Sunday, April 24, 2011

Corker’s plan to cap federal spending is a step in the right direction

Published in The Tennessean, Sunday, April 24, 2011

by Richard J. Grant


Most of us know what Charles Dickens meant when he wrote, "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

As individuals, we are quick to see the consequences of spending beyond our incomes. But the lesson is not so obvious when the government does the spending for us.

Currently, the U.S. Government is spending about 25 percent of our Gross Domestic Product (GDP), which means that the federal government alone is spending a quarter of what we produce each year. But tax revenues won't keep up with this level of spending. Revenues have recently been below 15 percent of GDP and rarely reach 20 percent. The government is either unable or unwilling to do what is necessary to raise revenue to match its appetite for spending.

Countries with higher percentages of government spending also tend to have lower rates of long-term economic growth. This means that Americans’ private disposable incomes are not only a smaller proportion of GDP, they are smaller in absolute terms than they would have been. The only way to mitigate this effect without reducing government spending is to reduce government regulations and to strengthen and extend private property rights. But our government is getting this wrong too.

The excess of spending over revenue this year will require the U.S. Treasury to finance a budget deficit of around $1.6 trillion. The national debt will increase by more than 10 percent. And the Dickensian warning will get harder to ignore.

Higher tax rates do not necessarily result in higher tax revenues but are more likely to dampen economic growth. We have a spending problem and that is what we must learn to control.
There are two complementary ways to approach the control of excessive government spending. One is to impose specific cuts or limits on specific programs. The other is to institute clear rules that will limit the total size of the budget.

Sen. Bob Corker, with growing support from his congressional colleagues, has introduced a bill that would place an effective cap on federal spending. It is called the “Commitment to American Prosperity Act of 2011” and goes by the appropriate acronym, “CAP Act.”

The CAP Act’s goal is to reduce the ratio of government spending to GDP gradually over a 10-year period to 20.6 percent, its 40-year average. Beginning with the 2013 Budget, total spending would be capped at 25 percent of the average GDP over the previous three years. Each year thereafter, the nominal spending cap would be reduced by 0.1711 percentage points and applied to a moving average of the GDP over the previous three years.

There is always a danger that Congress will go wobbly again and exceed the spending caps. To counter this, the CAP Act requires the Office of Management and Budget (OMB) to sequester congressionally allocated funds that exceed the spending caps. OMB would then assign spending cuts evenly across all categories to be carried out by a Presidential order.

The spending cap would be applied to all government spending, including the off-budget, ostensibly freestanding programs such as Social Security and Medicare. This would force Congress not only to prioritize its spending but to pay more attention to the effects of its taxation and regulatory programs on economic growth and the tax base.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com


Copyright © Richard J Grant 2011