Corker-McCaskill Spending Cap the Wrong Answer to Budget Challenges

We just issued an analysis of the new proposal from Senators Bob Corker (R-TN) and Claire McCaskill (D-MO) to limit total federal spending to 20.6 percent of GDP, the average from 1970 to 2008.  As our report explains, the proposal would force draconian cuts in Social Security, Medicare, and many other programs while making it harder for the nation to recover from recession:

That’s because the proposal, which would take effect in 2013 and phase in over 10 years, does not account for fundamental changes in society and government: the aging of the population, substantial increases in health care costs, and new federal responsibilities in areas such as homeland security, veterans’ health care, and prescription drug coverage for seniors.  These factors make the spending levels of an earlier era inapplicable for today’s discussions about how to reduce looming budget deficits and put the budget on a sustainable path in the coming years.

Limiting spending to an historical average of some kind has been a longstanding goal of very conservative organizations such as the Heritage Foundation.  The reality is, however, that policymakers will find it virtually impossible to maintain federal spending at its average level for decades back to 1970 without making draconian cuts in Social Security, Medicare, and an array of other vital federal activities.  That average reflects a federal government with far less responsibility than today, and a country with a much smaller percentage of elderly people and considerably lower health care costs.

. . . [I]mposing an arbitrary limit on federal spending would risk tipping faltering economies into recession, make recessions deeper, and make recovery from a recession more difficult.  Spending for some important federal programs — including unemployment insurance, food stamps and Medicaid — increases automatically during a recession, when the need for assistance grows.  Since GDP also shrinks during a recession and remains below its trend level during the early stages of recovery, federal spending increases significantly as a share of GDP during periods of economic weakness.  This automatic response softens the recession’s blow not only for the programs’ beneficiaries but also for the economy as a whole by maintaining total purchasing power.  Attempting to limit federal spending to a fixed share of GDP would “impinge on the stabilizers on the spending side of the budget,” as CBO Director Douglas Elmendorf testified last week.  Taking away these stabilizers, Elmendorf warned, “risks making the economy less stable [and] risks exacerbating the swings in the business cycle.”

To be sure, Congress could waive the law to allow for spending to exceed the limit during an emergency.  But the waiver would require a two-thirds vote in both the House and Senate, an extremely high hurdle that could be difficult or impossible to overcome even in a very severe economic downturn (as shown by the recent difficulty of securing even a three-fifths vote in the Senate to extend unemployment insurance benefits at a time when unemployment stood at close to 10 percent).  Furthermore, even if Congress eventually waived the limit, the economy would almost certainly weaken substantially before several calendar quarters of data became available to document that the economy was in a recession, and then weaken further before Congress suspended the expenditure limit.

You can read the full report here.