Can politicians restrain their spending?

My colleagues, Dr. Dagobert Brito and Dr. Robert Curl, recently published a column in the Houston Chronicle on “Competence, not amendment needed to fix debt” that questioned the logic of my column “A plan to move past debt status quo.”  They argued that my premise that politicians are incapable of spending restraint was incorrect for several reasons.

First, they argued that the U.S. budget was in a surplus in 2000 and thus that “some politicians must have shown restraint in spending.”  However, it is common knowledge that the surpluses from 1999-2001 mainly resulted from increased revenues (and increased projections of economic growth) related to the asset market bubble in the late 1990s, not spending restraint. For example, the Congressional Budget Office (CBO) Budget and Economic Outlook for fiscal years 2001-2010 stated that “Most of the improvement in the budgetary picture results from CBO’s updated economic outlook.”  In addition, over the period 1995-2000 total federal outlays increased from $1515.8 billion to $1788.8 billion or by 18 percent (a 3.6 percent increase annually) – is this our best hope for fiscal constraint?

Second, the authors point out that after World War II the national debt was greater than GDP, but that by 1960 the debt had been reduced to 55 percent of GDP. It is the “since we did it once, we can do it again” argument.  The argument against this comparison simple: This is not the 1950s. In the 1950s, baby boomers began to enter the labor market causing the U.S. workforce to swell. This increase in workers led to large increases in GDP and productivity, which helped shrink the debt-to-GDP ratio. Furthermore, in 1950, the ratio of workers per retiree was 16-to-1; today the ratio is about 3.2 workers per retiree, and by 2040 this ratio is projected to fall to 2.1.  With the baby boomers beginning to retire, we can expect smaller increases in GDP growth and productivity if the past is any indication of the future.

Third, their column implies that paying down the current debt of $14.3 trillion is the biggest problem we face.  However, that is far from true.  In fact, the gap between promised benefits to retirees and projected revenues in the coming decades has been estimated to be as large as $200 trillion. This long-run budget imbalance is the real problem facing the United States.  I admit that even a balanced budget amendment will not deal with the propensity of politicians to “cook the books” by pushing more and more debt onto future generations.

Finally, the authors argue against requiring a super majority to run a budget deficit by arguing that super majorities are only required in very specific cases.  However, the “Byrd” rule in the Senate allows senators to block legislation in the reconciliation process that increases the federal deficit beyond the 10-year budget window.  It requires a super majority (60 votes) to overturn the ruling, similar to what I would argue for under a balanced budget amendment.  In my original column, I also argued that any amendment should be flexible enough to allow for short-term fiscal policy responses in times of crisis and automatic stabilizers.

In my opinion, the arguments in support of the status quo are likely to impose staggering costs on future generations – costs that politicians seem likely to ignore given current political institutions.

John W. Diamond is the Edward A. and Hermena Hancock Kelly Fellow in Public Finance at the Baker Institute and an adjunct professor of economics at Rice University.