Sorting the Real From the Phony Spending Cut Options

By Fred Barnes

A balanced budget amendment will be hard, but block-granting Medicaid and food stamps to states would be a good start on reform.

Simple lessons from the presidencies of Franklin Roosevelt and Ronald Reagan point to what’s likely to be the only successful approach to containing government spending in the Barack Obama era.

In FDR’s time, a surge in spending by Washington was a cornerstone of New Deal efforts to lift the country out of the Depression. But unemployment never dropped below 14% in the 1930s and rose to 19% by the end of the decade. “Now, gentlemen, we have tried spending,” Henry Morgenthau, FDR’s Treasury secretary, confessed to House leaders in 1939. “We are spending more than we have ever spent before and it does not work.”

Mr. Reagan understood this lesson when he confronted a recession in 1981, his first year in the White House. He restrained domestic spending (while funding a robust military buildup), and overall spending actually declined in 1987. But the cuts were temporary. Mr. Reagan’s only lasting curb on spending was a gradual, scheduled increase in the Social Security retirement age to 67.

Since 1988, Mr. Reagan’s final year in office, spending has escalated to an estimated 25.3% of GDP in 2011 from 21.3%. The national debt has grown by nearly $4 trillion in Mr. Obama’s presidency. Yet a sharp hike in spending has worked no better for Mr. Obama than it did for Mr. Roosevelt. And now we face a borrowing and debt crisis caused chiefly by the spending binge.

So here are the two relevant lessons for the ongoing discussions on raising the debt ceiling between Congress and the White House: 1) spending does little to spur economic growth and job creation and 2) cuts are fleeting and quickly overwhelmed by more spending. Thus the solution to the spending problem is straightforward: Rather than temporary cuts, what’s needed are a permanent cap on spending and structural changes in entitlement programs.

The key word is “permanent.” And to work, a cap must be enforceable.

Caps on spending come in different sizes, all of them likely to be opposed by Mr. Obama and most Democrats. The Republican Study Committee, the caucus of House conservatives, wants a cap at 18% of GDP—the average level of tax revenues in recent decades—with automatic cuts if spending exceeds the cap. To waive the cap, a two-thirds vote of both houses of Congress would be required.

Republican Sen. Bob Corker of Tennessee has proposed a cap of 20.6% of GDP, the average level of federal spending over the past 40 years, also with a two-thirds vote of both Houses required to override the cap. The Corker plan has some Democratic support in Congress. Erskine Bowles, co-chair of the president’s National Commission on Fiscal Responsibility, favors a cap at roughly that level.

As part of their strategy of seeking spending cuts to offset the $2 trillion hike in the debt limit sought by Mr. Obama, Republicans are demanding a vote on a balanced budget amendment. A deficit, under the amendment, would be erased by spending cuts. A tax increase would require a two-thirds vote.

For now, a constitutional amendment to balance the budget is a nonstarter. In the unlikely event it succeeded in winning a two-thirds vote in the Senate and House, it would face the steeply uphill task of gaining approval by legislatures in three-fourths of the states. At best, that could take years.

And a spending cap is not the answer to escalating entitlement obligations. Social Security and Medicare spending would blast a hole in a cap unless they are revamped. Restructuring them would be an unenviable but not impossible task.

Mr. Obama has been giving mixed signals about whether Social Security reform can be part of the debt-limit talks, first no, now maybe. This is unfortunate since there’s been bipartisan agreement for years on how to reduce its costs: means-testing to slow the growth in benefits for the well-to-do, plus raising both the ceiling on income subject to payroll taxation and the retirement age. One version or another of this scheme has been backed, privately or publicly, by Presidents Bill Clinton and George W. Bush, Newt Gingrich, and the president’s fiscal commission—but conspicuously not by Mr. Obama.

Medicare is another story. Its fee-for-service payments will bankrupt the program by 2020, according to the Congressional Budget Office. A proposal by Rep. Paul Ryan, chairman of the House Budget Committee, would transform it into a program offering seniors a subsidy to choose among private health insurance plans. The subsidy would be larger for the less affluent and would grow at the rate of inflation. The plan would save trillions. So would a less sweeping plan by Independent Democratic Sen. Joe Lieberman of Connecticut and Republican Sen. Tom Coburn of Oklahoma.

Radically altering entitlements may be too ambitious and complicated for a debt-limit bill that must be passed within a few weeks. But that might not be the case with other mammoth programs that could be turned over to the states and funded with block grants from Washington, such as Medicaid and food stamps. Along with a cap on federal spending, the pressure for spending restraint in such programs would be doubled, since balanced budgets are mandated in most states.

At his press conference last week, Mr. Obama said negotiators have already identified more than $1 trillion in spending cuts. No doubt they have, but whether they are real or not, spending cuts are evanescent. Reductions one year are followed by increases the next, whether Democrats or Republicans are in charge in Washington. Members of Congress elected a few years after future cuts are promised today won’t feel obliged to impose them. In 1982, Mr. Reagan believed he had arranged to get three dollars in spending cuts for every dollar of additional tax revenues. The cuts either didn’t materialize or were soon overtaken by more spending. By the way, Mr. Obama says he favors the same 3-to-1 ratio.

Republicans should understand that an enforceable spending cap at a level most Republicans and even some Democrats support would reduce federal spending by trillions of dollars over 10 years even in the absence of serious Social Security and Medicare reform. It won’t be easy to get Mr. Obama to agree. It is certainly worth a try.

Mr. Barnes is executive editor of the Weekly Standard and a commentator on Fox News Channel.

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