The nation is headed toward a fiscal crisis. This year’s Fiscal Responsibility Act (FRA) was supposed to help change our economic course, but Congress may soon pass a large supplemental bill for wars and border security without offsetting the costs elsewhere. This is a pattern — passing fiscal-restraint laws but then bypassing them soon after, as with the Gramm-Rudman-Hollings deficit caps of the 1980s and the Budget Control Act spending caps of the 2010s.
The federal government has never been legally required to balance its budget, but prior to the 1930s, a strong anti-debt culture steered lawmakers toward fiscal responsibility. Congress balanced the budget in 68 percent of the years between 1791 and 1929.
That changed in the mid-20th century with the rise of Keynesian economics, which planted the false idea in Congress that deficit spending boosts growth. At the same time, Congress began putting more spending on autopilot as “entitlements,” thus ducking responsibility for rising program costs. Congress has balanced the budget in just 14 percent of the years since 1930, and deficits are trending ever higher.
Tougher federal spending caps are needed, but sadly any new restraints would probably be undermined by the twin fiscal evils of Keynesianism and autopilot entitlements.
Fortunately, there is another way to avert fiscal disaster: phase out $1.3 trillion a year in federal subsidies for state and local activities such as K–12 education, low-income housing, welfare, urban transit, and Medicaid. Devolving funding for state and local activities would slash federal deficits and stabilize the debt.
As the federal government cut subsidies, the states could downsize programs or they could fill the funding void with their own resources. In the latter case, the states would do so with current revenues — not debt — because they have extensive constitutional, statutory, and economic restraints limiting debt issuance.