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When Pay-As-You-Go Isn’t Enough, Save-As-You-Go

Most observers agree that the President and Congress should address the nation’s looming debt crisis by immediately enacting a bipartisan, comprehensive package of policy changes, similar to what was recommended by the Simpson-Bowles and Domenici-Rivlin commissions.

Unfortunately, that’s easier said than done. I still hold out hope that the Senate’s “Gang of Six” will come to an agreement, and that the rest of the Congress will follow – but I’m not holding my breath. And to do all of this before the looming debt ceiling increase vote (sometime in early- to-mid July) would be even more difficult.

A first step, instead, can be to create a new budget process to direct policymakers to achieve savings promptly and into the future.

The Bipartisan Policy Center, along with Senator Pete V. Domenici, Dr. Alice M. Rivlin, Dr. Joe Minarik, Dr. Bill Hoagland, Charles Konigsberg, Steve Bell, and others who have been involved in similar process reforms over the past 25 years, has developed a plan – Save-As-You-Go, or “SAVEGO” – to do just that.

Based on the successful budget process created in the Budget Enforcement Act (BEA) of 1990, negotiated by President George H.W. Bush and a Democratic Congress, SAVEGO would set separate targets and enforcement mechanisms for different parts of the budget.

Just as in the BEA, annual appropriations (or “discretionary” spending) would be limited by multi-year caps written into the law. However, given today’s much larger debt and deficits, the Pay-As-You-Go (PAYGO) rule implemented in the 1990 BEA to constrain mandatory spending and revenues is no longer sufficient. PAYGO was created to safeguard already-enacted budget savings, not to enforce future savings. Substantial deficit reduction was enacted alongside the BEA. Unless the President and the Congress can agree on actual sufficient budget savings up front, any new budget process must go much farther and actually mandate substantial future savings.

Hence, SAVEGO would require specific amounts of annual future deficit reduction from mandatory spending and revenues. Finally, SAVEGO would re-create the remedies – the “sequesters” – that will achieve any intended savings that Congress and the President fail to enact (for more details, please see the one-page overview and a second document illustrating how SAVEGO could work in practice).

The key to such a process is that it sets goals in terms of specific amounts of budget savings, which are under the direct control of policymakers, rather than specific deficit or debt targets (as was done in Gramm-Rudman-Hollings (GRH) in 1985), which are not under policymakers’ direct control because they are influenced by movements in the economy. The experience under GRH in the 1980s demonstrated that the Congress was unable to quickly adjust fixed deficit targets to respond to short-term fluctuations of the economy. GRH targets were adjusted following the 1987 stock maket decline, but faced again with adjustments in 1990, Congress modified the law in 1990 to eliminate its fixed targets. The 1990s began with a politically divided government, but the process changes agreed to in the BEA of 1990 allowed for Democrats and Republicans to work together to achieve the first balanced budgets after 29 years of deficits.

SAVEGO is sound economic and budget policy and process – much preferable to any alternative that triggers on the ratio of the debt to the GDP.

If there is an economic hiccup, an approach that uses a specific debt-to-GDP or deficit-to-GDP ratio as a budget trigger would require the Congress to revisit action that they already had taken, to find more savings. The Congress proved unable to do that under Gramm-Rudman-Hollings. Furthermore, cutting the deficit even more because the economy is weak would only make the downturn worse.

On the other hand, if the economy temporarily strengthened, a debt-to-GDP-ratio trigger would in effect give the Congress and the President a “party fund;” they could backtrack on past action, only to find subsequently that the economic strength was only temporary and that they had fallen off track. And again, such a budget trigger could entice the Congress into pro-cyclical fiscal policy, stimulating the economy at a time when that was precisely the wrong thing to do.

In contrast, SAVEGO would give the Congress better signals: Meet the targets, which you know up front, well in advance, and stick with them. You don’t have to chase your own tail to find further savings with every hiccup in the economy, but you can’t backtrack on the basis of temporary good economic news, either. The history of the 1980s and the 1990s confirms that this is the sound approach.

Gramm-Rudman-Hollings in the mid 1980s set the framework for what was to follow. Strict, inflexible deficit targets failed – but Congress learned from the experience and they were replaced after five years. In contrast, the BEA of 1990 helped to improve the budget from the largest deficit to the largest surplus in history. Based on these lessons of history, we believe that SAVEGO would be the next step in establishing an enforceable budget procedure to achieve fiscal responsibility now.

SAVEGO Overview

How SAVEGO Would Work

2011-04-20 00:00:00

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