Restoring Fiscal Freedom: Another Shot at Greatness

The following is an excerpt from Eugene Steuerle's book, Dead Men Ruling: How to Restore Fiscal Freedom and Rescue our Future.

To apply the three principles of a "grand compromise,"

policymakers would have to change fundamentally the practice of federal budget making in very specific ways. Here are several possible changes that would bring our three principles to life:

• Require the president and Congress periodically to enact extensions of entitlement programs and tax subsidies rather than continue them forever through inaction.
• Restrict at least the permanent growth of each entitlement program in the absence of new legislation, even if the program itself remains permanent.
• Strengthen the president's or agencies' powers to keep programs within annual budgets, which Congress would set in total each year. 
• Require budget offices to present budget choices in ways through which citizens can better understand what is growing or shrinking, whether automatically or by discretion.
• Require presidents to propose, and Congresses to enact, budgets that reach balance at least over a business cycle, with consequences if they do not (for instance, requiring the Congressional Budget Office to return automatically a president's budget submission if he or she did not comply with this provision--which admittedly would only embarrass that president, but still could have some effect).
• Prohibit policymakers from meeting annual or even ten-year budget targets by shifting program costs into the future, making today's deficit-boosting actions look smaller than they are.
• Adopt a budget process whereby Congress would focus more on longer-term fiscal trends, rather than annual budgets--for instance, by first passing a long-term budget before it enacted annual appropriations bills.
• Restore the "pay-as-you-go" rules of the 1990s by which policymakers would have to fully offset the costs of new tax cuts and entitlement expansions for as long as we face limited fiscal freedom or significant projected deficits.

Policymakers must craft each of these types of reforms skillfully. Consider triggers as one mechanism to restrict growth. In recent years, former Congressional Budget Office director Rudolph Penner and I proposed a series of triggers to help control the budget. For Social Security, for instance, we suggested that when the program's actuaries declare for several straight years that the system is out of balance, a trigger could gradually raise the "retirement age" (the age at which retirees can get full benefits) and slow the annual growth in benefits for higher-income recipients.

Congress did enact "triggers" to limit or cut spending, but they were quite cumbersome in design. In 2011, it required annual, across-the-board cuts--half in defense, half in domestic discretionary programs--that were known as the "sequester." Cumulated over the following decade, it would reduce federal spending by $1.2 trillion. This slashing approach, which began to be implemented in 2013, affected only a part of the budget: discretionary spending. Thereby, Congress sidestepped the three big areas of health, retirement, and taxes. Moreover, policymakers never intended these across-the-board cuts ever take effect but, instead, they intended to force other budgetary reform before we reached that point. But Congress could not agree on any alternative, so the provision went into effect, and only modest later efforts at the end of 2013 limited its bluntness.

To be sure, triggers are no cure-all. They cannot substitute for more comprehensive and detailed spending and tax reforms that, over time, will bring budgets close to balance and restore fiscal freedom. Limiting automatic growth in each key program in a reasonable fashion, while choosing where future growth would go, would far more efficiently and equitably attain long-term goals.

Fiscal turning points necessitate changes in how policymakers do their business, but those changes must serve the larger goals of fiscal freedom and effective governing. In the Revolutionary Era, Hamilton did not merely want to pay off state debts. He sought to lay the foundation of a strong central government that would serve an emerging nation. For the Progressive Era, policymakers did not merely want to replace a regressive tariff with a more progressive income tax. They sought to create the institutions that would support America's arrival on the world stage, adjust to the economic problems of the new industrial order, and give government countervailing power against concentrations of power and wealth.

For the fiscal turning point of today, we must restore fiscal freedom so that we can respond to our own challenges, whether a new international economic order or demographic shifts of a nature and size that are different from anything that we have experienced. Promoting policies for children, investment, and opportunity are among the most viable forward-looking responses to those challenges. Restoring fiscal freedom must make room for these reforms if we are to restore the fundamental, can-do optimism of the American people and unleash their creativity.

Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute. You can follow him on Twitter here.

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