Sunday, March 07, 2010

"Spending" cap

GOP Congressmen Jeb Hensarling and Mike Pence have a WSJ op-ed calling for a constitutional amendment "limit[ing] spending to one-fifth of the economy (our historical spending average since World War II). The limit could only be waived by a declaration of war or by a two-thirds congressional vote."

Whatever you think of the underlying policy aim, this would be comically ineffectual given that, as I have explained elsewhere, "spending" is not an economically meaningful term.

What are some of the games we would see if such an amendment were adopted? One would be tax credits in lieu of direct spending for everything under the Sun. Current year income tax liability, past or future years' income tax liability, payroll tax or gas tax or other tax liability - you name it, and "spending" could easily be designed to avoid the label by ostensibly reducing or refunding it.

A second game would be relabeling cash flows as being of debt principal. Start with the low-hanging fruit of re-designating Social Security taxes as partly loans, and Social Security benefits as thus partly repayments of loan principal. (For people already retired by the enactment date, we could simply call the benefits payroll tax refunds.) Perhaps this could work for Medicare as well, e.g., your "loan" is repaid via a payment to the service provider.

The government might also be able to give people scrip instead of current payment (as California was doing last year in their budget crisis), or to make transfers that are designated loans, the repayment of which is only subsequently forgiven.

And all this is on five minutes reflection. Now imagine turning Goldman Sachs (fresh off their Greek adventures) loose on the problem.

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