With Congress reconvening, members will soon be battling over discretionary-spending levels for fiscal year 2014, which begins October 1. They will decide whether to abide by current federal budget caps, which are designed to keep discretionary spending roughly flat over the next few years. The problem is that many lawmakers have become so used to rising budgets that a spending freeze seems impossibly tight-fisted to them.
During long periods in American history, flat budgeting was the norm. For the first 150 years of the nation’s existence, federal policymakers generally restrained spending and reduced debt between wars. Today, the war in Afghanistan is winding down and the economy is growing, so lawmakers should be cutting spending or at least holding it flat.
While the budget deficit is expected to continue falling until 2015, it will then start rising again. The problem is excessive spending, not a shortage of revenue. Consider that if Congress simply held total spending to this year’s level of $3.5 trillion, the budget would be balanced by 2016 as the growing economy generated rising tax revenue.
Freezing entitlement spending would be tough to do, so it makes sense to pursue structural reforms to these programs to reduce growth in spending rates. But with discretionary spending, a hard freeze makes sense — and this is where our early history is instructive. From the founding of the nation until entitlements were invented in the 1930s, the whole budget was “discretionary,” and during extended periods spending was held flat.
When the economy grows, lawmakers should cut spending or at least hold it flat.
Let’s start with President Thomas Jefferson. He and his Treasury secretary, Albert Gallatin, were appalled at the rise in federal debt under the prior Federalist government, and they vowed to reduce the burden. From 1801 to 1809, they succeeded in keeping federal spending at around $10 million. They cut debt from $83 million to $57 million.
Jefferson and Gallatin’s attack on debt and their relatively frugal budgeting influenced federal policy for decades. The federal budget was roughly balanced or in surplus every year from 1800 through 1836 except for five years around the War of 1812.
Wars have always been budget busters that push up spending and debt. But before the 1930s, responsible legislators rebalanced the books and restrained spending for long periods during peacetime. The Jefferson-Gallatin rule was simple: Freeze total spending and use natural revenue growth to generate surpluses and pay down the debt.
For two decades beginning in 1817, federal spending hovered around $20 million. As revenues grew with the economy, the large debt added during the War of 1812 was rapidly paid off. Indeed, the debt was completely wiped out by 1835 under President Andrew Jackson, although it did start to rise again very slowly after that.
Spending rose in the late 1830s, fell in the early 1840s, and then rose in the late 1840s owing to the Mexican-American War. Spending fell in the early 1850s and then rose in the late 1850s. So there were both ups and downs in spending, but as late as 1860, the eve of the Civil War, total federal spending was less than 2 percent of the U.S. economy.
The Civil War sent federal spending skyrocketing from around $70 million to more than $1 billion in 1865. Again, however, war was followed by a long period of retrenchment, as federal spending was held constant and the debt was paid down. Spending was roughly flat at about $300 million for two decades, 1870 to 1890. The budget was balanced every year from 1866 to 1893.
A fiscal champion during this period was President Grover Cleveland, a Democrat, who was in office for one term in the 1880s and another in the 1890s. He vetoed many pension bills and repeatedly countered Republican efforts to overexpand benefits for Civil War veterans. He also famously vetoed a subsidy bill for Texas farmers after a drought, arguing that such aid should come from private charity, not the federal government.
Unfortunately, Republicans William McKinley and Theodore Roosevelt, who took over from Cleveland, were less frugal, and the Spanish-American War at the turn of the century helped push up spending as well. But the government still ran surpluses about half the time, and so federal debt remained constant at about $1 billion from 1891 to 1916.
The First World War and two terms of President Woodrow Wilson exploded the federal debt to $25 billion by 1919. Once again, however, Americans were wise to elect advocates of restraint in Presidents Warren Harding and Calvin Coolidge. As writer Amity Shlaes has explained, Coolidge was intensely focused on finding efficiencies in the government. He kept federal spending frozen at $3 billion over the six years of his tenure, and federal debt fell steadily. When he left office in 1929, federal spending was just 3 percent of the economy.
Sadly, the idea of flat budgeting disappeared with the invention of entitlements under President Franklin D. Roosevelt in the 1930s. Entitlement programs put spending on autopilot, allowing politicians to dodge responsibility for chronic deficits and rising debt. Federal spending is now 22 percent of the economy, which is about ten times the level typical of peacetime during the nation’s first 150 years.
Entitlement reform is the main budget challenge today, but maintaining a freeze on discretionary spending at current sequester levels is also crucial to getting our fiscal house in order. Given that war costs are falling, at least for now, and that the economy is growing, now is the time to cut the government’s massive debt load — and not the time to undo the successful budget caps and sequester.