With the federal government approaching $34 trillion in debt, talk has (finally) turned to the question of how to stop the bleeding. A recent op-ed in The Wall Street Journal offered one possible solution:
Had the federal government limited the growth in spending to a maximum of the population growth rate plus inflation during that decade, in 2022 the federal government would have spent $1.6 trillion less than it did, resulting in at least a $200 billion surplus. If the federal government had done this over the past two decades, the national debt would have increased by less than $500 billion instead of $19 trillion.
The article promoted the Sustainable Budget Project, a new initiative by Americans for Tax Reform (ATR) designed to focus efforts on controlling spending at the federal and state levels.
While the spotlight on controlling spending matters, so do the details. On both practical and philosophical levels, the metrics laid out in the op-ed present potential problems in their implementation.
Proposed Reform Encourages Additional Inflation
The Journal article argues that the “sustainable budget” metric, by evaluating state spending growth when compared to population increase plus inflation, will create an “objective, binary metric to determine whether a state government spends too much.” But a binary metric could cause problems in addition to solving them.
To ask the obvious, does last year’s 40-year-record inflation rate, which peaked at 9.1 percent last June, imply that state governments should have grown their spending by double digits in 2022, even after the Covid-19 spending binge? That question should answer itself.
Linking a spending growth metric to annual inflation will only encourage Democrats to argue for higher inflation. The left is already clamoring for the Federal Reserve to end its interest rate hikes, lest they precipitate an economic recession. (While higher interest rates will reduce economic growth in the short term, allowing inflation to continue rising at record rates will do far more damage.)
Democrats would have every reason to call for higher inflation if governments adopted a spending limit metric linked to the growth in the Consumer Price Index. Higher inflation would allow government to grow faster, and it would also monetize (i.e., devalue) the debt government has already incurred. But working families who have spent the past several years struggling with “Bidenflation” would pay the price — quite literally.
Instead of using a binary approach linked to a single number and subject to distortion, state lawmakers considering a spending cap should implement a “lesser of” approach. For instance, they could allow spending to grow according to the lesser of 1) population growth, 2) price growth, or 3) a flat percentage number, like 3 percent. Using the “lesser of” approach would reduce the incentives to “rig” the system by manipulating a single formula input.
Why Not Reduce Spending?
But should states stop there? The Journal article argues that if state spending rises faster than ATR’s preferred population-plus-inflation rate, “then it is growing faster than what the average taxpayer can afford.”
One can almost hear the obvious retort: “I don’t want government spending to grow — I want government spending to shrink.”
That said, I recognize the practical implications in play. A state in the middle of a population explosion will probably have to raise its spending in absolute terms, even if spending remains flat or declines on a per capita basis. And just like a 1,000-calorie-per-day diet won’t work for most humans, spending restrictions have to remain politically sustainable, lest they lead to a backlash that prompts a spending binge.
But given the nonsense — not to mention the outright fraud — that governments spent money on during the pandemic, conservatives should have every reason to demand a rollback of Covid-era spending levels. Giving states a structure to raise spending still further contradicts that message.
Roll Back Government Control
The details behind the ATR’s state rankings illustrate this problem in greater detail. ATR’s metric counts Louisiana as one of seven states that “held growth in state funds, but not all funds, below the rate of population growth over the last decade, thereby keeping taxes for state funds lower than the average taxpayer can afford.”
But during the last decade, Louisiana began a Medicaid expansion under Obamacare that saw spending grow well beyond projections and imposed a major tax increase at the behest of Democrat Gov. John Bel Edwards. Should a state that, according to the Pew Charitable Trusts, was already the most dependent on federal revenues before implementing Medicaid expansion have accepted billions of dollars more from Washington? Is a state that has to raise taxes responsibly limiting its spending? Can Louisiana afford the level of government spending it has now? The answers should be obvious: No, no, and no.
The best way to reduce government power is to reduce government spending. Conservative groups should keep that their main focus as they make the case in Washington and in state capitols across the nation.
Originally Posted on: https://thefederalist.com/2023/11/06/how-to-pump-the-brakes-on-runaway-government-spending-without-ramping-up-inflation/?utm_source=rss&utm_medium=rss&utm_campaign=how-to-pump-the-brakes-on-runaway-government-spending-without-ramping-up-inflation
[By: Christopher Jacobs