Cut, Cap, Balance: How to Address the Debt Ceiling Issue

 

Colin Hanna, Chris Chocola, and Ken Blackwell, who head up various limited-government groups, say this about the debt limit in the Wall Street Journal:

First, we must demand that spending is cut. We should make discretionary and mandatory spending reductions that would cut the deficit in half next year. Last year's deficit was $1.6 trillion, the largest in history. We must cut our deficits now, not over 10 years.

Second, we must demand enforceable statutory caps to return federal spending to 18% of gross domestic product, where it has been for most of the past 60 years. Federal spending is now nearly 25% of GDP, which is unsustainable. If the spending cap is breached, it must trigger automatic spending reductions. Republicans in the Bush years and Democrats in the Obama years have proven that we cannot trust them when it comes to spending.

Third, we must insist on passage of a balanced budget amendment before that debt-limit vote occurs. The amendment drafted by Sen. Mike Lee (R., Utah) is a good example to follow. It requires a two-thirds vote in both houses of Congress to increase taxes and a three-fifths vote in both houses to raise the debt limit, and it requires the president to submit a balanced budget to Congress each fiscal year.

Whole thing here.

The thing about spending caps, of course, is that they are no substitute for the political will to enforce them (this is beyond any sort of legal or constitutional challenges or even political obstacles). If voters and their elected representatives don't believe in spending less, or balancing spending and revenue, they will always find ways around caps of any kind. Yet I think the sort of plan above helps focus attention and build the will needed to stay on the budgetary diet. And it's worth pointing out that Sen. Mike Lee's plan does allow the circumvention of spending caps under narrow circumstances (which of course brings us back to the start of this paragraph).

Another point worth noting - and it's one that Veronique de Rugy and I made in our story "The 19 Percent Solution: How to Balance the Budget Without Raising Taxes" - is that the level of total federal revenue is not like the volume knob on a stereo. It can't be turned up (or, alas, turned down) at will. It's remained stuck close to that 18 percent of GDP level for 60 years despite all manner of attempts to goose it up or bring it down. The best five-year stretch averaged 19.8 percent of GDP (fiscal years 1997-2001). Historical averages of revenue needs to be the starting point of all budget discussions, especially since it is possible to change spending levels (though certainly not easy). For those who worry that spending 18 percent of GDP is just too little to support core federal functions, recall that Bill Clinton spent 18.2 percent in his last year in office and over his last five years in office, federal outlays averaged 18.5 percent of GDP. Then came the deluge.

Reason.tv interviewed Chris Chocola of the Club for Growth last September in the run-up to the midterm elections. Take a look:

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  • ||

    Before we hear the usual about how that chart shows Americans paying less taxes than ever, just keep in mind that tax systems become more volatile and cyclical as they become more progressive.

    That is, during an economic downturn, the more progressive your tax system is, the bigger the percentage of revenues that you collect from a smaller percentage of the population, the more your tax revenues will take a hit.

  • Joe M||

    To underline this, people are paying less taxes as a portion of GDP because more people are unemployed and paying no taxes, decreasing the numerator, and government spending (which counts as part of GDP) is way up, increasing the denominator. Unemployment benefits count as part of GDP, even though they contribute zero to productivity.

  • Sean Healy||

    This is a great point. But be careful about how you remove progressivity from your tax system. Ireland lowered personal taxes enormously - both in terms of rate and taxable income - during its period of economic reform and restructuring from the late 1980s until the recent crash. By 2008 only 50% of people were paying income tax. The government also cut capital gains tax. But it paid for the lost revenue through lots of transaction taxes - especially on inflated real estate - and quasi-Laffer type increases on bigger incomes and capital gains. Once the arse fell out of the real estate market, revenue collapsed badly, which is why we're running 12%+ annual deficits now and relying on bailout money to keep from defaulting. (That and the craziest bank 'rescue' policy in the history of the world.) The government now has to very painfully broaden the tax base while also taxing the hell out of the richer half of the population, who were paying much more all along, but not particularly noticing because they were too busy counting the phantom equity in their houses.

  • Rich||

    We should make discretionary and mandatory spending reductions that would cut the deficit in half next year. [Emphasis added.]

    I keep seeing these kinds of "quantitative" recommendation. Serious question: What analysis goes into them, as opposed to just saying "Zero deficit, now"?

  • Kroneborge||

    Most of the proposals I've seen try and balance the short term damage to the economy from reduced government spending against the need to reduce the deficit.

    The goal being not to shock the economy into depression.

    After all, it takes time for people and the economy to adjust.

  • Rich||

    Well, yes.

    Let me rephrase: Why not cut the deficit by 34.6% by 2QFY13?

  • PETE||

    The answer: Very little

  • ||

    I have to give it to Dick Cheney on this one. Deficits don't matter. All that matters is how much govt is taking from the people. And that is always a function of spending. Reduce spending. Focus on the spending, not the deficit.

    They will always find ways to steal from us and it will always be a function of how much they are spending. By borrowing, they steal from us indirectly and by balancing the budget, they will certainly enact more taxes and steal from us directly.

    Either way, reducing the spending reduces the theft.

  • ||

    Even the recommendations urged by Chocola and company are but variations on the re-arranging the chairs on the deck of the Titanic theme.

    Good luck betting long on amerika.

  • Kroneborge||

    I'm not sure how you equate balancing the budget with re-arranging chairs.

    If we balanced the budget (even without generating surpluses) the size of the debt in relation to GDP would steadily decrease due to inflation.

    Moreover, if you kept it balanced it would prevent fisal appocoplyse due to entitlements.

  • ||

    I'm not equating the concept of actual balanced budgets with re-arranging the chairs on the deck of the Titanic.

    What Chocola, and to an extent, we, are discussing is just so much fantasy land.

    First, the political impetus to implement even a fraction of the subject recommendations is puny. Look at the reception which has been given to the congresscritter Ryan's very modest budget proposals.

    HEY! HEY!
    HO! HO!
    Ryan's Budget
    HAS TO GO!

    The recent New York special congressional election could be the canary in the coal mine should the democrats continue to skillfully exploit the medicare / entitlement issues. The public really does not have much of an appetite for entitlement reform, never mind entitlement reduction or elimination. As an anarcho-free enterprise-individualist, it has taken me a long time to accept the reality that most folks prefer to keep their lips firmly tethered to Big Daddy's man boobs.

    Second, even if Chocola's recommendations were adopted, which they have less than zero chance of being so adopted, it would be too little, too late.

  • Kroneborge||

    I disagree. The 14 trillion or so in debt we have is servicable (especially with a bit of inflation).

    It's the 65 trillion in entitlemets that is not.

    Still as you say, there isn't much stomache yet for addressing the hard problems.

  • Almanian||

    Chris CountChocoula for the fucking WIN

  • omg||

    I'm glad I wasn't the only one immature enough to think exactly that when I saw this post.

  • Tman||

    I want to hear from the the Krugnuts worshipers tell me how this country is going to stay above water with Federal spending at nearly 25% of GDP.

    The various forms of stimulus injected in to the economy which have raised federal spending to such obscene and unsustainable levels have achieved nothing but higher unemployment and more people on foodstamps. The results also have shown higher unemployment than what was predicted by White House economists forecasts in January 2009 if we didn't have the stimulus.

    TWENTY FIVE PERCENT OF GDP IS FARKING MADNESS.

  • Mike M.||

    There is an excellent, must-read article here on Zero Hedge titled "The Death of Demand - The Post-Consumer Debt Economy" that perfectly explains what the raving Krugnutters don't understand about how our economy has fundamentally changed: the American consumer is all tapped out after our decades long debt-fueled wild spending binge.

  • Tman||

    That's a great -albeit wrist slashingly depressing- article Mike. I enjoyed this part the most-

    The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society. Like frenzied rats in a cage, they only have one lever to push to release the cocaine-laced pellets, and so they've been pushing it for 40 years.

    Now they're hitting the bar with frantic energy, hoping the crazed and addled rats around them can dredge up some "demand" for more pellets to "consume." But the consumer-rats are bloated and lethargic; they've consumed so much debt-drug that they're near death.

    Like a star which has expanded and now cannot maintain its grand state, the debt-based consumerist economy is now poised to experience a supernova implosion.

    Thus why we have 25% GDP spending. Total fucking disaster.

    And yet Krugnuts still has a job.

  • ||

    I want to hear from the the Krugnuts worshipers tell me how this country is going to stay above water with Federal spending at nearly 25% of GDP.

    I believe shrike is your man for this. Just yesterday, he presented a fine basket of cherry-picked data to argue that quantitative easing has been a big success.

  • Tman||

    Anyone but Shriek. Please god. I'd rather argue with Max. He's a little less annoying.

  • ||

    How about a running Shrike / Epi exchange?

  • Joshua||

    Nick,
    I'm all for keeping the spending at 18% or below, but I don't understand why you keep using that number like it's some kind of magic. The only reason that it's hovered near 18% is because the people have punished officials who go higher.
    If the people change their mind and decide that they really want a huge empire and welfare state, they are capable of letting the government raise taxes. All you have to do is look at Europe - sometimes people choose stupid.

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