhaps the place to fight the budget fight and the line to hold is to insist on real PAYGO.