Princeton, N.J.
PRESIDENT OBAMA has been criticized as too slow to engage in major debates and too timid to make difficult decisions.
Some have argued that his budget speech last week fit that narrative. He waited to deliver his speech until five months after his own fiscal commission proposed steep cuts to spending and tax deductions to bring the deficit under control, and a week after Representative Paul D. Ryan, the Wisconsin Republican who leads the House Budget Committee, proposed to replace Medicare with a voucher-like program for those now under age 55.
In one important respect, however, Mr. Obama’s deficit speech disproves the caricature, and contains a bold, serious and timely proposal.
I’m not talking about the president’s plan to curb the growth rate of Medicare expenditures beyond what is already included in health care reform, or his renewed pledge to allow the Bush tax cuts on top income earners to expire — both of which will be difficult to achieve. (An earlier version of the Medicare proposal was projected by the Congressional Budget Office to produce only modest savings, and we all know what happened the last time the top tax rates were held hostage to middle-class tax cuts.)
What I have in mind is his endorsement of a trigger that would automatically kick in to reduce spending and tax expenditures if Congress and the administration fail to bring the debt under control.
Mr. Obama described what he called a “debt fail-safe”: “If, by 2014, our debt is not projected to fall as a share of the economy — if we haven’t hit our targets, if Congress has failed to act — then my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code.”
In essence, Mr. Obama proposed a rule that will enable us to get ahead of the long-run budget problem, and provide predictability and certainty to the federal budget.
Economists prefer rules over discretion when parties can choose to reverse themselves as tough decisions arise. Think of an overweight person intending to lose weight. He could use his judgment every time he is confronted with dessert. But that one extra slice of cake would not really matter much, so there is a tendency to indulge today and push restraint off until later. If, however, he buys all his meals in advance and commits to eat only those meals, he builds restraint into his diet. Rules can commit individuals or groups to a predetermined path.
If the political process always led to time-consistent, optimal decisions, rules would not be necessary. But that is not the world we inhabit.
Although rules are often flouted, they have helped trim budgets in the past.
The so-called pay-go rule in the Budget Enforcement Act of 1990 — which required increases in spending or decreases in revenue to be offset by other spending cuts or revenue increases — helped lead to the surpluses that arose in the late 1990s. We’ve also run the experiment in reverse: After the pay-go rules expired in 2002, increased spending on programs like Medicare prescription drugs and two rounds of tax cuts caused the deficit to soar.
While pay-go rules are helpful in the current environment, they are not sufficient given the burden the approaching retirement of the baby boom generation and rising health care costs will place on the debt. We need a supercharged pay-go rule, and that is what the president proposed. Because politicians prefer discretion, it took courage to propose an automatic trigger.
The proposal goes beyond the trigger proposed in December by Mr. Obama’s fiscal commission, which affected only tax revenue and kicked in only if tax reform was not enacted. Mr. Obama’s plan would automatically reduce direct spending and spending through the tax code.
Of course, the devil in any trigger is in the details. A key issue involves exceptions: What categories of spending or taxing would be exempted from the trigger, and how large a majority would be required to override the trigger?
Another important issue concerns the ratio of spending cuts to tax revenue. The president proposed a ratio of $2 of direct spending cuts (excluding interest on the debt) to every additional dollar of tax revenue in his speech. The House speaker, John A. Boehner, and many other Republicans have objected to raising additional tax revenue. But the two sides may be closer to some type of agreement than is commonly believed; they seem to agree that around $4 trillion needs to be trimmed from the budget over the next 10 to 12 years, but not on how to do it.
Discretion is hard for politicians to give up — and briefly satisfying, as dieters know when they dig out those hidden chocolate bars. What will help over time to lessen our appetite for more debt is to remove the temptation, and expectation, that when it comes to the budget we can always spend more than we have.
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