Theres an old joke about a chemist, a physicist and an economist stuck on a desert island. The castaways possess plenty of canned food, but no tools. The scientists set about an elaborate scheme to build a fire and explode the cans open. But the economist proposes a more elegant solution -- “First,” he says, “assume a can opener.”
Last week, Republican Representatives Mike Pence and Jeb Hensarling introduced a proposal that is the budgetary equivalent to that economists approach. With federal spending projected reach 24% of GDP by the end of this decade (or 23% if health reform dies) and continue rising thereafter, they have proposed a Spending Limit Amendment, which would cap federal spending at 20% of GDP.
However, they have not advanced a specific plan to shrink the government, or to reform the entitlement programs that drive governments growth as a share of the economy. Essentially, Pence and Hensarling are saying “assume federal spending at 20% of GDP,” which is not much more useful than assuming a can opener.
First, lets say what the Spending Limit Amendment is not: a politically viable proposal to change the Constitution. Constitutional amendments to limit state spending have been a popular cause for conservative activists, and have had some success in restraining growth of government, especially in Colorado. But this approach isnt possible at the federal level.
The high bar to ratification -- a 2/3 vote in both chambers of Congress followed by ratification in 38 state legislatures -- means that only proposals with broad bipartisan support can enter the U.S. Constitution. As a result, no constitutional amendment has significantly altered the way Washington does business since the end of Prohibition in 1933. Democrats will surely oppose this proposal, which means it will not get through Congress, let alone 38 legislatures.
Presumably, Reps. Pence and Hensarling can do this same math and know their amendment will not end up in the Constitution. I can only assume that their purpose in advancing it is to draw attention to the need for spending restraint in Washington -- to state a goal of shrinking spending below 20% of GDP.
Thats fair enough, as we do need spending restraint in Washington. But without the Amendment actually becoming law, spending restraint can only happen if legislative leaders make actual proposals to spend less money on specific things.
But last week, when Newsweeks Daniel Gross sought such proposals from Pence and Hensarling, he didnt get far. “Thats not what the Spending Limit Amendment is about,” said House Republican Conference spokeswoman Mary Vought. “Talking about savings in the budget before we have even decided how much the savings need to be is putting the cart before the horse.”
This is an odd response. “What should the government do?” and “how large should the government be?” are closely linked questions. If Mike Pence and Jeb Hensarling cant say what the federal government should stop doing, how do they know that 20% of GDP is the right level of federal spending?
This question is important, because cutting the government to 20% of GDP is not simple or easy. While federal spending fell below 20% of GDP for several years in the late Clinton and early Bush II administrations, this temporary dip was due to a confluence of factors that are hard to replicate. We cannot return spending to those levels simply by adopting a posture of spending restraint like in the ‘90s. Here are three reasons why:
1) After the Cold War, defense spending nosedived, falling from typical levels around 6% of GDP to a trough of 3% in 2000, when total federal spending bottomed out at 18.2% of GDP. But the ramp-up of the Global War on Terror pushed these figures back up to nearly 5%. We currently spend more than 1% of GDP on operations in Iraq and Afghanistan alone.
2) The 1990s were also a period of extremely robust GDP growth, allowing government spending to grow significantly in real terms while shrinking as a share of the economy. Unfortunately, GDP performance like was seen over those several years is likely not sustainable over the long term -- especially because some of the gains were illusory profits of dot-com startups.
3) Since 2000, health care entitlement spending has exploded and continues to explode. Medicare spending ballooned from $194 billion in 2000 to an estimated $451 billion in 2010. Partly that is due to the new Medicare drug benefit, but most of the increase relates to high medical inflation and the aging population. By 2035, health care entitlement spending will reach 10% of GDP, up from 5.2% today and 3.2% in 2000.
For these reasons, cutting the federal government back to 20% of GDP takes more effort than just saying “lets be restrained like Clinton and Gingrich were.” It requires affirmative steps to reverse and contain the growth in mandatory government programs and military spending that drive us farther and farther from 1990s spending levels.
A Republican who does have a specific plan to constrain entitlements -- Rep. Paul Ryan -- demonstrates the difficulty of the task. His Roadmap plan sets a more ambitious target, cutting government spending at 19% of GDP through fundamental reforms in Social Security and Medicare. To get there, he imposes significant benefit cuts and rises in the retirement age for people currently under 55.
However, even Ryans Roadmap would grow government spending as a share of the economy all the way through the mid-2030s, peaking over 24% of GDP. The Roadmap eventually cuts spending enough to comply with the Spending Limit Amendment -- by 2058, just in time for Mike Pences 99th birthday.
Asked at CPAC about the Ryan plan, Pence said that he would take different approaches in certain areas, but did not elaborate a plan of his own. If he has a plan to bring government spending in line with his constitutional amendment proposal sooner than 48 years from now, he has not made it public.
In the past, Pence has been an advocate of cost-saving entitlement reforms and he opposed the Medicare prescription drug benefit. But recently, as the federal budget crisis has intensified, he has gotten less specific about how to shrink the government. His Republican colleagues are even worse, attacking Democrats for proposing to cut Medicare and, in the case of RNC Chairman Michael Steele, actually issuing a Seniors Bill of Rights in opposition to Medicare cuts.
Given the current mix of federal spending, its impossible to shrink government to 20% of GDP without touching popular programs like defense and Medicare. So, its not surprising that Republicans prefer not to talk in detail about what it would mean to cut spending. But vague calls for less government spending -- and constitutional amendments with no chance of enactment fall in the “vague call” category -- dont do anything to shrink government.
Mike Pence, as a leader among fiscally conservative Republicans in the House, ought to be promoting a long-term spending plan that amounts to more than “assume federal spending restraint.” He should talk specifics.
Original Source: http://www.realclearmarkets.com/articles/2010/03/09/rep_mike_pence_assumes_a_can_opener_98376.html