Mr. Chairman, thank you for the opportunity to offer my views onthe imperative of budget process reform in the 104th Congress. Itis my conclusion that the process by which we make budget decisionsin Washington – the rules of the game – can substantially determinebudget outcomes. The rules matter. A fundamental imbalance existsin the current rules. For more than twenty years, forces that favorspending have consistently prevailed over forces that favor fiscalrestraint.
Earlier this year I authored a booklet entitled: “Government:America’s Number 1 Growth Industry.” Regrettably, that is exactlywhat the federal enterprise has become – our fastest growingindustry. I attach for the record a chapter of that book on theloss of control of federal spending.
How do we put an end to the pro‐spending bias in our budgetrules? A top priority for this Congress should be the enactment ofa new budget act. The 1974 Budget Reform and Impoundment ControlAct is a failure. One of the purposes of the 1974 Budget Act was toeliminate deficit spending. But here is the actual legacy of thatlegislation: in the twenty years prior to the Budget Act, thebudget deficit averaged just 1 percent of GDP and $30 billion in1994 dollars. In the twenty years since the enactment of the 1974Act, the average budget deficit has been $170 billion per year, and3.5 percent of GDP. We have accumulated more than $4 trillion ofdebt since 1976. By any objective standard, the budget process hasnot 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 moredamage to our national economy.
What should be the key components of a new budget act?
The centerpiece of any budget reform quite clearly is anamendment to the Constitution outlawing deficit spending. Mosteveryone on this Committee is keenly aware of the need for abalanced budget requirement, so I will not long dwell on thesubject. Deficit spending is an unconscionable form of fiscal childabuse.
There are hundreds of groups in Washington that pretend to speakfor the interests of children. But who in Washington, among thethousands of powerful special interest lobbyists andself‐proclaimed do‐gooders, speaks for the children who are goingto have to pay off our irresponsible debts today? The single mostpro‐child policy that any of us can pursue in Washington today isto reduce the crushing burden of debt our government is nowpreparing to place on the next generation’s backs.
I sincerely wish that we did not need a constitutional amendmentto solve Washington’s addiction to red ink. Unfortunately, thedestruction of our nation’s once firmly held moral rule againstdeficit spending requires us to amend out Constitution and commandCongress 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 thata constitutional requirement is just “a gimmick.” No one reallybelieves this. If the amendment were a gimmick, Congress would haveapproved it long ago. The reason that defense contractors,corporate lobbyists, federal workers, teachers unions, the welfareindustry and other powerful special interests groups ferociouslyattacked the BBA is not because they think it won’t work, butbecause they shudder at the thought that it will. What frightensthe predator economy in Washington is that gift‐ bearingpoliticians may have the federal credit card taken away fromthem.
The U.S. House of Representatives earlier this year wiselyapproved the BBA. The matter now lies outside of your hands. Thereal issue is: What can be done in the meantime to make the budgetprocess work better and to end deficit spending?
The House has passed a courageous budget resolution crafted byBudget Committee Chairman John Kasich which promises a balancedbudget by 2002. But one thing is a virtual certainty: no matter howsincere your intentions of balancing the budget, the deficit willnot be eliminated by 2002 unless new budget enforcement rules areimplemented to ensure that this admirable goal is honored.
Here are the components of a new budget act that I would urge inorder of priority:
- An Enforceable Legislative Balanced Budget Requirement
Don’t wait for a balanced budget amendment. Act now. The mosturgent reform for this Congress is to pass a legislative balancedbudget law that enforces the deficit targets established in theHouse Budget Resolution.
What I have in mind is a new Gramm‐Rudman formula thatestablishes iron‐clad enforceable deficit targets. One of the greatmyths in Washington is that Gramm‐Rudman was repealed because itwasn’t working. Gramm‐Rudman was repealed by the pro‐ spendingconstituencies in Congress precisely because it was working toowell.
Gramm Rudman was enacted in 1985, when Congress was underintense public pressure to immediately reform the budget and reducethe $200 billion budget deficit. The controversial law requiredCongress to balance the budget by 1991 by meeting a series ofannual 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 becauseCongress continually veered off the GRH balanced budget track. Itis true that Congress routinely missed the deficit targets. Actualdeficits under GRH were on average about $30 billion per year abovemaximum deficit targets.
Still, Gramm Rudman had a positive effect on the federal budget.The best way to measure this impact is to compare the actualdeficits recorded under the five years of GRH with what the deficitwas projected to be by the Congressional Budget Office (CBO)without the law. The 1989 deficit was about $100 billion lower thanit was expected to be in 1985 without Gramm Rudman. In fact, theGramm‐Rudman era, 1986 – 1989, was the only period of genuine deficitreduction in nearly twenty years. The deficit fell from 6 to 3percent of GDP over this period.
The most dramatic effect of Gramm‐Rudman was to curb governmentexpenditures. Government spending in the five years prior to GRHgrew at a rate of 8.7 percent, but slowed to only 3.2 percent inthe five years it was in effect. Even entitlement spending wascurtailed under GRH to a 5 percent growth rate, because Congressrealized that if they allowed programs like Medicare and Medicaidto rise uncontrollably, they would eat up the rest of the budgetand cause painful automatic cuts in discretionary spending.
Senator Gramm and Majority Leader Dick Armey have introducedlegislation to restore many of the features of the old Gramm‐Rudman. The most vital reform is a series of deficit reductiontargets, that if missed invoke automatic across the board spendingcuts– a sequester. I would urge that any new sequester processinclude all federal outlays except interest payments and SocialSecurity benefits.
This will impose a much‐needed dose of discipline into thebudget process.
- A Supermajority Requirement to Raise Taxes
Americans have been hit with twelve tax hikes in the past twentyyears: each one has succeeded in further expanding the size ofgovernment, rather than reducing the debt. Requiring a three‐fifthsor two‐thirds majority in both the House and Senate to pass a taxincrease would allow Congress to pass tax hikes in cases ofnational emergency, but would make it very difficult for Uncle Samto 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 intheir tracks. As one Arizona taxpayer advocate of the supermajorityrequirement recently told me: “Now the legislature doesn’t evenbother to propose new taxes.”
The Contract with America established new rules requiring a 60percent vote to raise income taxes. This was a good start. But nowthis hurdle should be made to apply to all revenue raisingbills.
- National Referendum on all tax increases.
Another populist budget reform that is sweeping through thestates is the requirement that any tax increase must be ratified bya popular vote of the people in the next election. This gives thetaxpayers veto power over the state legislature’s efforts to raisetaxes. Congress should be forced to take its case to the people,when it wants to take more dollars out of our paychecks. It is avirtual certainty that George Bush and Bill Clinton’s wildlyunpopular record tax increases would have been blocked if this rulehad been in effect.
Minority leader Dick Gephardt deserves hearty congratulationsfor 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 $100billion of less revenue than the Joint Tax Committee estimated whenthe law was enacted. Capital gains realizations are less than halfthe level expected. Why these gigantic forecasting errors? Congressstill uses static analysis to score tax rate changes – a scoringtechnique that assumes little change in behavior to tax changes andalmost no overall economic impact of new tax laws. The assumptionshave been shown time and again to be wrong. We know the proceduresare wrong. But we still use them.
This has negative policy consequences. The capital gains tax cutin the Contract with America will almost certainly raise revenuesfor the government – and the cap gains cut may raise substantial newrevenues. The rich will pay more taxes with the rate cut. But theJoint Tax Committee refuses to score these dynamic effects. Rep.David Dreier has introduced legislation calling for a zero capitalgains tax – something the Cato Institute has long endorsed. But thestatic revenue estimators say this will reduce revenues by $150billion over five years. Dynamic estimates indicate that a zerocapital gains tax will so energize our economy that total taxrevenues may actually increase if the capital gains tax iseliminated. 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 powerto cut out the waste that Congress won’t. A recent Cato Institutesurvey of current and former governors finds that more than 80percent believe the President should be given this authority. Oneof most negative consequences of the 1974 Budget Act was to stripthe President of his legitimate impoundment powers – a power thathad been exercised by every President from Thomas Jefferson toRichard Nixon. Line item veto would be a partial restoration of thepresidency’s legitimate powers over the purse strings.
- An end to baseline budgeting.
When the School Lunch Program is going to increase by 4.5percent per year, that is a budget increase, not a budget “cut.“Baseline budgeting is a fraud. Lee Iaccoca once stated that ifbusiness used baseline budgeting the way Congress does, “they’dthrow us in jail.”
It’s time to end the false and misleading advertizing in thebudget. Congress should be required to use this year’s actualspending total as the baseline for the next year’s budget. If wespend more than the current year, we are increasing the budget, ifwe spend less, we are cutting it.
- A statute of limitation on all spending programs It has beensaid that the closest thing to immortality on this earth is afederal government program. Congress doesn’t know how to endprograms – even years and years after their mission has beenaccomplished. (Hopefully, this Congress will prove this statementwrong!) A five‐year sunset provision should apply to every spendingprogram in the budget – entitlements and discretionary programs.This would require the true “reinvention” of programs by forcingthe re‐examination of every program including entitlements, everyfive years.
- Debt‐buy down provision
This is Rep.Bob Walker’s idea of empowering taxpayers todedicate up to 10 percent of their income tax payments toretirement of the national debt. Politicians earmark spending allthe time. Taxpayers should have that same right.
THE BUDGET STAMPS SOLUTION
Most of the above ideas are standard – though long overdue budgetreforms. I would also like to suggest one other less conventionalbudget process change. In fact, this is much more radical thananything tried to date to conquer the budget deficit. I borrow theconcept from former Reagan administration economist JohnRutledge.
If the balanced‐budget amendment remains stalled, why notcontrol the cash flow directly? Under the Rutledge plan, thegovernment would issue a special blue currency called “budgetstamps” that would be issued to all recipients of federalspending – much in the way that food stamps are issued to the poor.The recipients would redeem these blue dollars for greenbacks atthe local bank or post office. Here’s the catch: if the federalgovernment balanced the budget, a budget stamp would be worth onedollar. But if Congress spent twice as much as it collected intaxes, a budget stamp would be redeemable for just 50 cents.
This year the federal government would issue 1.6 trilliondollars of budget stamps. Those budget stamps would have a totalworth of $1.4 trillion – the amount of money collected in taxes.Hence, each blue budget buck would be worth roughly 87 cents. Eachday the federal Treasury would report to banks and Post Offices howmuch budget stamps are worth, depending on how many stamps had beenissued and how much revenue had been collected. In this way, totalcash outlays would exactly match tax revenue inflow.
Budget stamps would force the constituents of federal largesseto compete against each other at the budget table. Each dollarallocated to farmers would be one dollar less for welfarerecipients, social security beneficiaries, defense contractors,bilingual education teachers, subsidized artists, and so forth.
Deficits would be impossible, since the government under the newbudget process would be incapable of spending more than it took in.And finally, because Congress’s salaries (and staff’s) would bepaid in budget stamps, Newt Gingrich, Dick Gephardt, Bob Dole andevery member of this Committee would have a strong financialself‐interest in limiting spending.
I am convinced that Rutledge is on to something. The budgetstamp idea is one that the recipients of government largesse willhate, but taxpayers will love. Fortunately, there are still a fewmore of the latter than the former.