May 5, 2011

To get to the right result, you have to pick the proper target. That is the fundamental flaw with the proposal by Sens. Claire McCaskill (D-Mo.) and Bob Corker (R-Tenn.) to limit total federal spending to no more than 20.6 percent of the gross domestic product.

There are two problems with the McCaskill-Corker approach, which has attracted the support of all the Senate Republicans plus West Virginia Democrat Joe Manchin and Connecticut independent Joseph I. Lieberman. The GDP percentage, based on the historical share of federal spending over the past four decades, is too low to account for the needs of an aging society. And the two senators chose the wrong metric. The goal should not focus on spending but on getting the debt under control and eventually diminishing it.

Spending caps done right, which is to say caps that pinch but that are also achievable and enforceable, can be a useful element of a debt-reduction strategy. But making them the focus obscures the dual nature of the problem — excessive spending and inadequate revenue — and preordains a skewed result. Squeezing spending would allow — and even incentivize — spending through the tax code.

First, let’s examine the 20.6 percent of GDP target and what that would mean in practice. The historical spending average is not terribly relevant because the share of Americans 65 and older will grow by more than half over the next 25 years. Add to that the costs of homeland security in an age of terrorism, the increasing cost of paying interest on the debt and other, relatively new expenses (such as the Medicare prescription drug benefit), and 20.6 percent seems less like a useful guidepost and more like an irrational straitjacket.

Second, let’s consider the focus on spending alone. As the president’s fiscal responsibility commission and others usefully pointed out, an astonishing amount of “spending” — more than $1 trillion annually — is accomplished through the tax code, by way of tax credits or deductions. But there is little conceptual difference between billions spent to directly subsidize particular programs and billions spent indirectly in tax preferences. Either way, it’s money the government does not have, and that adds to the deficit.

Spending may grow to a higher share of GDP during a recession, both because revenue falls and needs increase. Likewise, balancing the budget in any particular year is not necessarily desirable. But it is essential to stabilize and reduce the debt. President Obama has proposed a mechanism for ensuring that will happen in the form of a debt fail-safe that would impose automatic spending cuts and tax increases.

The Bipartisan Policy Center recently unveiled a promising save-as-you-go approach, modeled on the pay-as-you-go concept but aimed at locking in savings, not simply avoiding digging the hole deeper. To get the debt to a set share of GDP — say 60 percent by 2021 — the plan would impose annual discretionary spending caps and required yearly savings in mandatory spending and taxes. This is a smarter, more balanced approach.