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The PAYGO “Diet”

June 25th, 2009 . by economistmom

Today OMB Director Peter Orszag testified before the House Budget Committee on the Obama Administration’s proposal for statutory PAYGO.  In his prepared testimony (and repeatedly in his responses to questions), Peter made reference to the fiscally irresponsible policies enacted during the Bush Administration:

This [PAYGO rule] may seem like a relatively easy rule to follow, but history suggests it is not. One way to see this is by looking at three relatively recent pieces of legislation that violated the PAYGO principle: the 2001 and 2003 income tax reductions, or EGTRRA and JGTRRA, and the Medicare Modernization Act of 2003, which created the Medicare Part D prescription drug benefit…[T]hose three bills together increased the 75-year fiscal gap—the difference between sustainable and unsustainable budgets—by roughly 3 percent of GDP…[i.e.,] nearly doubled the long-term fiscal gap. The difference, then, between adhering to and violating PAYGO is not a question of few billion dollars around the edges—but rather can go to the heart of the nation’s fiscal path.

Yet he defends the Administration’s PAYGO proposal, which allows those (fiscally irresponsible) policies passed in the Bush Administration to be extended without any offsets (i.e., continued in a fiscally irresponsible way), with the following (emphasis added):

Some have criticized the Administration for designing the PAYGO Act to reflect current policy rather than current law in these areas. These critics, however, have provided no indication of how they would offset the costs of continuing current policy in these areas, and I have seen no credible proposals for such offsets. The most plausible result of applying the PAYGO Act to a continuation of these current policies would therefore be waivers of the statute in these cases. Such waivers would establish a harmful precedent that could undermine the statutory PAYGO regime and lead to waivers for new policy, allowing policymakers to avoid the PAYGO budget constraint. The Administration therefore believes it is better to design statutory PAYGO in a credible way to minimize the potential for waivers, and that is what our proposal does.

As I’ve suggested in a recent post, one very effective way to offset the costs of any of these policies, such as the Bush tax cuts, would be to just not do it (those policies).  Having no way to pay for it shouldn’t lead us automatically to the conclusion that we must do it without paying for it.  (We could come to that conclusion more thoughtfully perhaps, maybe even within the Obama Treasury and the tax-writing committees of Congress, if we weighed the costs of the additional debt against the economic benefits of the tax cuts and decided the benefits outweighed the costs.)  As Doug Holtz-Eakin noted in his testimony at the same House Budget Committee hearing, the Administration’s PAYGO proposal goes far further into setting specific tax and spending policies than budget process rules are supposed to dictate:  “PAYGO should provide a level playing field among such initiatives and these proposals do not.  In effect, the [Obama] Administration’s proposals tilt the playing field toward their preferred policies”…and which happen to look strangely similar to those fiscally irresponsible policies of the Bush Administration.

But the Administration’s basic argument is that a current-law baseline standard for PAYGO, where any extension of the Bush tax cuts would have to be offset with other tax increases or reduced spending, is just too strict a diet that would surely be broken–and then there would be no dietary discipline at all.  They argue we can stick to a stricter, yet realistic, diet once we get past this one last binge.  (I have made this diet analogy before.)

In her prepared testimony, Alice Rivlin of the Brookings Institution seems to (somewhat painfully/regretfully) acknowledge the Administration’s “incredible diet” argument:

Critics of the Administration’s proposal point out that allowing these adjustments to a current law baseline amounts to accepting the damage already done to future budgets that these bizarre legislative provisions were designed to hide. They argue that in making these exceptions Congress would be ducking the responsibility to face the consequences of its past lack of budgetary courage. I agree that these are four examples of legislative sleight of hand covering up future bad news. But the bad news must be dealt with head-on in a comprehensive policy process. Keeping these four legislative anomalies in the current law baseline for PAYGO purposes, would only guarantee that PAYGO would be immediately waived and its future usefulness seriously impaired.

(But I’d note that keeping these policies out of the policy baseline and PAYGO rules enables these policies to effectively circumvent a “comprehensive policy process.”)

…And Bob Greenstein of the Center and Budget and Policy Priorities also seems to acknowledge this is really a “second best” strategy when it comes to fiscal responsibility:

The budget resolution adopted this year also makes clear that the cost of extending the expiring reductions in middle-class taxes and the estate tax enacted in 2001 and 2003 will not be offset. Given the long-term fiscal problem the nation is facing, and the inevitable need for higher revenues and slower spending in coming decades, I believe it is unwise to extend any expiring tax cuts or relief from required reductions in spending without offsetting the cost of those extensions, and I wish that enactment of a pay-as-you-go rule would ensure that they would be paid for. But, it is clear that the majority of lawmakers do not believe these extensions should be paid for and that, regardless of whether a statutory pay-as-you-go rule is enacted that applies to those extensions, Congress will not let those provisions expire or offset the cost of extending them.

Bob Greenstein then defends the Administration’s PAYGO exemptions by going back to the diet analogy (emphasis added):

A number of critics of the President’s proposal to except the cost of extensions of current policies from the pay-as-you-go rule have made their point by analogy, comparing the proposal, for instance, to a promise to abide by a diet that excludes chocolate cake or other highly caloric desserts from dietary restrictions. Such analogies are clever, but inaccurate; they miss the mark. A more apt analogy is with a promise to limit caloric intake in order to lose weight. If a person promises to eat nothing for 30 days, the promise is meaningless and clearly will not help achieve the desired outcome. The person will violate the promise every day, and after the person takes the first bite each day there is no useful yardstick to encourage the dieter to stop eating before he or she is satiated. If, however, the person sets a daily caloric intake at a reasonable level, the pledge might actually help the dieter stop overeating. It is true that the promised diet would be meaningless if the caloric intake is set at such a high level that the dieter can eat virtually anything he or she would like without exceeding the limit. But anyone who thinks the Congressional appetite for tax cuts and entitlement increases would be satisfied once Congress extends the expiring policies has not been paying attention. Drawing a line at extending current policies thus should help significantly in promoting fiscal responsibility.

First, I don’t see the current-law baseline, which assumes the Bush tax cuts expire and we return to Clinton-era tax policy, as analogous to eating nothing.  Second, I would argue that setting the “diet” at the Bush-policy-extended baseline isn’t “reasonable” (sustainable) and will only leave us still too fat.  Finally, Bob’s pointing out the insatiable appetite of Congress for fiscally-irresponsible policies doesn’t give me much faith that any diet (even with a weaker constraint) will do any good–they can violate an easy diet just as well.  I guess I’m saying it’s going to take a lot more than following a gimmicky diet–it’s going to take true internal willpower.

And to top off what should be called “PAYGO Day,” today the Concord Coalition released this issue brief on the Administration’s statutory PAYGO proposal.  Here’s a link to our blog post about it, on Concord’s Tabulation blog.

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