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A Dopey Budget Idea from Jeb Hensarling and Mike Pence

03 Mar 2010
Posted by Bruce Bartlett

In today’s Wall Street Journal, Republican Reps. Jeb Hensarling of Texas and Mike Pence of Indiana put forward a dopey idea for reducing federal spending so that they can appear to be fiscally responsible while still supporting every tax cut that comes down the pike and opposing any and all tax increases. Their simplistic idea is to just enact a constitutional amendment that would limit federal spending to “one fifth of the economy.”

This is a terrible idea on so many levels that it is hard to know where to begin to dissect it, but here goes. 

1. The Constitution has never in our history been used to enshrine a particular economic policy and it would be unwise to start now.
 
2. It will take years and extraordinary effort to get two-thirds of both the House and Senate to enact such an amendment. Keep in mind that every crappy delaying tactic that Senate Republicans have used against health care reform would certainly be used by opponents of this amendment. And what is the likelihood that such an amendment would ever even reach the floor given the current partisan makeup of Congress? If by some miracle this amendment made it through Congress, it would also have to get three-fourths of the states to approve it. At a minimum, going the constitutional route cannot be taken seriously as an answer to a problem of immediate concern.
 
3. When the congressmen say “the economy” one assumes that they are talking about the gross domestic product, a term with no legal definition. But perhaps they are referring to the gross national product or gross domestic income or national income. These terms are each slightly different but have at times been used as measures of “the economy.”* In the third quarter of last year, GNP equaled $14,363.7 billion, GDP equaled $14,242.1 billion, GDI (which is supposed to be the same as GDP) was $13,988.9 billion, and national income was $12,259.7 billion. There’s more than a $2 trillion difference between the high figure and the low one, which means that spending might be $420 billion higher or lower depending on which one is used.
 
4. Assuming that they meant GDP, there is another problem, which is that this figure is frequently revised; in fact, it is continuously being revised. And the magnitude of these revisions can be large over time. For example, back in 1981 we thought GNP in 1980 was $2,627 billion; today we think it was $2,822 billion.
 
5. An even bigger problem is that both the administration and Congress must necessarily develop the budget based on forecasts of GDP, which can sometimes be tragically wrong. For example, the budget for fiscal year 2009, which ended last Sept. 30, was first put forward by President Bush in January 2008. At that time, OMB estimated GDP for 2009 would be $15,215 billion. It turned out to be $14,259 billion—almost $1 trillion lower than expected. CBO did a little better; its January 2008 estimate for GDP in 2009 was $14,997 billion. Assuming that Congress used CBO’s forecast, it would have appropriated almost $150 billion more than permitted under the Hensarling-Pence proposal simply because of forecast error.
 
6. It would be one thing to impose a constitutional limit on spending if Congress had to vote on all of it every year; that is, if the entire budget consisted of discretionary programs. In fact, discretionary spending, which includes national defense, constituted only 35 percent of federal outlays last year, down from 61 percent in 1970. Since two thirds of the budget now goes either to interest on the debt or entitlement programs, how can this be controlled on a yearly basis? If too many people turn 66 and claim Social Security benefits, is Congress going to say they can’t have them if it would push spending above 20 percent of GDP? Of course not; the idea is ridiculous.
 
7. Tax expenditures are a huge loophole through which spending can be driven. For example, instead of spending $1 billion to buy some new equipment for the Army, the government could give the contractor a transferable, refundable tax credit worth $1 billion. Even if the contractor had no tax liability, it could simply sell the credit to some business that had at least a $1 billion tax liability. There would be no increase in spending as conventionally measured and taxes would simply be $1 billion lower.
 
8. Loans and loan guarantees are another loophole. Or the government could mandate through regulatory or even tax policy that private businesses or state and local governments undertake certain activities that the federal government normally spends money on. (It’s worth noting that there is no limit on taxation in the proposal; only spending is constrained.) The burden of government is not reduced when such methods are used, it only changes its form and location.
 
9. And of course there are the standard exceptions that Hensarling and Pence endorse for a declaration of war or a two-thirds vote by Congress to override the 20 percent limit. Since Congress hasn’t formally declared war since World War II, presumably none of the wars since then, including those we are fighting today in Iraq and Afghanistan, would permit deviation of the 20 percent rule. I wonder what Dick Cheney thinks about that? One also wonders what would happen the following year if Congress overrode the 20 percent rule by a two-thirds vote. Would spending have to be cut by an equal amount or could Congress simply enact a permanent override with one vote?
 
10. The whole question of enforceability is always glossed over by these constitutional approaches to the budget. Although Hensarling and Pence claim that their proposal is a “spending cap with teeth,” there is in fact nothing whatsoever in it that would require compliance. Congress, they say, “would be given the authority to enforce and implement it.” But Congress already has that authority and plenty of tools under the Budget Act of 1974 to implement a spending cap if it chose to. I guess that the congressmen just assume that the force of public pressure will make Congress and the administration be honest and law-abiding. But polls say that people already want a balanced budget and smaller deficits. Why would it be any different if there was a constitutional amendment mandating a limit on spending? Isn’t there a tremendous danger that the inevitability of Congress and the administration either sidestepping or just ignoring it would undermine the Constitution itself? Wouldn’t the courts have to take account of the flouting of it as opening the door to looking the other way when other constitutional provisions are violated as well? Or, alternatively, the courts might take it upon themselves to find a way of enforcing a spending limitation by mandating higher taxes, as the federal courts have forced local governments to do on occasion. I believe that state courts have also mandated higher taxes at times as well. At that point we might as well just dispense with Congress altogether.
 
In conclusion, this is a laughably bad proposal that deserves not one second of serious consideration. I’m embarrassed that I wasted so much time on it writing this post. But unfortunately, in this day and age, it appears that there is no idea too simplistic or unworkable to make the rounds through the right wing blogosphere to talk radio and hence to Fox News, so I feel obliged to at least try and stamp it out before it gains traction.
 
 
* In Senate Report 99-162 (1985), the Senate Judiciary Committee explained a constitutional amendment that would have allowed spending to rise no faster than “national income.” It had this to say about what the term meant (p. 52): “The precise concept of national income is intended to remain subject to the discretion of the Congress. Currently reported concepts include gross national product, net national product, national income, and gross domestic product. Any of these may be chosen, as might some new measure determined by the Congress.”
 
Addendum: Jon Chait puts in his two cents here. Daniel Gross comments here.

It sounds like quite a good

It sounds like quite a good idea, then. Especially 9 - getting war funding back under the control of the senate would be a good idea. The "problem" with the variability of GDP is not really a problem - the Senate would just have to aim well under the maximum allowed spending limit so that recalculations wouldn't make the budget unconstitutional. I also like 8 - attempting to directly get the States or private business to do things it much more publicly visible & politically honest than sneaking those things onto a budget somewhere. I say implement it now.


Thanks for the ammo, Mr.

Thanks for the ammo, Mr. Bartlett


Implement it now? It seems

Implement it now? It seems that the prior poster either can't read or can't comprehend.


Are they kidding?

If they have some puerile control lust, lets redirect them to legislating a flat balance of payments (as a floor...surpluses allowed).

Enforced, of course, by a properly scaled foreign value-added tax, so a FVAT?


Bruce Bartlett writes, "1.The

Bruce Bartlett writes, "1.The Constitution has never in our history been used to enshrine a particular economic policy and it would be unwise to start now."

The Constitution enshrine the economic policy of private property: “nor shall private property be taken for public use, without just compensation.”

Tax policy was enshrined in the Constitution here, “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.”

More tax policy in the Constitution here, “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.”

Almost all of Article 1, Section 8 is about economic policy,
"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
To borrow Money on the credit of the United States;
To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
To establish Post Offices and post Roads;
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;"

Points 2 through 10 are just as laughable as is Bruce Bartlett's point 1. And so, point 2 through 10 doesn't merit serious consideration. I am embarrased I wasted my time reading this blog.


The Constitution Doesn't Dictate Policy

Tom,

Your argument is not logical. Even assuming that Mr. Bartlett was incorrect on Point 1, it does not make his other points "laughable." Each should be taken on its merits, and refuting one does not constitute a refutation of the others.

Moreover, your argument is wrong. Mr. Bartlett stated that the Constitution does not enshrine "economic policy," and he is correct. The Constitution provides a framework within which economic policy can be made (for example, the "takings" clause would restrict communistic policies), and apportions responsibility for economic regulation among the branches, but it does not dictate any particular policy. The fact that 19th century laissez faire policies, Roosevelt's expansionistic programs, and Bush II's tax-cuts-plus-sharp-spending-growth have all taken place under the same constitutional framework proves the point. The Pence proposal is a specific limit of the sort not otherwise found in the Constitution.


A better tax plan, which includes spending limits

See section 6 below, relative to setting budgets. Any plan must be part of a comprehenxsive tax overhaul. Here's mine; I hope you'll take a minute to read it. With notes its only one page. It differs from VAT's et al. There's a lot more than taxes here. A PLAN FOR EQUITABLE TAXES

1. All persons residing in the U.S. shall come together in units known as "households" for the purpose of reporting all income from any source, each item to be identified by payer's and payee's tax number. Members of a "household" need not be related, need not reside together, and a household may consist of as few as one person.
2. Each year congress shall set by legislation a "minimum wage" and a "tax rate".
3. The following income shall not be subject to taxation:
• An amount equal to a year's earnings (arbitrarily set at 2000 hours) at the minimum wage rate, for each adult (age 20-60) member of the household, decreasing 10% per year to 50% at age 15 and increasing 10% per year to 150% at age 70.
• All payments for what is classified as necessary health care for all members of the household including medical care, pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
• All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level, and a per-diem allowance for students traveling more than 50 miles from primary residence for education.
• All income saved into an identified account from which investments may be made.
4. The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount.
5. There shall be no federal tax on corporations or other business entities.
6. The Office of Management and Budget shall compute revenues to be expected using the newly set tax rate and minimum wage, applied to the previous year's reported incomes. No expenses in excess of that amount may be authorized or made by the federal government without approval by 75% of each house of Congress.
7. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in a manner exactly as applied for the Federal tax.
8. For households whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states.

With equality as the primary goal, this act established "households" as the taxed unit, so that all persons, whether related or not, are taxed equally. It seeks the elusive concept of fairness by taxing at the same rate all "disposable" income. It sets the Federal budget to produce a surplus in times of economic expansion and a deficit in times of contraction to promote economic stability. It encourages growth of the tax base, thus growth of the government's ability to pay for its responsibilities, by fostering health care, education and investment, all of which contribute to growth of income. It encourages savings to aid the elderly. It recognizes disparity in cost of living among various locations. It facilitates sufficient sources of revenue for states and municipalities. The extent of the tax burden on each household is clearly visible.
T's et al.


of course it's unserious

Yes, this policy makes no sense-- it's never going to be enacted, and it wouldn't work if it were.

But that's what Republicans do. They come up with talking points. There have been no serious policy proposals from Republican politicians for years.

The voters, the media, and the Democrats don't hold them accountable. Therefore, like spoiled children, they just do whatever pops into their little heads.

When they are in charge, we get unaffordable wars and tax policies and catastrophic mismanagement of governance. When they are not in charge, they remember again that they hate the government.

This is old news. Critiquing the nonsensical policy, while a worthwhile pursuit, doesn't get to the root problem of the party's unseriousness.


Careful there Doofus

Doofus,

You're making quite the Ad Hominem attack there. This policy may be crap, but there have been plenty of good ideas offered up by Republicans.


Policy and politics

It will take years and extraordinary effort to get two-thirds of both the House and Senate to enact such an amendment...

To put it mildly. :-)

Since this is has no chance whatsoever of coming anywhere near getting any serious consideration, why waste energy getting upset about it?

It's political posing in an election year. That's what politicians do.

Is it really so shocking to find politics in politics?

Yes, this policy makes no sense -- it's never going to be enacted, and it wouldn't work if it were. But that's what Republicans do...

Oh, yeah, that's right. Democratic politicians never engage in political posing. Especially not in an election year. ;-)


I was going to point out

I was going to point out Bruce's #7 as soon as I finished reading what their proposal is. It's a very important point. For more (including a translation of the relevant part of Obama's State of the Union address) see http://dmarron.com/2010/02/08/the-problem-with-tax-expenditures/#comment...

By the way, Hensarling is the ignorant idiot who actually tried to get Greenspan to say that tax cuts increase revenues. Greenspan said the opposite, of course:

House Budget Committee hearing, 9/8/04:

[Rep. Jeb] Hensarling [R-TX]: … the latest reports I see from Treasury indicate that revenue is actually up since we passed the latest round of tax relief…seemingly suggesting that at least in this particular case, that maybe tax relief did help ignite an economic recovery that has added revenues to the Treasury and actually helped become part of the deficit solution as opposed to part of the deficit problem. So my first question is, have you seen these reports from Treasury, and do you concur that revenues are up now over what they were a year ago?

Mr. Greenspan: Well, Congressman, I think the general conclusion about the fact that revenues are lower than they would otherwise be without the tax cut, but higher because of the tax cut, is best described by saying that a tax cut will immediately lose revenue, and then to the extent that it increases economic activity and generates a larger revenue base will gain some of it back. It is very rare, and very few economists believe that you can cut taxes and you will get the same amount of revenues. But it is also the case that if you cut taxes, you will not lose all the revenue that is implicit in the so-called static analysis.
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_house_hear...

I think a more complete transcript would have recorded Hensarling going "Doh!"


First, you sound like a brat.

First, you sound like a brat. Dopey, crappy? You should try talking like an adult.

Second, who cares if the Constitution doesn't enshrine economic policy yet? It didn't enshrine freedom for slaves until it did.

Third, you act as if you've unearthed that amendments go to the states. No way!

Fourth, government forecasts are bad because there is so little incentive to be right. Also, governments could spend less in the face of uncertain forecasts.


Why Nothing Works

The nature and extent of spending of any government is determined by the FUNCTIONS of the government.

For all the blame casting and other carping in these comments, and in most articles, there is little attention given to how those FUNCTIONS of GOVERNMENT are determined.

Are the functions of our federal government determined by Constitutional authority or by the public acceptance of socially beneficial objectives?

Have the functions of our federal government been expanded beyond the specific authorizations of our Constitution since 1914? Certainly; consider both how and why.

Then consider how many and which of those functions without specific authorization have required ever-increasing spending - even if usually in pursuit of great social benefits.

Two items of those current functions generally accepted as providing great social benefit, Social Security and Medicare/Medicaid are not based on any specific constitutional authorization - and their determination as functions of government has been by public acceptance of political fiat.

The same is true of Education, Housing, Healthcare, Art, Science and the myriad of other essential social objectives - and what has been the accepted expansion of governmental functions into them continues to expand spending.

If the performance of the obligations that humans have to one another are to be devolved to governments (at various levels) that expands the functions of governments; which expands spending.

So, who among us has ACCEPTED these expansions of functions, how and why has it been done and does it CONTINUE TO BE done ? Important as that is to understand, it is more important to accept and work out non-destructive ways to roll-back and limit the functions of government.

We will never resolve the problem of spending unless we resolve the issue of the functions of government.


Re-election fodder

I'm glad Mr. Hensarling and Mr. Pence have found an issue they can campaign on in the Fall, because that's all it is. If they had any actual intestinal fortitude they would put together a list of budget cuts that gets the budget within that 20% limit, and show us that it's actually possible. But of course, unless you cut Medicare, Medicaid, Social Security and Defense - all of which are political suicide from one side of the electorate or another, you can't do it. So instead we'll propose a pipe dream, we can crow about it during the Fall elections, and then conveniently forget about it when we regain the majority in the House. Bravo, Congressmen: "If this were play'd upon a stage now, I could condemn it as an
improbable fiction."


Actually

21 percent is pretty easy.

Stop paying SS and Medicare benefits to the top 20% by wealth/income of recipients.

Reduce Defense spending by $100 billion.

Nominally freeze everything else for 4 years.

Done


"The Constitution has never

"The Constitution has never in our history been used to enshrine a particular economic policy and it would be unwise to start now."

Only someone who hasn't read the Constitution in detail, and paid careful attention to its provisos could say this. What about legal tender laws? Requirements that only gold and silver can be made legal tender by the states. Prohibitions against fiat money? Do your homework Bruce Bartlett before you prattle off a tangent.

The propriety of Pence's proposal, however, is moot. I think it is silly.


Plan Diverts Us From Real Issues

I very much agree with Bruce's assertion that the Hensarling and Pence plan is unpassable (point 2), unworkable (points 3-6), easily circumvented (points 7-9), and enforceable (point 10). The first point likewise suggests that it is a bad idea and a bad precedent. Another problem is that it doesn't seem to include any adjustment for economic downturns. During a recession, the economy shrinks but certain spending (such as unemployment compensation) grows. Of course, a two-thirds vote of Congress could override the 20 percent rule. However, this does not seem like a safe or efficient way to handle the predictable results of a recession. In addition, it provides the Congress with no guidance as to how much the 20 percent rule should be surpassed.

In fact, I do think that it's useful to look at spending as a percentage of GDP as a starting point in planning the budget. As can be seen in the first graph at this link, spending has been somewhat stable by this measurement, at least over the very long run. It did reach 23.5% of GDP in 1983 but ended 2008 at 20.7% of GDP, very close to the 20.4% of GDP where it ended 1953. Our initial response should be to resist a change in this relative stability, either through an increase in spending or a decrease in revenue (via a tax cut). Still, with the Boomer retirement about to retire and entitlement costs set to grow as a percentage of GDP under current law, we do need to face the issue of to what degree entitlements will have to be restrained and/or to what degree revenues will have to grow. Proposing a unpassable, unworkable, easily circumvented, and enforceable plan does nothing to address this issue. In fact, until the Hensarling and Pence plan fails or is discarded, it will cause the issue to be ignored.


Missed a big issue...

Considering what has gone down the last few years I would think the idea of hamstringing ourselves during a financial crisis would be the primary issue with this plan. So let's get this straight, when there's an output gap and we need to borrow and spend to save ourselves from sinking into a depression; our constitution would direct us to cut spending and possibly raise taxes. NICE.

I'm sure Krugman's going to have a field day with this.


How about just not spending

How about just not spending so much money, especially on things that obviously should not be spent on by the government (healthcare being an obvious example)? There is no need to limit government to spending of 1/5 the economy: Congress just needs to stop being generous with other people's money.

Pipe dream, but as the President said, "That's what elections are for."


A better idea

Why don't we just tie Congressional salary to balanced budgets?


As Reagan stupid, too?

Reagan proposed this constitutional amendment in 1987. Did you think he was stupid to do so then? (And of course he got to the ballot in California in 1973 a spending limit of 7.62% of personal income; it lost narrowly.)


Utter nonsense from point 1. . .

"1. The Constitution has never in our history been used to enshrine a particular economic policy and it would be unwise to start now."

This is utter nonsense. The Constitution was amended to allow for a particular economic policy: the institution of the INCOME TAX.

This changed the way we funded the Federal government ever since.

***

AMENDMENT XVI: Passed by Congress July 2, 1909. Ratified February 3, 1913.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.


Big deal, just cap taxation too!

1. Who cares about enshrining a particular economic policy? Other comments have already weighed in on this point.

2. Forget the congress, just have the states call a constitutional convention. Then you and all the other smart people can come together and write one with teeth.

3. Use GDP.

4. About GDP forecasting: fine. Cap spending at 20% of the GDP 5 years ago, as currently estimated by the CBO.

5. See 4.

6. Yes, the entire point of this amendment should be to constitutionally force congress to cut entitlements. They won't be able to kick the can down the road anymore.

7. Cap taxation at 50% and make all state and local taxes absolutely deductible against federal income tax. That will lessen the market for any sort of transferable, redundable tax credit. I'd rather Congress have to think about how to make tax loopholes to spend than just spend endlessly with no thought at all.

8. Fine. Classify loans as spending in the amendment. Close the loophole.

9. If we want to go to war and can't get a congressional declaration, we'll have to cut spending elsewhere to come up with the funds. Time to prioritize. If it is really important have congress override it with 2/3rds. Specify in the amendment that any such vote can only apply to the current budget year.

10. Since we are capping taxation as well, a court cannot mandate higher taxation. If congress fails to get the budget under the specified level, all spending will be cut by an equal percentage across the board of federal programs and departments. Give private citizens standing to file suits if Congress does not comply.

**Yawn** That was easy. I'm ashamed you spent so much time framing your improvements to the proposal as reasons why it will not work. Thanks for the road map, we'll be sure to give you the credit when it is passed.




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