A federal spending cap: the ingredient that might break the budget logjam

Charles Blahous Contributor
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The 12-member budget “super-committee” established by the recent debt ceiling legislation faces a tall order: to get seven of its members to agree to $1.5 trillion in deficit reduction over the next 10 years.

The recent history of bipartisan negotiations has much to tell us about which tactical approaches might maximize the committee’s chances of success. It also has much to teach us about the substantive compromises that might be reached. In particular, we should not anticipate a bipartisan accord on tax policy in the absence of a binding commitment to a hard cap on total federal spending as a percentage of GDP.

The two sides start with different assumptions: Republicans don’t want to raise taxes, whereas Democrats believe taxes need to be raised. But where recent White House-led budget discussions collapsed over the tax issue, all three Senate Republicans on the Simpson-Bowles commission supported a plan containing sweeping changes to tax law. Why were the results so different?

To understand the dynamic (and to simplify the issue) one can imagine the following conversation:

WH/D’s: To fix our fiscal problem, we need to raise taxes.

R’s: We disagree. The structural fiscal problem is essentially a spending problem.

WH/D’s: We recognize that spending, especially entitlement spending, is a problem. But we aren’t willing to cut it enough to avoid raising taxes. And if we agree to cut spending, you need to agree to raise taxes.

R’s: We don’t agree. Over the long term, both spending and taxes will be far higher than they’ve ever been before, even as it is. Raising taxes simply makes taxpayers pay for your unwillingness to deal with the real problem, the spending problem.

WH/D’s: What about tax deductions and credits? Would you agree this is just spending through the tax code?

R’s: To a degree, yes.

WH/D’s: Would you agree to a package that has some cuts to direct spending, combined with revenue increases consisting of closing tax expenditures?

R’s: No. That still just forces taxpayers to pay for your unwillingness to deal with the remaining spending problem.

WH/D’s (to public): R’s are unreasonable ideologues. They refuse to compromise.

If this is the way that the conversation takes place within the super-committee, then it’s unlikely to reach agreement.

The more fruitful conversation on the Simpson-Bowles commission could perhaps be summarized like this:

Co-chairs: If D’s put entitlement spending on the table, you R’s need to put taxes on the table.

R’s: We won’t raise taxes.

Co-chairs: What if we closed tax expenditures and used part of the savings to reduce marginal tax rates, and part to close the deficit?

R’s: That’s intriguing. But it still doesn’t solve our fundamental problem: we’re not interested in raising revenues so that Washington can continue spending an expanding share of the country’s economic output.

Co-chairs: Well, then, what if we committed to limiting federal spending to 21% of GDP over the long run — its historical average?

R’s: Now you’ve got our attention. Let’s talk.

The commitment of the co-chairs to limit federal spending as a percentage of GDP was the critical ingredient that enabled a discussion about tax revenues to take place on the fiscal commission. A successful bipartisan negotiation cannot be conducted simply by telling one side of the aisle that they need to put aside their most fundamental policy concern, which on the Republican side is the growth of federal spending and tax burdens.

Obviously, nothing is sacred about the historical level of 21% of GDP. Some on the left will argue that it should be higher, while some on the right will argue that it should be lower. But whether the number is 20%, 21% or 22% of GDP, it’s achieving a specific and stable limit that is essential to addressing conservatives’ concerns.

The critical element that made the Simpson-Bowles commission process successful was that the co-chairs listened to the concerns expressed by those on both sides of the aisle, and crafted a package to address them. The element that made the recent “grand bargain” negotiations unsuccessful by contrast was that no final package resolved those concerns, while public admonitions were administered to the effect that the concerns should simply be shelved. Which direction the super-committee process takes will have much to say about whether it succeeds.

(This is a condensed version of an article that was published in E21.)

Charles Blahous is a research fellow with the Hoover Institution and a senior research fellow at the Mercatus Center. He serves as one of the two public trustees for the Social Security and Medicare programs. He is also the author of Social Security: The Unfinished Work.