Balancing a Budget is Easy: Cheat
I’m sympathetic–even enthusiastic–about the idea of limiting federal government spending to 18 percent of GDP as many in the GOP say they want to do. Although simply cutting “waste” won’t do it, some common sense reforms in entitlement programs combined with selected defense drawdowns could probably bring the budget to around that level. Over the next decade or so, it’s a good goal for reform-minded conservatives to support. That said, the “Cut, Cap, and Balance” proposal now moving before the House–which would cut spending to 18 percent of GDP ($110 billion in total cuts right away) is an awful idea particularly when coupled with a balanced budget amendment. And it isn’t just the economic costs of rapid spending cuts (which I’m not sure would be as bad as some predict.) Instead, it’s the way Congress would behave: If the experience in the states is any guide, a need for sudden, rapid cuts in the budget will lead to Congress simply “cheating” its way out of the hole with “off budget expenditures” and “independent authorities.”
As state legislatures and governors (49 of whom operate under balanced budget requirements) know, getting a“balanced” budget is easy if you can cheat. While there are a variety of ways of doing it, most states do it by creating “independent authorities.” Want to take on lots of debt to build a new road or help a politically connected developer build a new shopping mall? Easy. Just charter a “toll road authority” or “improvement district” and let it issue bonds that the state claims it won’t be responsible for but investors know believe carrya state guarantee nonetheless. You’ve accomplished whatever it is you wanted to and, because the debt belongs to the “authority’ or “district” the states budget looks nice, clean and balanced. Authorities like these–created under the leadership of master builder Robert Moses and liberal Republican governor Nelson Rockefeller–sent New York State and New York City for a huge economic tailspin in the 1970s but proved so alluring that modern New York politicians continue to use them with abandon.
The federal government does the same thing itself although not on quite the scale relative to its budget that some states do. Fannie Mae and Freddie Mac were “privatized” in the 1960s largely because they were costing so much to run as government agencies. The National Flood Insurance Program, Amtrak, and the United States Postal Service (the first two of which have lost money every year of their existence) are mostly “off budget” and independent but nonetheless have huge liabilities that taxpayers will have to reckon with at some point in the future.
Given the need to make very tough choices right away–which the plan would force–everyone in Congress will have enormous incentives to cheat. Want to “solve” Medicare? Just create a “private” “Medicare Authority” and say that Congress doesn’t owe the money it borrows. Problem solved. (Until the “authority” goes bust and needs a bailout that dwarfs the $130 billion poured into Fannie and Freddie.) Same for Social Security. Indeed, any government program with a revenue stream can probably be spun off into a supposedly “private” entity that, if Fannie and Freddie are any guide, will combine the lack of public accountability and excess of private sector firms with the inefficiency and corruption of the public sector.
Getting federal spending down to 18 percent of GDP is a good goal. But trying to achieve it right away is likely to cause more problems than it solves.
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