James and Andrew, your recent posts offer some apt criticisms of S.J. Res. 7, the proposed balanced-budget amendment co-sponsored by all 45 Senate Republicans. You persuasively argue that it is unrealistic to think that a constitutional amendment can limit federal spending to 18% of GDP. Norm has made the same point elsewhere. But the reality is even more troubling than you suggest. S.J. Res. 7 would actually impose a significantly more stringent cap, limiting federal spending to about 16.7% of GDP, a level not seen since the 1950s.
The problem is the way the proposed amendment measures GDP. Section 2 states, “Total outlays for any fiscal year shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending before the beginning of such fiscal year” (emphasis added). By linking each fiscal year’s spending cap to the preceding calendar year’s GDP, the proposal builds in a 21-month lag. (For example, fiscal 2018 will begin on October 1, 2017 and end on September 30, 2018; the preceding calendar year will begin on January 1, 2016, 21 months before fiscal 2018 begins, and end on December 31, 2016, 21 months before fiscal 2018 ends.) The exact value of the spending limit depends on GDP growth. If nominal GDP grows 4.3% per year, in line with the relevant Congressional Budget Office projections, then it rises 7.6% each 21 months. So, if GDP is $1,000 in a calendar year, it is $1,076 in the following fiscal year and the proposal’s $180 cap on fiscal-year spending is 16.7% of GDP.
The version of this proposal introduced in 2011 as S.J. Res. 23 computed the spending limit in the same manner that S.J. Res. 7 now does. The fact that the proposal’s actual limit was well below 18% was pointed out at the time by Donald Marron, director of the Urban-Brookings Tax Policy Center and a member of the Council of Economic Advisers under President George W. Bush, and by Bruce Bartlett. Yet, when the sponsors reintroduced the proposal last week, they ignored these corrections, again claiming that the proposal merely limits spending to 18% of GDP. Marron recently reiterated the relevant arithmetic.
One concern involves truth in advertising. If Senate Republicans want to limit federal spending to 18% of GDP, they should rewrite S.J. Res. 7 to do that. If instead they want to limit spending to 16.7% of GDP, they should say so and stop using the 18% number.
But the bigger concern involves budget policy. The 16.7% limit is even more hopelessly unrealistic than an 18% limit. Historical budget data show that federal spending hasn’t been that low since 1956, before the creation of Medicare and Medicaid. During the last 45 years, spending has never fallen below 18.2% of GDP, the trough reached in 2000 and 2001.
The imperative goal of keeping federal spending from rising too far above 20% of GDP in the face of population aging and rising health care costs will require herculean work and tough political decisions by Republicans, including a repudiation of their recent Medicare rhetoric. The fantasy that a constitutional amendment can cut spending to 16.7% of GDP by fiat is a dangerous distraction from the hard work ahead.