Mr. Chairman, thank you for the opportunity to offer my views on the imperative of budget process reform in the 104th Congress. It is my conclusion that the process by which we make budget decisions in Washington—the rules of the game—can substantially determine budget outcomes. The rules matter. A fundamental imbalance exists in the current rules. For more than twenty years, forces that favor spending have consistently prevailed over forces that favor fiscal restraint.
Earlier this year I authored a booklet entitled: “Government: America’s Number 1 Growth Industry.” Regrettably, that is exactly what the federal enterprise has become—our fastest growing industry. I attach for the record a chapter of that book on the loss of control of federal spending.
How do we put an end to the pro-spending bias in our budget rules? A top priority for this Congress should be the enactment of a new budget act. The 1974 Budget Reform and Impoundment Control Act is a failure. One of the purposes of the 1974 Budget Act was to eliminate deficit spending. But here is the actual legacy of that legislation: in the twenty years prior to the Budget Act, the budget deficit averaged just 1 percent of GDP and $30 billion in 1994 dollars. In the twenty years since the enactment of the 1974 Act, the average budget deficit has been $170 billion per year, and 3.5 percent of GDP. We have accumulated more than $4 trillion of debt since 1976. By any objective standard, the budget process has not worked better under the 1974 act—it has worked much worse.
The 1974 Budget Act cannot be fixed. Tinkering won’t do the job. The 104th Congress ought to repeal the act before it does more damage to our national economy.
What should be the key components of a new budget act?
The centerpiece of any budget reform quite clearly is an amendment to the Constitution outlawing deficit spending. Most everyone on this Committee is keenly aware of the need for a balanced budget requirement, so I will not long dwell on the subject. Deficit spending is an unconscionable form of fiscal child abuse.
There are hundreds of groups in Washington that pretend to speak for the interests of children. But who in Washington, among the thousands of powerful special interest lobbyists and self-proclaimed do-gooders, speaks for the children who are going to have to pay off our irresponsible debts today? The single most pro-child policy that any of us can pursue in Washington today is to reduce the crushing burden of debt our government is now preparing to place on the next generation’s backs.
I sincerely wish that we did not need a constitutional amendment to solve Washington’s addiction to red ink. Unfortunately, the destruction of our nation’s once firmly held moral rule against deficit spending requires us to amend out Constitution and command Congress to do what it used to feel honor-bound to do—that is, balance the budget.
The argument is made by tax and spend opponents of the BBA that a constitutional requirement is just “a gimmick.” No one really believes this. If the amendment were a gimmick, Congress would have approved it long ago. The reason that defense contractors, corporate lobbyists, federal workers, teachers unions, the welfare industry and other powerful special interests groups ferociously attacked the BBA is not because they think it won’t work, but because they shudder at the thought that it will. What frightens the predator economy in Washington is that gift- bearing politicians may have the federal credit card taken away from them.
The U.S. House of Representatives earlier this year wisely approved the BBA. The matter now lies outside of your hands. The real issue is: What can be done in the meantime to make the budget process work better and to end deficit spending?
The House has passed a courageous budget resolution crafted by Budget Committee Chairman John Kasich which promises a balanced budget by 2002. But one thing is a virtual certainty: no matter how sincere your intentions of balancing the budget, the deficit will not be eliminated by 2002 unless new budget enforcement rules are implemented to ensure that this admirable goal is honored.
Here are the components of a new budget act that I would urge in order of priority:
- An Enforceable Legislative Balanced Budget Requirement
Don’t wait for a balanced budget amendment. Act now. The most urgent reform for this Congress is to pass a legislative balanced budget law that enforces the deficit targets established in the House Budget Resolution.
What I have in mind is a new Gramm-Rudman formula that establishes iron-clad enforceable deficit targets. One of the great myths in Washington is that Gramm-Rudman was repealed because it wasn’t working. Gramm-Rudman was repealed by the pro- spending constituencies in Congress precisely because it was working too well.
Gramm Rudman was enacted in 1985, when Congress was under intense public pressure to immediately reform the budget and reduce the $200 billion budget deficit. The controversial law required Congress to balance the budget by 1991 by meeting a series of annual deficit reduction targets. If Congress missed these targets, the law would trigger automatic spending cuts—a process called “sequestration”—to reduce the deficit to the mandated level.
Critics charge that the act was a blunderous failure because Congress continually veered off the GRH balanced budget track. It is true that Congress routinely missed the deficit targets. Actual deficits under GRH were on average about $30 billion per year above maximum deficit targets.
Still, Gramm Rudman had a positive effect on the federal budget. The best way to measure this impact is to compare the actual deficits recorded under the five years of GRH with what the deficit was projected to be by the Congressional Budget Office (CBO) without the law. The 1989 deficit was about $100 billion lower than it was expected to be in 1985 without Gramm Rudman. In fact, the Gramm-Rudman era, 1986-1989, was the only period of genuine deficit reduction in nearly twenty years. The deficit fell from 6 to 3 percent of GDP over this period.
The most dramatic effect of Gramm-Rudman was to curb government expenditures. Government spending in the five years prior to GRH grew at a rate of 8.7 percent, but slowed to only 3.2 percent in the five years it was in effect. Even entitlement spending was curtailed under GRH to a 5 percent growth rate, because Congress realized that if they allowed programs like Medicare and Medicaid to rise uncontrollably, they would eat up the rest of the budget and cause painful automatic cuts in discretionary spending.
Senator Gramm and Majority Leader Dick Armey have introduced legislation to restore many of the features of the old Gramm- Rudman. The most vital reform is a series of deficit reduction targets, that if missed invoke automatic across the board spending cuts— a sequester. I would urge that any new sequester process include all federal outlays except interest payments and Social Security benefits.
This will impose a much-needed dose of discipline into the budget process.
- A Supermajority Requirement to Raise Taxes
Americans have been hit with twelve tax hikes in the past twenty years: each one has succeeded in further expanding the size of government, rather than reducing the debt. Requiring a three-fifths or two-thirds majority in both the House and Senate to pass a tax increase would allow Congress to pass tax hikes in cases of national emergency, but would make it very difficult for Uncle Sam to continue its annual ritual of peacetime tax hikes.
Several states, including Arizona, California, and Oklahoma, have enacted such measures; they have stopped tax increases dead in their tracks. As one Arizona taxpayer advocate of the supermajority requirement recently told me: “Now the legislature doesn’t even bother to propose new taxes.”
The Contract with America established new rules requiring a 60 percent vote to raise income taxes. This was a good start. But now this hurdle should be made to apply to all revenue raising bills.
- National Referendum on all tax increases.
Another populist budget reform that is sweeping through the states is the requirement that any tax increase must be ratified by a popular vote of the people in the next election. This gives the taxpayers veto power over the state legislature’s efforts to raise taxes. Congress should be forced to take its case to the people, when it wants to take more dollars out of our paychecks. It is a virtual certainty that George Bush and Bill Clinton’s wildly unpopular record tax increases would have been blocked if this rule had been in effect.
Minority leader Dick Gephardt deserves hearty congratulations for suggesting this reform as part of his 10 percent tax plan. Perhaps a bipartisan consensus could emerge on this issue.
- Dynamic scoring of tax law changes
The 1986 capital gains tax rate increase has raised roughly $100 billion of less revenue than the Joint Tax Committee estimated when the law was enacted. Capital gains realizations are less than half the level expected. Why these gigantic forecasting errors? Congress still uses static analysis to score tax rate changes—a scoring technique that assumes little change in behavior to tax changes and almost no overall economic impact of new tax laws. The assumptions have been shown time and again to be wrong. We know the procedures are wrong. But we still use them.
This has negative policy consequences. The capital gains tax cut in the Contract with America will almost certainly raise revenues for the government—and the cap gains cut may raise substantial new revenues. The rich will pay more taxes with the rate cut. But the Joint Tax Committee refuses to score these dynamic effects. Rep. David Dreier has introduced legislation calling for a zero capital gains tax—something the Cato Institute has long endorsed. But the static revenue estimators say this will reduce revenues by $150 billion over five years. Dynamic estimates indicate that a zero capital gains tax will so energize our economy that total tax revenues may actually increase if the capital gains tax is eliminated. But as long as we are slaves to static scoring, Mr. Dreier’s much-needed legislation will never be approved.
Dynamic scoring will yield more accurate tax revenue estimates, and thus encourage better policy.
- Line item veto authority for the President.
This provision is obvious. The President should have the power to cut out the waste that Congress won’t. A recent Cato Institute survey of current and former governors finds that more than 80 percent believe the President should be given this authority. One of most negative consequences of the 1974 Budget Act was to strip the President of his legitimate impoundment powers—a power that had been exercised by every President from Thomas Jefferson to Richard Nixon. Line item veto would be a partial restoration of the presidency’s legitimate powers over the purse strings.
- An end to baseline budgeting.
When the School Lunch Program is going to increase by 4.5 percent per year, that is a budget increase, not a budget “cut.” Baseline budgeting is a fraud. Lee Iaccoca once stated that if business used baseline budgeting the way Congress does, “they’d throw us in jail.”
It’s time to end the false and misleading advertizing in the budget. Congress should be required to use this year’s actual spending total as the baseline for the next year’s budget. If we spend more than the current year, we are increasing the budget, if we spend less, we are cutting it.
- A statute of limitation on all spending programs It has been said that the closest thing to immortality on this earth is a federal government program. Congress doesn’t know how to end programs—even years and years after their mission has been accomplished. (Hopefully, this Congress will prove this statement wrong!) A five-year sunset provision should apply to every spending program in the budget—entitlements and discretionary programs. This would require the true “reinvention” of programs by forcing the re-examination of every program including entitlements, every five years.
- Debt-buy down provision
This is Rep.Bob Walker’s idea of empowering taxpayers to dedicate up to 10 percent of their income tax payments to retirement of the national debt. Politicians earmark spending all the time. Taxpayers should have that same right.
THE BUDGET STAMPS SOLUTION
Most of the above ideas are standard—though long overdue budget reforms. I would also like to suggest one other less conventional budget process change. In fact, this is much more radical than anything tried to date to conquer the budget deficit. I borrow the concept from former Reagan administration economist John Rutledge.
If the balanced-budget amendment remains stalled, why not control the cash flow directly? Under the Rutledge plan, the government would issue a special blue currency called “budget stamps” that would be issued to all recipients of federal spending—much in the way that food stamps are issued to the poor. The recipients would redeem these blue dollars for greenbacks at the local bank or post office. Here’s the catch: if the federal government balanced the budget, a budget stamp would be worth one dollar. But if Congress spent twice as much as it collected in taxes, a budget stamp would be redeemable for just 50 cents.
This year the federal government would issue 1.6 trillion dollars of budget stamps. Those budget stamps would have a total worth of $1.4 trillion—the amount of money collected in taxes. Hence, each blue budget buck would be worth roughly 87 cents. Each day the federal Treasury would report to banks and Post Offices how much budget stamps are worth, depending on how many stamps had been issued and how much revenue had been collected. In this way, total cash outlays would exactly match tax revenue inflow.
Budget stamps would force the constituents of federal largesse to compete against each other at the budget table. Each dollar allocated to farmers would be one dollar less for welfare recipients, social security beneficiaries, defense contractors, bilingual education teachers, subsidized artists, and so forth.
Deficits would be impossible, since the government under the new budget process would be incapable of spending more than it took in. And finally, because Congress’s salaries (and staff’s) would be paid in budget stamps, Newt Gingrich, Dick Gephardt, Bob Dole and every member of this Committee would have a strong financial self-interest in limiting spending.
I am convinced that Rutledge is on to something. The budget stamp idea is one that the recipients of government largesse will hate, but taxpayers will love. Fortunately, there are still a few more of the latter than the former.