All About the “Cut, Cap & Balance Act.”

Let’s run a little bit of Keith Hennessy’s analysis, but when you get home I want you to pour a glass of wine or decaf* and read the whole thing; this is a critical issue.

The key to understanding this bill is that it focuses on government spending, rather than on taxes or deficits. The bill would achieve significant deficit reduction through cutting and limiting spending, and all of its mechanisms use spending rather than deficit targets.

Surprise, surprise: the bill consists of three parts.

1. Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. (I explain a sequester below.) The intent of this section is to force Congress and the President to cut spending immediately.

2. Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.

3. Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).

What is a sequester?

A sequester is an automatic across-the-board proportional spending cut written into law and implemented by the Office of Management and Budget (OMB). It is usually combined with some kind of budget target and designed as a backup measure to force legislative action to hit that target.

Example

Imagine there are 10 government programs that spend $50 each. Congress passes and the President signs a law that includes a spending target of $490, a deadline of December 31st, and an across-the-board sequester.

If new laws are not enacted by December 31 to reducing spending to $490, then the sequester kicks in. OMB cuts all 10 programs by whatever percentage is needed to hit the target. In this case, each $50 program is cut by 2%, to $49, to hit the aggregate spending target.

If the new law were to exempt five of the 10 programs from the sequester, then the remaining programs would be subject to a 4% cut to hit the same spending target.

If Congress doesn’t like the results of an anticipated sequester, they can and should enact a new law before December 31 which hits $490 in a different way. They could cut one program by 20% ($10) and leave the other 49 programs untouched, for example. [. . . ]

Most Members of Congress complain that automatic sequester mechanisms include programs they don’t want to cut. I have the opposite complaint – the sequesters in this bill exempt too much. In particular, both the mandatory sequester in the Cut section and the across-the-board sequester in the Cap section exclude Social Security, Medicare, military personnel, and interest costs. While military personnel costs would rank high on my list of spending priorities, I think the best sequester mechanisms apply to all non-interest spending.

In particular, we need to address spending trends in the big three entitlements. By exempting Social Security and Medicare from the sequester, this bill makes it that much harder for Congress to bite the bullet and make needed changes in both programs. It is easy to understand the legislative necessity that drove this decision, but it’s a big policy mistake nonetheless.

At the same time, these sequester mechanisms are much better than past ones enacted into law, which exempted hundreds of programs from the across-the-board cut. A well-designed sequester is not supposed to be the mechanism that cuts spending. It is supposed to be the forcing mechanism that convinces Congress to make decisions to cut spending. If you exempt too much, then the incentive placed on Congress is even weaker. [. . . ]

It might therefore be more appropriate to think of this as a “Balanced Budget through Spending Cuts Amendment.”

I support balancing the budget through cutting spending rather than raising taxes. I don’t feel strongly either way about whether or not this should be enshrined in the Constitution. I lean a little against, because I hate messing with the Constitution.

All that is irrelevant, however, because even if this kind of BBA did pass both Houses of Congress, it would take many years for three-fifths of the States to ratify it as an amendment to the Constitution. Federal budget problems are upon us now – we can’t wait for a Balanced Budget Amendment to be ratified. While this part of the bill is useful to make a point, I fear it serves as a distraction from actually cutting spending. [. . . ]

I recommend supporting this bill even with its significant imperfections. I place enormous value on the creation of an enforceable cap on total government spending.

Good

* Focuses on the problem I think needs to be solved: too high and too rapidly growing government spending;

* Cuts spending 2012 and creates a sequester to enforce those cuts;

* Caps federal spending below 20% of GDP and phases down to that over a few years;

* Creates a sequester mechanism to force spending cuts to hit those levels;

* The mandatory spending sequesters are far broader and therefore superior to those enacted in the past; and

* The form of the Balanced Budget Amendment, which would drive spending cuts rather than tax increases, is good.

Bad

* The sequester exempts too much, and in particular it exempts the two largest entitlement spending programs, Social Security and Medicare. If enacted, this bill might make it legislatively harder to reform these two programs. That’s a huge problem.

* While it appears to increase the debt limit, it sets conditions that won’t be met in time. This problem is solved as long as some other bill becomes law soon to increase the debt limit.

* I lean against amending the Constitution, even for a Balanced Budget Amendment whose form I like. And the legislative reality means time spent on a BBA could be better spent trying to cut spending.

No bill is perfect. In my view, the good far outweighs the bad in this bill.

I know this is serious business, but I have to admit that part of the fun of this bill would be seeing the President in a situation wherein he has to decide whether to stomp his little feet and not sign it, or to sign it anyway and do a slow burn for months afterward.

That may be a confessable sin, as a matter of fact.

* East Coasters can look at it before bed over their camomile tea, or wait until the morning. But this will be on the quiz, okay?

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