Published in The Tennessean, Sunday, May 1, 2011
by Richard J. Grant
The “CAP Act of 2011,” as championed by Sen. Bob Corker, R-Tenn., would place a cap on total federal government spending and gradually reduce the maximum level to 20 percent of GDP over 10 years. Placing a legislated cap on spending does not bind future congresses, but it would give them guidance and would provide a benchmark that future taxpayers could easily monitor.
The purpose of a cap is to create an upper limit. It is a ceiling, not a floor. It also leaves open the question of what will be the composition of the spending that does occur. We still need to make specific choices about specific spending programs and specific cuts. That is the purpose of the budget.
President Barack Obama has presented two budgets already this year, neither of which would comply with Corker's spending cap. Obama's first budget would actually have kept spending close to present levels and the second would not even bring spending down to 22 percent of GDP. Both budgets would require tax revenues to increase significantly above historic levels as a percentage of GDP.
The second Obama budget appeared to be a reaction to the budget presented by Rep. Paul Ryan, R-Wis., who chairs the House Budget Committee. The president was outflanked by the Ryan plan, which not only brings spending down to at least 2007 levels, but also offers entitlement reform and tax-rate reduction. Ryan would bring spending down to about 20 percent of GDP within five years. That makes the Ryan plan perfectly compatible with the Corker plan.
Ryan's plan has been attacked from two directions: from those who feel the cuts should come more quickly and from those who fear that it might adversely affect Medicare. The first group has a reasonable case from a straight economic perspective. This might best be illustrated by a bill proposed early in the new Congress by Sen. Rand Paul, R-Ky., that would have been called the “Cut Federal Spending Act of 2011.” A much more timid budget plan for 2011 has already been passed, but Sen. Paul would have cut $500 billion from the budget in the first year. That would reduce federal spending by about 15 percent and would reduce this year's deficit by a third.
In a clearly written 12-page bill, Sen. Paul suggests numerous significant and clean cuts that would be justifiable on economic and constitutional grounds. It does not touch Social Security or Medicare, but those could be reformed separately.
Attacks on Rep. Ryan's budget from the left insinuate that his plan would jeopardize Medicare. Ryan's plan would actually spend at least as much as that promised in the Affordable Care Act (better known as ObamaCare), but with greater choice and flexibility. Seniors would get a better and more secure deal.
In a growing economy, spending as a percentage of GDP can be reduced without necessarily cutting the dollar amount of spending. Long-term economic growth tends to be higher in those countries where government spending and taxation are kept lower. It is significant that the Ryan plan would also simplify the tax structure and reduce the top individual and corporate rates to 25 percent. This would increase the growth potential of our economy.
The determination to cap and reduce government spending as a share of the economy will ensure for us a larger and better-developed economy.
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: email@example.com
Copyright © Richard J Grant 2011