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There will be no end to fiscal chaos without better budget rules

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20.03.2019

The basic fact is that we have no long-run budget policy — no policy for the size of deficits and for the rate of growth of the public debt over a period of years. Annually we make decisions about the size of the deficit that are entirely inconsistent with our professed long-run goals, with the explanation and hope that something will happen or be done before the long-run arises, but not yet.

Herbert Stein, AEI Economist, Dec. 1984

The 35-day government shutdown that kicked-off 2019 is only the latest indicator of the fiscal chaos that reigns in Washington. The chaos is reflected both in the failure of Congress to follow the procedural rules it has set for itself, and in a failure to provide a degree of fiscal stimulus or restraint that is appropriate to the state of the business cycle. Without better fiscal policy rules, the chaos will continue.

Congress does have rules to guide fiscal policy. The 1974 Budget Act specified a set of procedural rules that Congress is supposed to follow each year in passing a budget. However, Congress has passed the full set of appropriations bills on schedule only three times in the past 40 years.

Even more problematic is the failure to align annual tax and spending decisions, whether made on time or not, with long-run goals of stability and economic growth. Attempts to address that problem have proved inadequate.

Consider the debt ceiling, first enacted more than 100 years ago. Even if we could accurately determine the point beyond which debt becomes excessive, the ceiling in its current form is unworkable. Since it is set in nominal terms, with no allowance for inflation or growth of the economy, Congress must vote periodically to raise it. That creates opportunities for various factions to disrupt the budgeting process with brinkmanship over extraneous issues, even though everyone knows that the consequence of not raising the ceiling — default on the debt — would be so dire as to make the whole process a charade.

A more recent type of rule, known as pay-as-you-go, or PAYGO, has fared little better. PAYGO has taken several forms since it was first established in 1990, but the underlying idea is to require that tax cuts or new spending be offset by tax increases or spending cuts elsewhere in the budget. In case the necessary offsets are not made, sequestration — mandatory cuts to already authorized programs — can be invoked to prevent an increase in the deficit. In practice, however, Congress can, and does, waive PAYGO rules whenever it wants to. For example, it used a waiver to allow the 2017 tax cut to go into effect despite the resulting increase in the deficit.

If procedural rules are not enough, what would work better? The........

© Salon