There has been much talk about the bipartisan group of 12 legislators charged with developing policies to shave at least $1.2 trillion off the deficit over the next 10 years—and the automatic spending cuts that would occur if this supercommittee fails to come up with a plan.
But as the nation grapples with a sluggish economy and capital market instability, those interested in our country’s fiscal health would be well-advised to remember that there is nothing automatic about automatic spending cuts.
In 1985, Congress passed the Balanced Budget and Emergency Deficit Control Act, which called for automatic spending cuts, or “sequestration,” if annual deficit reduction targets weren’t met. Called Gramm-Rudman-Hollings after its Senate authors—Phil Gramm (R-Texas), Warren Rudman (R-N.H.), and Ernest “Fritz” Hollings (D-S.C.)—the act was designed to reign in the large deficits caused by the Reagan administration’s tax cuts and defense spending increases to produce a balanced budget by 1991.
The new supercommittee plan is strikingly similar to Gramm-Rudman-Hollings. Both came about as part of a deal to increase the nation’s debt ceiling. Both called for automatic spending cuts if deficit reduction targets weren’t met. And both mandated that savings come largely from reductions in defense and non-defense discretionary spending, rather than tax increases or entitlement reform.
At the time, many observers considered Gramm-Rudman-Hollings a bold effort to bring the nation’s deficits under control. To Republican Sen. Bob Packwood, for example, Gramm-Rudman-Hollings was a “watershed” that presented a “significant opportunity to deal with the deficit.”
And despite the fact that half the automatic cuts would come from defense, President Ronald Reagan went so far as to declare that Gramm-Rudman-Hollings was a “historic agreement” that would finally “put our house in order.”
Yet Gramm-Rudman-Hollings’ flaws were evident from the start. By exempting tax increases and entitlement spending, the bill ignored two major components of the deficit. With these sacred cows off the table, sequestration was limited to relatively minor parts of the budget.
Gramm-Rudman-Hollings also did little to prevent future Congresses from ignoring or overriding its provisions. The deficit reduction targets were only as good as legislators’ willingness to live up to them, something Rudman recognized when he admitted that the act was a “bad idea whose time has come.”
Cracks in Gramm-Rudman-Hollings started to emerge almost immediately. Because it gave the legislature rather than the executive branch the authority to determine the precise sequestration, in 1986 the Supreme Court ruled that the act violated the constitutional separation of powers.
Congress passed a revised bill the following year. But by then, slow progress on deficit reduction had pushed the balanced budget timeframe out until 1993.
Over the next few years, both the White House and Congress regularly used an array of gimmicks to meet the deficit reduction targets—and thereby avoid automatic cuts.
Both the Reagan and George H.W. Bush administrations produced “rosy scenarios” of economic growth that made projected deficits appear smaller than they actually were. Lawmakers also moved certain spending programs off budget and manipulated the timing of others.
Things came to a head in 1990, when deteriorating economic conditions—the main factor in the size of a given year’s deficit—meant that Washington ran out of ways around the targets. Facing the prospect of a massive sequester, Bush convened bipartisan meetings. The new panel replaced the Gramm-Rudman-Hollings framework with the Budget Enforcement Act of 1990.
The 1990 agreement is famous for the tax increases that forced Bush to go back on his campaign promise of “no new taxes.” Yet even though it cost Bush the support of his conservative base, the Budget Enforcement Act was more successful at deficit reduction than its predecessor.
In addition to setting annual discretionary spending caps, the act created a PAYGO system in which major changes in taxes and spending were required to be deficit neutral. Under PAYGO, any proposal to increase entitlement spending had to propose taxes to pay for it, and any legislation reducing taxes had to specify offsetting spending cuts.
By preventing Congress from passing laws that would contribute to long-run fiscal instability, PAYGO helped lay the groundwork for the balanced budgets of the late 1990s. In fact, the expiration of PAYGO in 2002 allowed the George W. Bush administration to push through tax cuts that drove the government back into the red.
The lessons for today are clear. Instead of automatic spending cuts tied to deficit reduction targets—or even more misguided measures like a balanced budget amendment—we should strengthen procedures that limit the government’s ability to behave in a fiscally irresponsible manner.
President Barack Obama and Democrats in Congress recognized this last year when they reinstituted a form of PAYGO. Yet by mandating automatic spending cuts tied to deficit reduction targets, the recent debt ceiling deal threatens to divert attention from these more sensible reforms.
As Washington gears up for its next round of budget battles, elected officials should remember that triggers are a poor way of reducing the deficit—and that revitalizing the economy is the most important thing we can do to get the national debt under control.
Patrick Sharma is a Bancroft fellow at the University of California, Berkeley, where he co-directs “Slaying the Dragon of Debt,” a historical research project on U.S. fiscal policy.
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