America's Fiscal Constitution (62 page)

Federal leaders have always had a long list of spending items or tax cuts they would support only if they could be funded with available tax revenue. The nation’s Founding Fathers deferred many of their own cherished
plans until the nation paid off its debts. Many Americans now respect President Truman for his foresight in calling for a program of hospital insurance for older Americans and armed forces capable of backing American international leadership. But Truman never endorsed debt-financed peacetime military spending or health insurance.

With policy guidance from elected officials, congressional staff should be able to provide estimates of the amount of tax revenues available to pay for various spending bills. Budget professionals for state legislatures, county governments, and city councils all routinely certify the amount of tax revenues available for each appropriation.

The combination of a “pay as you go” federal funds budget and specific authorizations of debt would allow the federal government to send each taxpayer an itemized receipt showing the pro-rata uses of tax dollars and debt incurred on behalf of the taxpayer. Consumers receive itemized receipts from even small retailers, and credit card companies manage to send reports showing spending, unpaid balances, and interest charges. The federal government should be accountable in the same manner.

Reform 4: Tax Financing of Medicare

Wilbur Mills created a tax-financed trust fund for hospitalization and a trust fund for outpatient services financed partially using premiums charged to beneficiaries and partially by federal funds revenues. Though President Johnson assured Mills that there was enough room in the budget to pay for half of the outpatient services in Medicare Part B, the use of federal funds to finance a portion of Medicare did depart from the traditional practice of paying for social insurance entirely with dedicated revenues. The plan to use federal funds revenue to cover a portion of Medicare Part B might have worked—for at least a decade—if not for the cost of the Vietnam War. Other federal obligations and rising medical costs forced Congress to support Medicare Part B with higher taxes, cuts in other programs, and—eventually—debt.

In 1997 President Clinton and Congress addressed this issue with legislation that limited the rate of growth in Medicare Part B reimbursements to the rate of growth in national income. After the collapse of the American Fiscal Tradition, however, Congress cut federal funds revenues, suspended the reimbursement ceilings, and added a prescription drug benefit—Medicare Part D—financed primarily with debt.

In 1983 Congress followed the customary practice for financing social insurance when it brought the Social Security trust fund into actuarial balance well in advance of the retirement of Baby Boomers. The failure to do the same thing for Medicare may be water under the bridge, but it is not too late to place Medicare on a “pay as you go” basis before the tidal wave of Baby Boom retirements arrives in full force. It will be difficult, if not impossible, to balance the federal funds budget after 2010 without sufficient tax revenues to cover the federal funds portion of Medicare Parts B and D.

Traditional budget practices would require Congress to dedicate sufficient tax revenues to fully support the obligations of the Medicare trust funds. Citizens have a variety of views concerning the appropriate level and costs of services provided by Medicare. No one, however, can justify adding a layer of compound interest to the already high cost of medical services.

“Pay as you go” Medicare will make clear to the public precisely how the popular program is financed. Many citizens mistakenly believe that they have fully paid for Medicare with their payroll tax contributions and annual premiums. The very idea of “medical insurance” funded with loans incurred on behalf of taxpayers borders on fraud. What would you call it if an insurer paid a medical bill and then reimbursed itself with a loan to be paid by the families of all patients?

Reform 5: A National Bond Election

Polls show that most voters strongly prefer a budget that balances without higher taxes
or
cuts in the largest categories of spending, such as Medicare. These polling results do not mean that the public is altogether unwilling to choose between practical alternatives. A reasonable consumer might express a preference for a Mercedes and then buy a Chevy if that is all he or she can afford. Americans need to be told just what medical services are available at various levels of premiums and taxation. Many federal officials are well aware of the trade-offs, though they fear that they will experience the fate of the proverbial messenger if they bring bad news to voters.

It is difficult to solve an ill-defined problem. Voters find it hard to grasp the purpose of federal borrowing after years of confusing and conflicting explanations. Members of Congress feel they cannot raise taxes or cut programs that drive federal spending if their opponents in the next election
can so easily mischaracterize the available alternatives. The challenge, then, is how to best enlist public participation in decisions on budget trade-offs.

That type of participation occurs thousands of times every year, when cities, counties, school districts, and states seek voter authorization to incur debt supported by general tax revenues. Voters are told the amount of requested debt and how it is to be used. Public officials tell rating agencies and voters whether tax rates would need to be raised to service the debt. State and local officials prepare budgets in light of the need to preserve future revenues available for the coverage of debt service. Bond elections are as routine as Fourth of July parades.

Nothing prevents Congress from holding a national referendum on whether to incur federal debt for specific purposes and amounts. Such a national referendum would allow conservative advocates of smaller government to make the case for bringing expenditures in line with the level of tax revenues. Progressive leaders could then make the case for taxes required to finance needed services. If enough members of Congress push for a national bond election, those who resist will have to explain why voters should be blocked from being heard on such a critical decision.

Since 1970 state and local debt has increased at half the rate of federal debt.
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The requirement of bond elections has helped enforce that discipline.

T
HE
P
RACTICALITY OF
B
UDGET
R
EFORMS

The foregoing five budget reforms will help overcome political obstacles to balancing the budget. The time is right for this type of change. Contrary to the views of cynics, most citizens elected to the presidency and Congress do care about their nation’s future and financial independence. Congress has been willing to impose fiscal limits on itself.

The first four budget reforms are modeled after practices that worked for generations. Budget experts were expected to provide realistic revenue estimates, and then officials in Congress or the executive branch whittled down their wish lists to the amount of those revenues. Trust fund spending was confined to the amounts of dedicated revenues and Congress-approved specific authorizations of debt. These basic budget practices remained intact even while partisan control of the White House and Congress shifted back and forth.

New political dynamics should now empower budget reformers. By 2013 both traditional conservatives and progressives in Congress were
dealing with the consequences of the post-2000 borrowing binge. Many conservatives now recognize that debt-financed government failed to restrain the overall size of government or—by 2013—the tax rates applied to the highest incomes. And the very idea of borrowing for routine expenses goes against the grain of business managers who have been a core Republican constituency for over a century. Progressives in Congress recognize that even with high tax rates on the wealthiest Americans, all domestic programs will be cannibalized by interest on debt, basic national defense, and medical expenses.

The timing is right for “pay as you go” Medicare reforms. Virtually all Republican and Democratic members of Congress have pledged to support Medicare while exploring ways to constrain the growth in its cost. Democrats have been frustrated by Republican efforts to reduce federal funds revenues without paying the political price that would accompany the corresponding level of Medicare cuts. Republicans have been unable to overcome the resistance to limitations on average spending per beneficiary. Attempts to make Medicare more sustainable have been thwarted by the illusion that the debt-financed portion of Medicare is free. Republicans and Democrats should be able to agree on the principle of “pay as you go” Medicare and still have plenty of opportunity to rally their constituencies behind plans with varying levels of cost.

Long-term “deficit reduction plans” that push hard choices into the distant future are no substitute for plans to balance the budget within several years. The principle of living within one’s means is well understood. Few urgent problems are best solved slowly over decades. Federal officials succeeded in balancing budgets when they explained to the public the need to protect future opportunities and preserve national independence. Elected officials who continue to borrow undermine the credibility of that message. An elected official who warns of the danger of debt while proposing a plan to borrow trillions of dollars more is like a television evangelist who preaches personal virtue but leads a tawdry private life.

Budget plans that call for sacrifices in ten years, but not now, also run a serious economic risk. The race against compound interest, which accelerates over time, must be won as a sprint rather than a marathon. The longer the nation borrows to pay for routine spending, the more likely that an emergency—war or recession—will disrupt any deficit reduction plan that is stretched out over decades. As compound interest accelerates—or “snowballs,” to use George Washington’s metaphor—it has a greater
impact when it hits the wall imposed by the willingness of creditors to lend.

A tax-financed budget is likely to spur more effective management of formula-based spending, described in budget jargon as “nondiscretionary spending,” “mandatory spending,” and “entitlements.” Each of those terms has a distinct legal definition, but they generally refer to spending that is driven by formula, budgeted as an estimate, and made in the form of a payment to a beneficiary or service provider.

Budget reforms enacted in the last several decades have focused on limits to spending outside of formulas—“discretionary spending.” Those reforms include the Gramm-Rudman-Hollings Act of 1985 (sequestration after debt limits), the Budget Enforcement Act of 1990 (caps on annual appropriations), and the Budget Control Act of 2011 (sequestration above spending caps). The distinction between federal funds discretionary spending and nondiscretionary spending should not automatically determine what should be funded with tax revenues rather than debt. Consider, for example, the trade-off between a new benefit for veterans (nondiscretionary) and an adjustment in the compensation of active-duty soldiers (discretionary). The decision on how to allocate tax revenues between those two alternatives should not depend primarily on their classification as discretionary or nondiscretionary.

Competent federal managers should be able to avoid running out of money near the end of a year and leaving the beneficiaries and service providers of a formula-based program in the lurch. Well-managed corporations—including insurers—track actual-to-budget variances and manage cash reserves available to pay costs that are difficult to predict in advance. If the federal government cannot rely on management practices required to function within an annual spending ceiling, how can it expect to manage costs over multiple years?

C
ONSTITUTIONAL
A
MENDMENT

Madison was right: it makes more sense to limit debt with broad principles enforced by voters than with specific constitutional language enforced by courts. Yet, over several decades, many states have passed some form of resolution endorsing a constitutional requirement for balanced budgets. Such an amendment in 1995 fell one Senate vote short of the required two-thirds vote of the House and Senate. A lively debate has occurred in
recent years concerning the relative desirability of a “clean” amendment limiting the use of debt and a version that would restrict the use of tax increases to accomplish that purpose.
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A balanced budget constitutional amendment would still necessitate reforms in congressional budget procedures. For example, the constitutional amendment that almost passed in 1995 stated that “Congress shall enforce and implement this article by appropriate legislation, which may rely on estimates of outlays and receipts.”
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Proposed balanced budget amendments have difficulty specifying how best to retain the traditional ability to borrow during economic downturns. Few mainstream political leaders believe that the federal government should take actions such as raising taxes, laying off military personnel, or reducing the social safety net whenever federal revenues drop during recessions. For this reason, the constitutional amendment that almost passed Congress in 1995 allowed debt to be authorized by a vote of at least 60 percent of the House and the Senate. The requirement of a super-majority is intended to give the federal government flexibility during economic emergencies. However, history shows that the requirement for a 60 percent vote gives a minority the ability to use that bargaining power to actually increase spending or lower taxes in a manner that requires more debt.

For example, in budget negotiations during the 1980s President Reagan and Congress obtained a bipartisan majority by trading higher defense spending in exchange for higher domestic spending. The pivotal budget bills passed in 1990 and 1993 would have resulted in greater debt if they had been stripped of additional revenues in order to obtain a 60 percent vote. Even with rising concern about the level of debt in recent years, congressional leaders could find it harder to enact any combination of lower spending and higher tax revenues if their efforts could be blocked by 40 percent of the members of the House or Senate.