The Magnitude of the Mess We’re In

In an opinion piece last fall in the Wall Street Journal, George Schultz, and several colleagues from Stanford University’s Hoover Institution, very cogently describe the horrendous economic and fiscal mess in which the United States is now embedded.  Trillion dollar deficits for four years in a row, now going on five, a persistently weak recovery from the great recession of 2008, several rounds of quantitative easing by the Federal Reserve now totaling over three trillion dollars, and worst of all, a complete lack of consensus by political leaders on how to respond to this dangerous situation.

The President and the Democratic majority in the Senate, flush with victory after the November 2012 elections, believe that they have a mandate to continue their present expansionist policies.  The Republican majority in the House of Representatives, only slightly diminished by the 2012 elections, feels equally strongly that it has a mandate to continue applying the brakes.  As a fiscal conservative I agree with the Republicans that we must return to the sound fiscal and monetary policies advocated so eloquently in the above WSJ article.

What strategy can the House Republican’s follow to move federal policy in this direction?  House Speaker John Boehner has suggested that any increase in the debt limit be matched dollar for dollar by cuts in federal spending over a ten year period.  For example, the “Boehner Rule” would require that an increase in the debt limit of $1 trillion, enough to last about one year, would be offset by spending cuts of $100 billion a year for 10 years.  If such a regimen were then repeated a year from now, another $100 billion in spending cuts per year would be needed as well, and so on.

Taking into account the baseline budgeting process in Congress, whereby budgets are automatically increased from one year to the next by the anticipated rate of inflation, and also the occasional need for emergency appropriations to cover natural disasters and other dire events, the Boehner Rule would have the likely effect of holding spending approximately constant from one year to the next in absolute terms.  While this is not the same as what most people would understand by actual spending cuts, nevertheless it does represent significant restraint in federal spending, compared to recent patterns.

As the economy continues on its current growth trajectory of about 2% per year, this would mean that new tax revenues would eventually catch up with relatively flat spending levels and eventually lead to a balanced budget.

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