Promises, Promises ... Just Balance the Budget

Tue, 15 Jul 2008 22:10:42 +0000

I think we've got an old-fashioned disagreement here at CG&G. Unlike Stan, I fully expect the federal government to abide by a balanced budget standard, and I reserve the right to be disappointed, cranky, and vocal about it when it doesn't. By a balanced budget standard, I mean:

1) For the General Fund (i.e., excluding Social Security and Medicare Part A), a target of balancing the budget over a complete business cycle. Alternatively, I would accept a weaker standard of no upward trend in the ratio of (total) debt to GDP.

This allows for countercyclical budget policy. It does not allow for so-called stimulus packages that are enacted with no intention of repaying the additional borrowing at the next turnaround in the business cycle. It also does not allow for semi-annual budget forecasts that have on-budget deficits during periods of above-average growth. With this standard in place, it doesn't run afoul of Stan's concern about whether a budget deficit is the short-term policy in 2013.

2) For Social Security and Medicare Part A, which are funded primarily through the payroll tax, the rules governing benefit amounts and eligibility should be such that based on current projections, they have no long-term deficits.

This should require periodic adjustments in parameters like the age of benefit eligibility for future beneficiaries or the tax rates on future workers that reflect changes in the demographic and economic environment. This should not require immediate changes in benefits or taxes, as long as the periodic adjustments have been done properly.

3) For the other health-related entitlement programs that are not funded by the payroll tax, like Medicaid and Medicare Parts B and D, there is a need to consider the implications of projected increases in health care expenditures per capita in advance of the actual expenditures. Eligibility rules and premia paid by beneficiaries, if they are going to be changed, should be changed well in advance (as in #2).

Okay, that's my standard for running federal budget policy. I would be willing to allow for very infrequent, one-time deficit spending initiatives on programs explicitly designed to benefit future citizens rather than current citizens. But I'd have a pretty high threshold for that. Anything less than this standard constitutes poor stewardship of financial resources at the expense of future citizens.

So the campaign promise is to implement these three steps in order to attract votes as a fiscally responsible candidate. On #2 and #3, I'd be pushing to raise future benefit eligibility ages in all entitlement and health programs to get as much of the way toward balance as I could. I'd then schedule future tax increases to get the rest. On #1, I'd start by committing to at least a 10% reduction in all broad categories of discretionary spending, including national defense. Including defense is important--if defense expenditures are cut, nothing else has much of a case for special treatment. Carbon taxes and progressive increases in income tax rates would close the remaining gap.

This might be one of the least popular campaign promises to make, and fiscally responsible candidates don't have a good track record over the last 25 years. But that's due largely to the delusion evident in Washington and in the electorate that we can run large deficits without consequence. Working to rid our minds of that delusion would set the stage for more intelligent campaign discussions about budget policy.