Consumers know that it is psychologically easier to spend with plastic than it is with cash. Cash seems more real, does it not? Why is that? I would say that the difference is the time factor. With cash, the money is instantly subtracted from one’s net worth, whereas with credit, the effect is delayed. Compulsive shoppers achieve immediate purchase gratification while delaying the pain of payment. They live from paycheck to paycheck and when income falters they can descend into unmanageable debt.
It occurs to me then that the national debt and the budget deficit are very much like the credit-card problem the average consumer has. Both Congress and the Executive have had a compulsive shopping problem that is driven and exacerbated by their constituency, the electorate.
The time problem with money is well-known and we have tried to fix it. One method, which ought to have worked but didn’t, was PAYGO. A review of PAYGO is instructive of the problem. In fact, it is a veritable memoir of how we got in this mess.
What is PAYGO? PAYGO in the U.S. “. . . is the practice of financing expenditures with funds that are currently available rather than borrowed”. Also from the Wikipedia page,
It compels new spending or tax changes to avoid adding to the federal deficit. It should not be confused with pay-as-you-go financing, which is when a government saves up money to fund a specific project. Under the PAYGO rules a new proposal must either be “budget neutral” or offset with savings derived from existing funds. The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint.
PAYGO was originally enacted in 1990, and it even included provisions for increasing taxes to compensate for extra spending. If the budget projected additional spending for the following year, PAYGO required a “sequestration” of “non-exempt” mandatory programs to compensate. What a concept: living within our means. Wow.
It was actually working for a while; by FY 2000 the federal surplus was 2.4%. Yes, surplus. That’s not a misprint. But, by 2002 there was a deficit of 1.5% of GDP. So, what happened? Well, for one thing the dotcom bubble slowed the economy. Also, Congress and president Clinton, apparently giddy from fiscal success, changed how they spent money. Again, from Wikipedia,
Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. While staying within the technical definition of the law, this allowed spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000.
The PAYGO statute expired at the end of 2002. After this, Congress enacted President George W. Bush’s proposed 2003 tax cuts (enacted as the Jobs and Growth Tax Relief Reconciliation Act of 2003), and the Medicare Prescription Drug, Improvement, and Modernization Act. The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements.
After PAYGO expired, budget deficits predictably returned:
In the first 6 years of President Bush’s term, with a Republican controlled Congress, the federal debt increased by $3 trillion. The public debt continued to grow after Democrats gained control of Congress in 2006, and the deficits averaged $1.25 trillion annually for the next 4 years under the Democratically controlled Congress.
Congress tried PAYGO again in 2007, but under pressure because of the Alternative
Minimum Tax and the Great Recession, effectively abandoned it less than a year later amidst a flurry of exceptions, exemptions and excuses. By 2009 the budget deficit had grown to $1.42 Trillion dollars. Central to the problem of course are the big entitlement programs, Medicare and Social Security.
What happened seems clear. We made a law not to spend excessively, our income declined (the economy), we got cheated (the housing crisis), we ignored our own law, and now we are in a deep debt-hole. Climbing out, I submit, is not just a matter of erasing huge chunks of spending as the Tea Party would have it – the economy is an engine that must have fuel. The challenge is to give it just enough fuel that it will return to running on all cylinders, but not to starve it and cause it to stall.
Click on PAYGO for its Wikipedia link.