PAYGO is an Unworkable Gimmick

COMMENTARY Budget and Spending

PAYGO is an Unworkable Gimmick

Jul 2, 2009 3 min read

Senior Fellow, Manhattan Institute

President Obama is establishing a reputation for misrepresenting his own policies. He promoted his "stimulus" bill as an immediate, anti-recessionary cash infusion, even though most spending won't occur until after the recession ends. He titled his budget "A New Era of Responsibility," even though it doubles the national debt. And he claims his health care reform plan will save money, even though it's expected to cost up to $1 trillion.

The president also misrepresented his proposal to bring back the Pay-As-You-Go (PAYGO) law that existed in the 1990s. In a White House speech, he defined PAYGO as mandating that "Congress can only spend a dollar if it saves a dollar elsewhere."

That is simply not true.

For starters, PAYGO exempts discretionary spending - that huge chunk of the federal budget (40 percent) that includes most defense, education, housing, homeland security and transportation> spending. Congress could triple the discretionary budget tomorrow without triggering PAYGO. That's quite a loophole.

Nor does PAYGO apply to the current entitlement-spending baseline. Thus, total entitlement spending can continue growing 6 percent annually without triggering PAYGO. Social Security, Medicare and Medicaid can continue down their path to swallow up the entire federal budget.

What's left? PAYGO merely says that if Congress wants to grow total entitlement spending faster than the 6 percent annual rate in the baseline, it must raise taxes accordingly. Or, if it wants to reduce net taxes, it must cut entitlement spending accordingly.

That's all.

Consequently, PAYGO isn't designed to actually reduce spending or the deficit. It's not even designed to slow their growth. Even with PAYGO, this year's 8 percent growth in discretionary spending (the third consecutive year of such growth), and its $110 billion growth in Social Security, Medicare and Medicaid would require zero offsets. Only the creation of a new entitlement program (or tax cut) would have to be offset.

It gets worse.

Because PAYGO requires so little of Congress, one would think compliance is guaranteed. Wrong. PAYGO has already been in place - and ignored - for most of the last two decades.

From 1991 through 2002, PAYGO existed as a statute. The White House would keep a running scorecard of all newly enacted entitlement and tax legislation (allowing one bill to offset another). If, at the end of the year, all tax and entitlement legislation had not offset each other, an automatic series of entitlement-spending cuts ("sequestrations") would be triggered to offset those costs.

It was never enforced. Over those 12 years, Congress enacted $700 billion in non-offset entitlement expansions and tax cuts, and then cancelled every single sequestration that would have enforced the law. Congress typically waited until the final spending bill of the year, and then simply added a paragraph mandating that PAYGO not be enforced against any past bills.

The result? Entitlement spending actually grew faster after PAYGO's implementation.

And even if Congress had allowed sequestration cuts to go forward, the law had been gutted into irrelevance. Congress had already mandated that Social Security, anti-poverty spending and nearly all of Medicare could not be sequestered to offset PAYGO violations. That left just $31 billion worth of entitlement programs that could be cut as part of a sequestration.

The PAYGO law mercifully expired in 2002. Yet Congress brought it back as a rule in 2007. Instead of sequestrations and scorecards, the rule simply required that each new entitlement-expansion or tax-cut bill be deficit-neutral.

The results were the same. After much fanfare, Congress waived PAYGO every time it proved even slightly inconvenient. The lawmakers waived it to extend unemployment benefits. They waived it to create a $63 billion veterans' entitlement. They waived it for the $787 billion "stimulus" bill. House Speaker Nancy Pelosi, California Democrat, suggested that PAYGO be waived for any bill she feels will help the economy.

Even when PAYGO wasn't waived, Congress resorted to gimmicks for compliance. The lawmakers passed an expansion of the State Children's Health Insurance Program (S-CHIP) that scored 10 years of tax increases, but only the first five years of the new spending. They enacted a farm bill with timing shifts, funding cliffs and other gimmicks to create the illusion of deficit-neutrality. Spending skyrocketed and PAYGO was again exposed as a joke, a fraud and a gimmick.

Which is why Mr. Obama's call to bring back statutory PAYGO cannot be taken seriously. The same president who made a mockery of the PAYGO rule on S-CHIP and the "stimulus" bill cannot credibly claim he will suddenly enforce a PAYGO statute.

In fact, his PAYGO proposal is designed to fail. By walling off nearly all entitlement programs from any possible sequestration cuts that would enforce PAYGO, the president statutorily guarantees that a sizable sequestration cannot occur. So if the massive health care bill isn't deficit-neutral, a PAYGO sequestration (even if allowed) may not be able to fully offset the costs later.

Enacting PAYGO is worse than doing nothing. It provides lawmakers with a convenient talking point and taxpayers with a false sense of security on budget reform. Better to focus on real spending caps and other reforms that could actually rein in spending and deficits.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First Appeared in The Washington Times