U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

70–855 2012

S. HRG. 112–189 

MAXIMIZING AMERICA’S PROSPERITY: HOW 

FISCAL RULES CAN RESTRAIN FEDERAL 

OVERSPENDING 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 27, 2011 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

ROBERT P. CASEY, JR., Pennsylvania, 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

JIM DEMINT, South Carolina 

DANIEL COATS, Indiana 

MIKE LEE, Utah 

PAT TOOMEY, Pennsylvania 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

MICK MULVANEY, South Carolina 

MAURICE D. HINCHEY, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

WILLIAM E. HANSEN, Executive Director 

ROBERT P. O’QUINN, Republican Staff Director 

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas .............. 1 

Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from Pennsylvania ......... 3 

WITNESSES

Hon. James C. Miller III, Senior Advisor, Husch Blackwell, LLP and Former 

Director of the Office of Management and Budget, Washington, DC .............. 5 

Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute, Washington, DC ............. 6 

Hon. Robert D. Reischauer, President, Urban Institute, Washington, DC ......... 8 

SUBMISSIONS FOR THE RECORD

Study titled ‘‘Spend Less, Owe Less, Grow the Economy’’ submitted by Vice 

Chairman Kevin Brady ........................................................................................ 30 

Study titled ‘‘Maximizing America’s Prosperity’’ submitted by Vice Chairman 

Kevin Brady .......................................................................................................... 48 

Prepared statement of Representative Kevin Brady ............................................ 63 

Prepared statement of Senator Robert P. Casey, Jr. ............................................ 64 

Prepared statement of Dr. James C. Miller III ..................................................... 65 

Prepared statement of Dr. Daniel J. Mitchell ....................................................... 66 

Prepared statement of Dr. Robert D. Reischauer ................................................. 69 

(1) 

MAXIMIZING AMERICA’S PROSPERITY: HOW 

FISCAL RULES CAN RESTRAIN FEDERAL 

OVERSPENDING 

WEDNESDAY, JULY 27, 2011 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 10:15 a.m. in Room 216, 

the Hart Senate Office Building, the Honorable Kevin Brady, Vice 

Chairman, presiding. 

Senators present: Casey, Klobuchar, DeMint, and Lee. 

Representatives present: Brady, Burgess, Campbell, and 

Maloney. 

Staff present: Gail Cohen, Will Hansen, Colleen Healy, Jesse 

Hervitz, Matt Solomon, Connie Foster, Robert O’Quinn, and Michael Connolly. 

OPENING STATEMENT OF HON. KEVIN BRADY, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS 

Vice Chairman Brady. Well good morning, everyone. Thank 

you for being here. Between debt limit discussions and broken subways, we are running a little late today. Thank you for your patience. 

I am pleased to join with Senator Casey and Senator DeMint and 

other members of the JEC in hosting this hearing today to talk 

about how we can fundamentally restrain future spending in Congress; what tools work at the state level; what are the right measurements. 

The United States is on the precipice of a financial crisis because 

Washington really spends too much relative to the size of our economy. Under this President, Federal spending has grown far beyond 

the ability of our tax system to generate revenues from American 

families and businesses sufficient to pay for Washington’s overspending. The resulting large budget deficits are causing an 

unsustainable accumulation of Federal debt. 

Business investment in new buildings, equipment, and software 

drive job creation—not Federal spending. Today, both large corporations and entrepreneurs are not investing because of uncertainty. They fear higher taxes and new burdensome regulations. 

Consequently, job creation is anemic, the unemployment rate remains stubbornly high, and American families are suffering. 

As one major businessman recently—a Democrat, it turns out— 

recently commented about the Administration, he described it as 

2 

the greatest wet blanket to business and progress and job creation 

in my lifetime. The business community in this country is frightened to death. 

Overspending cannot be cured by a so-called ‘‘balanced approach.’’ A recent study, ‘‘Spend Less, Owe Less, Grow the Economy,’’ published by the Joint Economic Committee Republican staff 

this past March found that successful fiscal consolidations by our 

global competitors were composed of at least 85 percent spending 

reductions with additional revenues largely from non-tax sources 

such as asset sales. Balanced approaches that included both spending reductions and tax increases failed in other countries. 

[The study titled ‘‘Spend Less, Owe Less, Grow the Economy’’ appears in the Submissions for the Record on page 30.] 

Instinctively, Americans know that Federal spending must be reduced. Nevertheless, Washington has demonstrated that it cannot 

maintain a spending diet. Public choice economists have identified 

many biases in our political system against fiscal restraint and for 

higher Federal spending. 

When I became Vice Chairman, I asked the Joint Economic Committee Republican staff to examine what Constitutional and statutory tools our global competitors and our states use to control their 

government spending. The results were published in the study, 

‘‘Maximizing America’s Prosperity,’’ this June. This study found 

that our global competitors capped the spending of their national 

government relative to the size of their economy to put their financial house in order. We must do the same. 

[The study titled ‘‘Maximizing America’s Prosperity’’ appears in 

the Submissions for the Record on page 48.] 

Washington should also consider using a number of tools that 

our states employ to control their spending, including the item-reduction veto and sunset laws. The item-reduction veto allows state 

governments to reduce specific items in appropriations bills without vetoing an entire bill. Sunset laws require the periodic review 

of all state agencies and programs. State agencies and programs 

expire if the legislature does not review them before their sunset 

date. 

Interestingly, the study found that the effectiveness of state tax 

and expenditure limitations has varied greatly based on their design. In particular, expenditure limits tied to measures of a state’s 

actual GDP have been breached during recessions when mandated 

spending cuts proved to be politically unsustainable. 

Today’s hearing will examine how these lessons can be applied 

to the Federal Government. Like our global competitors, Congress 

must establish spending caps. Yet, from our own states we have 

learned that the durability of spending caps through business cycles depends in large part on how they’re designed, their metrics. 

In my opinion, caps should be placed on Federal non-interest 

spending. Congress can control discretionary and entitlement 

spending through legislation. However, interest spending is a function of past fiscal decisions, the Federal Reserve’s monetary policy, 

and financial market conditions largely beyond the control of Congress. 

Clearly, any spending caps should be related to the size of the 

economy over time. However, actual GDP poses a problem because 

3 

it fluctuates with the business cycle. Therefore, spending caps 

based on actual GDP allow rapid spending growth during boom 

times only to force large, politically unsustainable spending cuts 

during recessions. 

A better choice is potential GDP. Potential GDP is a measure of 

what GDP would be at full employment without inflation. It is a 

well understood and a widely used economic concept. For example, 

Stanford University economist John Taylor uses potential GDP in 

the ‘‘Taylor Rule’’ to estimate what the Federal Reserve’s target 

rate for Federal funds ought to be. The Congressional Budget Office already calculates potential GDP for its 10-year budget window. 

Potential GDP is the GDP family’s smarter brother. Using potential GDP provides a more stable path for controllable spending 

through time, eliminating the spending blowouts on the upswing 

and preventing draconian spending cuts on the downswing that 

have not proven to be achievable. 

Given the differences between Republicans and Democrats on the 

size and scope of the Federal Government, it is unlikely that we 

will agree on the level of spending caps. However, I hope that we 

could agree on the metrics used to design them. 

I look forward to hearing the testimony of today’s witnesses. And 

with that, I would like to yield to the Chairman of the Joint Economic Committee, Senator Casey. 

[The prepared statement of Representative Kevin Brady appears 

in the Submissions for the Record on page 63.] 

OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., 

CHAIRMAN, A U.S. SENATOR FROM PENNSYLVANIA 

Chairman Casey. Vice Chairman Brady, thanks very much. I 

don’t know if Senator DeMint—did you want to jump ahead? 

Senator DeMint. [Nods in the negative.] 

Chairman Casey. I will be brief. I will submit a statement for 

the record, but I want to thank our Vice Chairman for calling this 

hearing. I know we will have a chance to examine some very difficult issues, and especially in light of where we are today with a 

resolution to this debt ceiling debate that we have been having. 

I think the key thing here is that I think there is broad agreement that we not only have to get a resolution of this, but we have 

got to do so by way of reducing spending. 

One of the reasons that I favor the approach taken by the Major 

Leader, Senator Reid, is that there is a substantial reduction in 

discretionary spending. And that would be the second time, if it 

were enacted, the second time this year where those numbers have 

been reduced. And I think that indicates the willingness that folks 

have here in the Congress to reduce spending. 

But there is more to do, and there is also an awareness I think 

that no matter what happens between now and the deadline, that 

we are going to have a lot of work to do after that—a lot of work 

to do in terms of cutting spending, a lot of work to do to putting 

us on a much firmer fiscal, or a much firmer foundation for fiscal 

responsibility. 

So we have got a lot of work to do. The key thing I think for the 

American people to see is that we are trying to do this in a biparVerDate Nov 24 2008 13:28 Jan 18, 2012 Jkt 070855 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\70855.TXT DPROCT
4 

tisan way. This is not just about getting the policy right; how we 

do it, and the manner and approach we take is going to be very 

important. 

So I want to thank the Vice Chairman for calling the hearing, 

and I will have to leave early after the testimony of Dr. Miller, Dr. 

Mitchell, and Dr. Reischauer. But I will be here for the testimony 

and then I have to go, but I know the hearing is in good hands 

with our Vice Chairman. 

Thank you. 

[The prepared statement of Senator Robert P. Casey, Jr. appears 

in the Submissions for the Record on page 64.] 

Vice Chairman Brady. Mr. Chairman, thank you very much 

for your participation and for working together on a series of hearings about our economy and jobs and the path forward, and the 

right size of government as we strengthen our economy. 

I would ask—normally we do not ask for opening statements, but 

I know Senator DeMint has a very busy schedule today, and certainly would offer that opportunity. 

Senator DeMint. No, thank you. 

Vice Chairman Brady. Thank you very much for being here. 

And Representative Campbell, as well. Thank you. 

I would like to take a moment to introduce our distinguished 

panel of three witnesses, two of whom happen to be Georgia Bulldogs: Dr. James C. Miller III is the Senior Advisor to the International Commercial Law Firm of Husch Blackwell, LLP, and a 

member of the Board of Directors of Americans for Prosperity. Dr. 

Miller is one of the country’s leading public choice economists. His 

experience in government includes serving as Chairman of the Federal Trade Commission and Director of the Office of Management 

and Budget during the Reagan Administration; and Chairman of 

the Board of Directors of the U.S. Postal Service during the second 

Bush Administration. Dr. Miller’s private-sector experience includes serving on the Board of Directors of several organizations, 

and as Chairman of the Capital Analysis Group of Howery LLP. He 

is a frequent contributor to many national media outlets. Dr. Miller 

holds a B.B.A., Economics, from the University of Georgia; and a 

PhD in Economics from the University of Virginia. We are pleased 

to have you here today as a witness, Dr. Miller. 

Dr. Daniel J. Mitchell, our second Bulldog, is a Senior Fellow and 

tax expert at the Cato Institute. Prior to his time at Cato, Dr. 

Mitchell was a Senior Fellow with the Heritage Foundation. He 

knows the Hill well, having worked as an economist for Senator 

Bob Packwood and the Senate Finance Committee. Dr. Mitchell 

also contributes to several national newspapers and is a frequent 

guest on radio and television shows. He holds Bachelor’s and Master’s Degrees in Economics from the University of Georgia, and a 

PhD in Economics from George Mason University. Thank you for 

joining us today, Dr. Mitchell. 

Dr. Robert D. Reischauer is President of the Urban Institute and 

is a nationally known expert on the Federal budget, Medicare, and 

Social Security. Dr. Reischauer served as the Director of the nonpartisan Congressional Budget Office from 1989 to 1995, and currently serves on the boards of several educational nonprofit organizations. He is one of the two Public Trustees of the Social Security 

5 

and Medicare Trust Fund. Much like our other two witnesses, Dr. 

Reischauer is a frequent contributor to the public policy debate in 

newspapers, on the radio, and television. Dr. Reischauer holds an 

A.B. in Political Science from Harvard University; and a M.I. and 

PhD in Economics from Columbia University. Thank you, Dr. 

Reischauer for sharing your experience today. 

With that, I would invite Dr. Miller to begin the testimony. And 

again, welcome, all. 

STATEMENT OF HON. JAMES C. MILLER III, SENIOR ADVISOR, 

HUSCH BLACKWELL, L.L.P AND FORMER DIRECTOR OF THE 

OFFICE OF MANAGEMENT AND BUDGET, WASHINGTON, DC 

Dr. Miller. Thank you, Mr. Vice Chairman. I appreciate the opportunity of being with you today and to testify about this proposed 

Maximizing America’s Prosperity Act. It addresses a very important question, perhaps a little bit abstract compared to all the nitty 

gritty of the negotiations going on today, but nevertheless I think 

a very important one. And that is: How do you maximize economic 

activity and thereby maximize income per capita, incomes per capita? 

This Act relates this to the proportion of government—the expenditures of government as a proportion of GDP. And why is that 

important? The reason is that there is—while the economists are 

debating over precise numbers—there is general consensus that 

there is a relationship between the size of government and our 

economy and the ability of our economy to produce goods and services. 

Obviously at root state of society, there is very little output, 

where people do not have property rights and so forth. But as you 

apply property rights, you enforce contracts, and this sort of thing, 

output rises. But if you get too large—that is, you get the government too large—this output begins to fall. It can no longer maintain this rise. 

And so a challenge, it seems to me, for the Members of our Congress is to look and see—to understand this relationship better, 

and to consciously try to choose the size of government, relative 

size of government, that maximizes prosperity. And if not doing 

that, recognize what the tradeoffs are. 

This bill, like I said, does address the question of output. I have 

a little graph in my testimony that depicts the relationship that I 

just described. The MAP Act places a ceiling on spending, or actually noninterest spending as a proportion of potential GDP. And it 

provides for mechanisms to keep that spending under control. 

It provides, for example, sequestration of budget resources. I 

have experience with that because Gramm-Rudman-Hollings was 

passed and implemented while I was Budget Director. It provides 

for an item-reduction veto for the President. It requires the President’s budget submissions to comply with the restraints of the 

MAP Act. 

It establishes a commission to recommend the sunsetting of 

agencies—and goodness knows, while there are a lot of criticisms 

of agencies that are not justified, there is a lot of criticism that is 

justified. And some agencies simply should be sunsetted, and this 

commission would supply, or would come up with those kinds of 

6 

answers. And there would be an expedited procedure for Congress 

to consider those recommendations. 

Let me just mention three additional points: 

First of all, there are things that you could do in addition to the 

MAP Act. It’s not that you should exclude all these things. For example, the Cut, Cap, and Balance legislation passed by the House 

includes a requirement to put before the states a balanced budget 

amendment. I think that would be a good idea, in addition to the 

passage of the MAP Act. 

Second, the cost of government includes—I think we would all 

agree here—the cost of government includes not only spending but 

the cost of regulation. And I have urged for some years that Congress impose a regulatory budget and have the budget, or a regulatory budgeting process just like the fiscal budget process, and 

that you would want to add that cost in the cap, or you might want 

to change the numbers for that reason. Also, tax expenditures are 

basically an alternative way of accomplishing the same thing you 

can accomplish with direct outlays. 

And relatedly, there will be attempts to get around the strictures 

of the MAP Act by going for more regulation, or for tax expenditures. So you want to close off those loopholes and keep those opportunities from abusing the purposes of the MAP Act. 

Mr. Chairman, and Mr. Vice Chairman, that concludes my remarks. Thank you. 

[The prepared statement of Hon. James C. Miller III appears in 

the Submissions for the Record on page 65.] 

Vice Chairman Brady. Thank you, Dr. Miller. 

Dr. Mitchell. 

STATEMENT OF DR. DANIEL J. MITCHELL, SENIOR FELLOW, 

CATO INSTITUTE, WASHINGTON, DC 

Dr. Mitchell. Thank you to the Chairman, and Members of the 

Committee, for this opportunity to testify. 

In the past 10 years under Presidents of both Parties, the burden 

of Federal spending has jumped from 18.2 percent of GDP to close 

to 25 percent of GDP—but that is just the tip of the iceberg. 

Thanks to demographic changes and poorly designed entitlement 

programs, the burden of Federal spending as a share of GDP could 

double over the next several decades according to CBO’s long-term 

forecast. 

The question is: What are we trying to fix when we are looking 

at budget process reforms? This is a critical question. Most people 

think that deficits and debt are the problems with fiscal policy. Excessive red ink surely is a problem, as places such as Greece and 

Portugal demonstrate, but deficits and debt should be viewed as 

symptoms. The real problem is that governments are too big and 

they are spending too much. 

The true fiscal tax is the amount of money that government diverts from the productive sector of the economy. And whether it finances that spending by borrowing, or whether it finances that 

spending by taxes, it still results in a transfer of resources from the 

private sector to the public sector. And so I think the important 

thing, when you are looking at budget process reforms, is trying to 

address that issue. 

7 

But it is also important to have very realistic goals. No budget 

process reform is going to be perfect. The appropriate analogy is 

that fiscal rules are sort of like anti-crime mechanisms. If you put 

locks on your door, that does not mean you will not ever be burglarized. Even if you have bars on your window, an alarm system, 

and gun ownership, you are not guaranteed that you will never be 

victimized by crime. But the perfect should not be the enemy of the 

good, particularly when the alternative is to let the country slowly 

but surely sink into some sort of a European-style fiscal crisis. 

I touch on several things in my written testimony, including a 

balanced budget amendment, line-item veto, current-services’ budgeting, but in my brief time for oral testimony I want to focus on 

the idea of spending caps and what should they try to achieve. 

A spending cap is, of course, the notion that there should be 

some upper limit on how much government can spend in any given 

year. Those spending caps can be very narrow—say, just applying 

to discretionary spending; or they can be very broad. 

When you are talking about defining a spending cap, there are 

two ways of doing it. You can just say: government can only spend 

so much of GDP—however GDP is defined; or you can say: government can only spend this nominal amount every single year. 

In theory they could wind up being exactly the same thing. I like 

the idea of focusing on GDP, and I especially like the idea of looking at potential GDP, because, as was discussed in the opening 

statement by Vice Chairman Brady, when you focus on actual GDP 

and you have booms and busts in a business cycle, you wind up allowing politicians to spend too much money perhaps when the 

economy is booming. And we certainly see this in states. 

One of the reasons why states get in fiscal trouble is that when 

the economy is doing very well, their revenues are rising 8, 9, 10 

percent a year, and they wind up letting spending increase by that 

much. Then, when the economy goes into a downturn, all of a sudden, the revenue disappears and they wind up in very, very serious 

trouble, as we have seen with States such as California and Illinois. 

Whereas, if you focus on potential GDP, you not only solve that 

problem, you smooth out the spending patterns of the government, 

and you create something that is more stable. 

One of the problems with Gramm-Rudman was not a problem 

with the legislation itself, but a problem with the political durability of the legislation. As we moved into an economic downturn, 

the Gramm-Rudman spending caps—which were very indirect because they were actually deficit caps, which basically meant government could spend the amount of revenue coming in plus the deficit cap—those indirect spending caps under Gramm-Rudman simply could not be sustained when the potential sequester became too 

large, or Congress was being asked to do too much. And so potential GDP largely solves that problem. 

Another advantage of potential GDP, if you are using some forecast of future GDP, is that there is a risk that lawmakers might 

pressure CBO or OMB. 

And then, real quickly, I want to talk about what spending to 

cap. Obviously we know from looking at the CBO and OMB forecast that entitlements are the main long-term problems. So while 

8 

discretionary caps are good, some cap that applies to all spending 

is better. But if you take out interest, you actually focus on just the 

spending that Congress truly can control through legislation. 

So I think the idea of focusing on primary spending—in other 

words, total expenditures minus debt interest—is a very reasonable 

way of doing it. It also has certain advantages in not complicating 

tax policy debates. 

But I see I am out of time, so I will stop there. Thank you very 

much. 

[The prepared statement of Daniel J. Mitchell appears in the 

Submissions for the Record on page 66.] 

Vice Chairman Brady. Thank you, Dr. Mitchell. Appreciate it. 

Dr. Reischauer. 

STATEMENT OF HON. ROBERT D. REISCHAUER, PRESIDENT, 

URBAN INSTITUTE, WASHINGTON, DC 

Dr. Reischauer. Vice Chairman Brady, Chairman Casey, Members of the Committee: 

I appreciate the opportunity to discuss the contribution that fiscal rules might play to restrain Federal spending. As my prepared 

statement makes clear, I think fiscal rules can play a rather limited role in getting the Nation’s fiscal house in order. 

Let me elaborate on this by offering a few observations about 

some of the fiscal rules mentioned in the letter of invitation. 

What would happen if the existing Concurrent Budget Resolution 

were replaced with a Joint Resolution requiring the President’s signature? 

Well first, the Congress would give up some of the budgetary 

independence that it gained when it went to the Congressional 

Budget Process in 1974. 

Second, it is likely that it would be even more difficult to formulate a budget resolution with three cooks in the kitchen representing two Branches of Government versus the current situation 

where we have the two Chambers of Congress representing one 

Branch of Government. And that has not proven very successful in 

the last few years. 

Third, a Joint Resolution would fog responsibility for failure as 

few would be able to judge which of the three participants was responsible for budgetary failure. 

Overall, I do not see why one would expect this reform to have 

an appreciable impact on spending or deficits, although it could 

make post-budget resolution decisions and processes less contentious and speedier. 

What about discretionary spending caps enforced through sequestration? 

This tool is clearly going to play a major role in whatever resolution we have to the debt ceiling crisis, and that seems appropriate 

considering that the discretionary spending caps of the 1990s appear to have been quite successful. But before you place too much 

emphasis on this mechanism, you should examine the record carefully. 

Between 1990 and 2000, total discretionary spending measured 

in inflation-adjusted dollars fell by almost 6 percent, or an even 

more dramatic 27 percent drop as a percentage of GDP. But this 

9 

successful record was largely a story about the defense budget and 

the rapid economic growth of the last half of the 1990s. 

The Berlin Wall came down in the Fall of 1989. The Soviet Empire collapsed, bringing the Cold War to an end. The combination 

of this new international environment and the spending caps resulted in a reduction in defense outlays of over 20 percent during 

that decade measured in real or constant dollars, a reduction as a 

fraction of GDP of 42 percent. 

The story was quite different if one looks at the nondefense side 

of the budget where the constant dollar spending actually increased 

by 17 percent over this period. And as a percent of GDP, it just decreased marginally, but that was due to the rapid growth in the 

economy in the last half of the 1990s, some of which proved to be 

illusory. 

The take-away lesson from the 1990 experience with spending 

caps is that this tool can be effective if there exists a broad bipartisan consensus that certain areas of the budget should be scaled 

back in a significant way. But spending caps are relatively easy to 

agree to because no one knows which specific programs will be reduced disproportionately to achieve these caps. 

This creates a real risk that more will be promised than can be 

delivered, and the caps will prove to be unsustainable as they did 

after 1997. 

What about enhanced recision authority? 

The Budget Control and Impoundment Act gives the President 

the authority to propose recisions, but Congress has no obligation 

to take them up. And so the President’s requests are frequently ignored. Enhanced recision authority would stop this benign neglect 

by requiring Congress to vote on the President’s recision requests 

unamended, up or down, within a fixed time period. 

Enhanced recision would give the President a strengthened ability to weed out narrow, special interest allocations that do not have 

widespread Congressional support. It is doubtful, however, that 

large amounts of budget authority would be rescinded under this 

tool, and furthermore one has to make sure that whatever budget 

authority was rescinded did not get reallocated back into the pot 

but rather was offset by reductions in the budget resolution’s allocation of authority. 

Balanced budget amendments to the Constitution could dampen 

the growth of spending, but this would come, in my opinion, at a 

very high price. The automatic stabilizing role that the Federal 

Government now plays for the economy would be seriously compromised. Economic downturns would be both deepened and prolonged, and vulnerable populations would suffer. 

Under a balanced budget amendment, the Federal Government 

will lose some of the budgetary flexibility it has now and its ability 

to respond quickly to unexpected events, be they natural or manmade catastrophes. 

Some proposed versions of a balanced budget amendment would 

make it difficult for Social Security or the government’s pension 

plans to draw down reserves that they have built up over the years 

to pay benefits. 

10 

Similar constraints would face the FDIC, the PBGC, and many 

of the government’s insurance and loan guarantee programs, effectively eliminating the reasons for their existence. 

While the wording of the balanced budget amendments being 

considered by the Congress seems simple and clear, all of these 

proposals raise thorny questions involving definitions, implementation challenges, and enforcement. 

For example, answers would have to be found to such questions 

as: What is the budget? What constitutes the budget? Is Congress 

or the President responsible for achieving balance? And through 

what processes? 

What remedies would be imposed if balance were not achieved? 

And on whom? To assure the balanced budget amendment could 

achieve its objectives, Congress would probably have to cede some 

of its short-run authority over the budget to the President. 

Let me conclude by noting the fiscal rules can help frame and organize budget decisions. They can influence expectations, and they 

can provide a bit of political cover to those who must make difficult 

votes. But they cannot create or substitute for political will. 

History has shown us that if fiscal rules are found to be too stringent, they are going to be ignored, waived, circumvented, or repealed. Recent experience suggests that there exists a bottomless 

well of budget gimmicks that lawmakers can draw on to avoid the 

discipline implied by fiscal rules they have endorsed but cannot 

find the will to impose—— 

Vice Chairman Brady. Doctor, at this point we have exceeded 

the time by about two-and-a-half minutes. 

Dr. Reischauer. Excuse me. 

Vice Chairman Brady. We will make sure your full—no, no. 

We will make sure your full statement is included in the record. 

[The prepared statement of Hon. Robert D. Reischauer appears 

in the Submissions for the Record on page 69.] 

Vice Chairman Brady. We will begin questioning. We appreciate being joined by Senator Lee and by Congressman Burgess, as 

well as Senator Klobuchar. Thank you. 

The size of a country’s debt relative to its economy is a major indicator of its financial health. The amount of deficit related to its 

economy is the same. The size of government related to its economy 

and to its revenues are critical. 

Republican or Democrat, everyone agrees that a nearly 25 percent—a government that is nearly 25 percent the size of the economy is unsustainable. So how we shrink the size of this government over time is critical. And those spending caps matter. 

In the MAP Act—and both Dr. Miller and Dr. Mitchell referenced 

this—we use different metrics. Rather than total spending that includes interest, which is not controllable—it is like a credit card; 

you cannot control necessarily the interest rate on your card, but 

you can control the monthly principal and continue to focus to 

shrink that over time. 

The same with GDP. Not only are there wide bands, it was revised several times over the years. You are always looking back at 

it, and it can be gamed. People try to get around it by making continual rollover estimations, or estimates of it. Potential GDP tracks 

actual GDP but in a much tighter band, so in the future you conVerDate Nov 24 2008 13:28 Jan 18, 2012 Jkt 070855 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\70855.TXT DPROCT
11 

strain spending during good economic times and the cuts are not 

quite so steep during the tough times. 

My question is: For lawmakers who are so accustomed to measuring all spending rather than controllable spending, and actual 

GDP versus the more stable potential GDP, as economists how do 

you translate this into a real-world example that lawmakers can 

better understand? Because it is a shift from the way we have 

thought about spending caps in the past. 

Dr. Miller. Dr. Mitchell. 

Dr. Miller. Well nothing comes to my mind as an easily grasped 

analogy or metaphor on this. I think I have no criticism of your 

choice of potential GDP. In fact, I think potential GDP, as Dr. 

Mitchell was mentioning, may have a stabilizing effect along the 

same lines that Dr. Reischauer was suggesting that the Federal 

spending does play with our national economy. 

If I might, Mr. Chairman, Mr. Vice Chairman, I would like to 

mention—I am not sure if it is—maybe it is a clarification of what 

Bob was saying. I think that these kinds of institutional restraints 

do work. They absolutely do work. 

If you look at the Gramm-Rudman-Hollings, it really worked. It 

brought the deficit way down. And it would have brought it all the 

way down to zero had Congress not panicked and changed the 

rules, or changed the targets when they did. 

Secondly, I did some work with one of my colleagues, Mark 

Crane, who, Mr. Chairman, Mr. Casey, is the William Simon Professor of Economics at Lafayette College, and we looked at state restraints. It may have been material that you covered in that report 

you were talking about. But states that had balanced budget requirements tended to control spending better. 

States that had a line-item veto for the governor tended to control things better. And all those institutional arrangements, they 

do work. But I think Bob’s point is correct to the extent that he 

is saying that they may not work—they would not work if Congress 

undermines them. 

So you are making a big statement if you pass this kind of legislation because you are basically going—you need to commit that 

you are going to live under those constraints in the future. 

Vice Chairman Brady. Thank you, Dr. Miller. 

Dr. Mitchell. 

Dr. Mitchell. Your question is a challenge because I suspect 

that the average person, or for that matter the average lawmaker, 

when told that we are going to have some budget rule focused on 

potential GDP, they are going to say, wait, that sounds fishy. They 

are going to be suspicious. And for that matter, primary spending. 

Wait, wait. What’s that? 

So there really is an educational mission here. This hearing obviously is part of it. As I am sure you know, Senator Corker has 

some legislation in the Senate, and so there is a lot of discussion 

about this, and everyone seems to be talking about discretionary 

caps. 

I just think it is a question of almost Member to Member education, staff to staff education, so they understand that this is not 

just some strange idea pulled out of nowhere that allows for some 

12 

slipperiness. It is something that actually makes the legislation 

much more durable over time. 

And I gave my little example that putting locks on your doors 

does not mean you will never get victimized by crime. Maybe another way of thinking about it, when trying to put together budget 

process reform is: If I go on a diet and I want to lose 20 pounds 

and I only lose 10 pounds, it is still good that I went on a diet even 

if I did not achieve all of what I wanted. It is better not to have 

those extra 10 pounds. 

And so, yes, I fully expect that any budget process reform, no 

matter how well designed, is going to face challenges in enforcing 

and implementing it in the future just because it is the nature of 

the political system for people to try to get around it. But by all 

means, it is better than not doing something. 

Vice Chairman Brady. It is the biggest challenge when we set 

these guardrails, to put them in place in a way where, when things 

get a little tough, as Dr. Miller pointed out, both parties do not 

hold hands and jump the guardrails. That has been the challenge 

in the past. Appreciate the commitment. 

Senator Casey. 

Chairman Casey. Thanks very much, Mr. Vice Chairman. 

Dr. Reischauer, I wanted to ask you two basic questions, but 

then also if we have time refer back to part of your testimony. 

Am I right that you were at the Congressional Budget Office 

from 1977 to 1981, and then Director from 1989 to 1995? 

Dr. Reischauer. Yes. 

Chairman Casey. That is a long—— 

Dr. Reischauer. I mean, not—I actually was the first employee 

of CBO. Alice Rivlin and I got in the cab. In 1975 I was sort of a 

kid at the Brookings Institution, and we came down to the Capitol. 

She was sworn in. There was a reception. The lights went out, and 

she said to me: Help set it up. 

[Laughter.] 

And I had to find a home, and I had to figure out how to get 

franking privileges, all of the complexities of starting something 

here. So it was really 1975 through the beginning of 1981, and then 

1989 to 1995. 

Chairman Casey. So present at the creation. 

Dr. Reischauer. But don’t blame me. 

[Laughter.] 

Chairman Casey. They are in the news again. But in light of 

that experience, and you have been through a lot of these budget 

debates and what economic conditions were like in the 1980s and 

the 1990s versus today. Anything you can tell us about how you 

compare the conditions then as to what they are now? And use that 

as a basis to analyze how we approach these budget issues. Or is 

that significant, or relevant? 

Dr. Reischauer. It is both significant and relevant. 

There is a huge difference between where we were in the 1970s 

when we were worried about growth and budgets, and the 1980 

deficit problems. And that was, that we looked forward and we 

said: We’ve got to do something because the Baby Boom generation 

is going to retire in a couple of decades. 

13 

Well, it is a couple of decades later and they are retiring. The 

demographic tsunami is on us. And we have not, in a sense, prepared ourselves for that. 

If you go back to the first years I was at CBO, there was one 

very huge difference when we were projecting the budget situation. 

And that was, we did not have an indexed-tax system. And so it 

was almost always true that no matter how deep the deficit was 

in the budget year, when you looked forward things corrected 

themselves. And they corrected themselves because the tax burden 

rose as people’s effective tax rates rose as their incomes rose, and 

they got into higher and higher brackets. 

I am all for the indexation of the tax system, but we had in that, 

you know, an automatic fix for the deficit problems that we faced. 

I just want to add one thing, because it will probably be one of 

the few opportunities I have to show that there is some common 

agreement on this panel. 

That is, the use of potential GDP is really a good idea. And also 

if one were going to go down the route that Dr. Mitchell talked 

about, talking about spending, ex-interest is the right way to go 

about it. 

So I am on board with that. But I would add one caution. That 

is, that potential GDP is not a concept that everyone agrees how 

it should be calculated. When we are talking about actual GDP, 

when we are talking about outlays, when we are talking about revenues, there is no debate about what those involve. It is complicated to figure out what potential GDP is, and therefore it is difficult to explain to the average person I think. 

Thank you. 

Chairman Casey. Well, Doctor, if you guys can stay a couple of 

hours maybe we can get agreement on the debt ceiling, too. That 

would be great. 

[Laughter.] 

One final question. I know I am down to about 30 or so seconds. 

When you assess the last decade or so, how did we get to where 

we are now? What is your sense? We had not just surpluses in the 

late 1990s, but the projection was I guess trillions in surplus. 

Dr. Reischauer. Yes, it was sort of amusing. Eleven years ago 

we were having an argument on how the Federal Reserve would 

manage monetary policy when there was no Federal debt to buy 

and sell? 

And the answer to that question of course was: Well, they could 

begin buying and selling GMAC paper, Fannie and Freddie paper, 

et cetera. 

Well, half of it came true. They are. 

[Laughter.] 

But the other half, the elimination of Federal debt, seems to have 

fallen a bit short. 

Chairman Casey. I have a couple more but if I do not get them 

to you I will have to submit them in writing. Thank you. 

Vice Chairman Brady. Thank you, Mr. Chairman. 

Representative Campbell. 

Representative Campbell. Thank you, Mr. Vice Chairman. 

You know I think the reason we are talking about spending caps 

and so forth is, in the 12 years since I lost my mind and left the 

14 

private sector and came into this line of work, it is politically really 

easy to spend money and give people money or services and not ask 

them to pay for all of it. And that is just a really easy political 

thing to do. 

So I think the natural thing that happens in any legislative body 

is to create deficits, because it is politically easy. There are some 

of my colleagues who never vote for a tax increase, but never vote 

for a spending cut either, because neither one is particularly popular. 

So, you know, there are a lot of things we have in life as individuals that we know are the right thing to do but we do not like to 

do. So what we generally do is create some external discipline that 

makes us do what we know we ought to do but will not do without 

that discipline—whether that is the trainer at the gym, or the 

money that comes out of your 401K, comes out of your paycheck 

so that you save for your retirement. 

That is what drives my interest in spending caps, or balanced 

budgets, or whatever. 

Dr. Reischauer, the first question is for you. I certainly get the 

impression from your testimony you are not a fan of balanced 

budget amendments. 

Is there a form of a spending limit or spending cap that you like, 

or that you think is better than the status quo that I just described? 

Dr. Reischauer. Well—— 

Representative Campbell. Or let me phrase it more broadly. 

Is there an external discipline that you believe could help the situation to keep us from being driven toward these increasing and 

unsustainable deficits? 

Dr. Reischauer [continuing]. Well I think that the various 

measures that I talked about, excluding the balanced budget 

amendment, can make small contributions. But they are not going 

to solve the problem. 

The question here I think has much more to do with the structure of our political system and the fact that you are elected every 

two years, Senators every six years; you can communicate to the 

public all of the good things you do directly on television; there is 

very little in the way of Party discipline, and you want to continue 

to be elected. And that is not changed by a set of rules that, when 

faced with tough decisions that might mean that you face a primary opponent, or lose in a general election, it is very difficult to 

in a sense do the ‘‘right’’ thing for the long-run fiscal health of the 

Nation. 

If you do, no one will thank you 20 years from now. It will be 

sort of unclear the contribution that you did make. I do not think 

that is any different from many of us in our current jobs where we 

do not make decisions that could lead to us being asked to leave. 

You know, it is just that you bear a much greater responsibility for 

the future of this country than I do. 

Representative Campbell. Okay, I want to just, before my 

time runs out—— 

Dr. Reischauer. Oh, sorry. 

Representative Campbell. Dr. Mitchell, what are your 

thoughts on the disciplines? And also, we are talking about a 

15 

spending cap. I am curious about your view of a balanced budget 

amendment versus a spending cap, or any external discipline that 

we have not discussed. 

Dr. Mitchell. I am obviously a big fan of spending caps. I focused on that in my oral testimony just because I think there is 

actually some nontrivial chance that something like that could 

emerge from the political process this year. 

I am also a fan of a balanced budget amendment, specifically the 

kind of amendment that has super-majority requirements for tax 

increases, and limit spending as a share of GDP. And I view those 

two as complementary because the spending caps get you to a point 

in the process where you actually are finally balanced. And then 

some sort of Constitutional reform can keep you there. 

The challenge of course is how do you get a two-thirds vote in 

both Houses of Congress and ratification by three-fourths of the 

States? I hope that happens in my lifetime. I am not sure I would 

bet a lot of money on it, and therefore I was focusing more on 

spending caps just for purposes of my oral testimony. 

Representative Campbell. Okay, let me—Dr. Miller, the same 

question as Dr. Mitchell’s. 

Dr. Miller. Well let me say, if your goal is to maximize prosperity I think it would be better—if you had to choose one or the 

other—would be to go with the MAP Act, with appropriate restraints on the abuse of regulation and tax expenditures as a way 

of getting around the constraints. 

But the balanced budget amendment would be very helpful inasmuch as, because of fiscal illusion the public generally, and their 

elected representatives, tend to underestimate the cost of government that is financed by debt. And if you had a balanced budget 

amendment, then you could not do that. 

Representative Campbell. Thank you. Thank you, Mr. Chairman. 

Vice Chairman Brady. Thank you. Former Chairwoman 

Maloney. 

Representative Maloney. First of all, thank you for calling this 

hearing. And it is good to see you again, Dr. Reischauer. Welcome 

back. It is very nice to see all of you. I regret I was in another 

hearing earlier. 

Chairman Bernanke testified last week before the Financial 

Services Committee that cutting too deeply too strongly would impede economic recovery and would increase unemployment in our 

country. That is then another challenge for us. 

So I would like to ask Dr. Reischauer to respond to his comments. We face many challenges, one of which is a fragile economy 

that we need to make sure continues to recover. 

Dr. Reischauer. 

Dr. Reischauer. I agree with that completely. We are not in a 

situation right now where it would be good for the economy if 

sharp fiscal contraction were enacted by Congress. At the same 

time, I think it is imperative that decisions be made now that are 

credible and specific that will begin tightening our fiscal stance by 

2013. 

I think that it would be a huge tragedy if that did not occur. But 

as we have seen from the impact that the cutbacks by state and 

16 

local governments are having on our overall employment and our 

overall economy, contraction at this point would be damaging and 

could even threaten another recession. 

Representative Maloney. Well that is very sobering. I have 

been told that right now our revenues are 15 percent of the GDP 

and 25 percent expenditures. So it is very out of line. And I would 

like your comments if that is a correct number. I read that in the 

paper. I do not know if it is correct or not, but having only 15 percent revenues with 25 percent expenditures, that is not sustainable. 

And your comments on what we could do to address that, and 

certainly putting it more in balance would help with economic 

growth, I would think, again Dr. Reischauer. 

Dr. Reischauer. Those are roughly the right numbers. And you 

are absolutely correct that that is an unsustainable situation. And 

as I suggested in the answer to my previous question, we should 

move forward with legislation that will guarantee that that gap 

narrows. 

I, as opposed to my colleagues here, would narrow the gap in different ways. I would rely partially on revenue increases associated 

with tax reform. But I think it is essential that we not focus solely 

on discretionary spending when we are ratcheting down the spending side of the budget. That has not been a major cause of the deficits that we are experiencing now, nor is it projected to be a cause 

of future deficits. 

What we have to do is reform the entitlement programs that are 

projected to grow rather substantially, but do that within a framework that preserves their fundamental objectives to help elderly, 

disabled, and low-income groups share in the American dream. 

Representative Maloney. And some of these proposals, one 

thing that I find very disturbing about this economic downturn is 

that the gap between the haves and the have-nots is growing, and 

in fact it is larger than it ever has been in the history of our country. 

Some of us are concerned that the cuts directed to the seniors 

and the needy will only broaden that gap and cause more turmoil 

in trying to get back to a balanced economy that works for everyone. 

On the balanced budget amendment, one of the things that helps 

our families grow is the ability to borrow money to buy a car so 

you can get to work, to invest in a company so that you can be an 

entrepreneur and grow it and make it prosper. And I would like 

to ask Dr. Reischauer and Dr. Miller, on the balanced budget 

amendment, if one should be ratified and passed in our country, 

what would the impact be on our ability not only to respond to catastrophes such as a 9/11 where we had to reorganize the whole 

spending of our country to respond to homeland security and more 

efforts to protect the Homeland, or our ability to invest in innovation and areas to grow our economy. 

What would the impact of a balanced budget amendment be on 

the ability of our country to do, like a family does, take out a loan 

to buy a car to get to work; to take out a loan to invest in new technologies; to create the new ideas that not only employ our people 

but move our country forward? 

17 

Dr. Miller, if you could comment on it—and Dr. Mitchell, too, if 

you would like. I know my time is up, I believe. Thank you. Thank 

you, Mr. Chairman. 

Dr. Miller. Congresswoman, as I said in my statement, in an 

ideal world the Federal Government would borrow sometimes, run 

surpluses at times, et cetera. But the world is not ideal. It is not 

perfect. And so this rough-and-ready rule of a balanced budget 

would lead, in my judgment, to a much better situation than we 

have today. 

Secondly, the proposals for a balanced budget requirement that 

I have seen—and I will not comment on cap and balance, the legislation that recently passed the House—but most of them I have 

seen incorporate a supermajority option. That is, that you could 

violate this balanced budget requirement upon a supermajority 

passed by both Houses of Congress and signed by the President. 

And that would meet your concern for some kind of an emergency. 

Let me say also with respect to Dr. Reischauer’s point about— 

and to the issue that you raise, Congresswoman, about the possible 

damage to the economy of immediately having a balanced budget, 

given the difference between spending as a portion of GDP and revenue as a portion of GDP. 

First of all, under the MAP Act those limits would not apply immediately. 

And secondly, as I believe passage of that Act and the affirmation and guarantee that outlays by the Federal Government would 

be a declining portion of GDP, would lead to economic growth to 

increase—given that our tax rates would not be going down 

much—you would have an increase in the total amount of revenue 

generated by the economy. 

And so that would itself narrow the deficit. So I think there is— 

I agree that we are in a very unusual situation, as I think you were 

pointing to, and we need to be careful how we get out of this box. 

But I think that it is doable to get out of the box without having 

substantial adverse effect on the economy. 

Vice Chairman Brady. All right. Thank you all very much. 

Senator Lee. 

Senator Lee. Thank you. And thank you, Chairman Brady, for 

calling this meeting and assembling this great panel of experts. 

As we approach the August 2nd debt limit deadline, I like most 

of my colleagues am very concerned about the double-pronged 

threat that we face. I want to emphasize the double-pronged nature 

of the threat because there is only one side of it I feel has gotten 

adequate attention. 

On the one hand we face a very real threat that has gotten a lot 

of attention, that if we do not raise the debt limit by August 2nd 

bad things will happen. Bad things do happen when you are traveling at 120 miles an hour and you immediately decelerate to 50 

or 60 miles an hour. If you do it a little bit more gradually, things 

can be a little bit less painful and injurious. 

On the other hand, we also face a different risk, one that has gotten far too little attention. That is, that if we raise the debt limit 

reflexively, if we raise the debt limit the same way we have always 

raised it in the past, if we raise it especially to an unprecedented 

$2.4 trillion amount all in one fell swoop without putting in permaVerDate Nov 24 2008 13:28 Jan 18, 2012 Jkt 070855 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\70855.TXT DPROCT
18 

nent binding structural spending reform mechanisms that will fundamentally change the way that we spend money in Washington 

and put us on a trajectory toward a balanced budget, we will face 

a credit downgrade. 

And that threat could well be as severe, if not more severe, than 

the threat associated with not raising it, at least in the short-term 

period. 

It is at that point that I think our most vulnerable populations 

in America face perhaps the greatest threat. If we look at what 

happened in Greece when Greece went into its economic tailspin 

after its debt-to-GDP ratio went well above 100 percent, let’s just 

say it is a very bad time to be a poor person, or an elderly person, 

or a person who for whatever reason is dependent on government 

assistance or government programs of one sort or another in 

Greece. 

Because when that happens, when your sovereign credit rating 

goes down that badly that quickly, it is the poor and the otherwise 

vulnerable that suffer the most. 

So, Dr. Reischauer, I have a question in response to your testimony, both your initial testimony and your answers to some of 

these questions. You referred to America’s vulnerable populations 

and the fact that if we had a balanced budget amendment in place 

that might limit or impair our ability to provide them the services 

that they need to support them. 

But is it not also true, Doctor, that if we do raise the debt limit 

again, and if we do not put in place a permanent structural binding 

spending reform mechanism, that could also bring about revenue 

shortfalls that are equally if not more harsh, draconian, and abrupt? 

Dr. Reischauer. My responses to that are, the reference in my 

answers to the previous questions and in my prepared statement. 

It was about the cyclical nature of the economy. If you had a balanced budget amendment you would have a hard time paying unemployment benefits, SNAP benefits, various things that people depend on. That is sort of a short-term issue. 

On the long-term issue, I agree with you completely that if we 

let this fiscal situation continue to run out of control until there is 

a response from international markets and we are forced to make 

changes not on our own timetable, not maybe in our own priorities, 

but being dictated to by our creditors or international lending agencies, the fate of low-income vulnerable elderly populations will be 

severely tested, I think. 

One reason I have long been an advocate of putting our fiscal 

house in order is precisely that: I think it is in the long run best 

interests of those who are less fortunate to get this done, and get 

it done quickly. 

Whether one needs a balanced budget amendment or some extraordinary set of rules to do this, I am a bit skeptical because I 

have watched this process over a 30-year period and many times 

we have said, well, you know, this is the silver bullet, this is the 

process reform that will make it happen. And it has not happened. 

Senator Lee. But does the fact that it has not passed and we 

still have not solved the problem prove your point? Or does it prove 

the opposite point? I mean, one could argue, could one not, that beVerDate Nov 24 2008 13:28 Jan 18, 2012 Jkt 070855 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\70855.TXT DPROCT
19 

cause it has not passed, and because we have still not solved the 

problem, perhaps we ought to do that which we have failed to do 

in the past, which is to Constitutionally obligate ourselves to do it? 

Dr. Reischauer. That is an argument we could have, but I don’t 

want to take the risk. 

Senator Lee. Understood. And I see my time has expired. 

Thank you. 

Vice Chairman Brady. Thank you, Senator. Congressman Burgess. 

Representative Burgess. Thank you, Chairman. 

Let me ask a question. I apologize that I wasn’t here at the beginning, but as you know we are debating and redebating the 

issues related to the debt ceiling. I just have to say for the record, 

I am grateful this country has a statutory debt limit. I do not think 

we would be doing this hard work right now if we were not required to do it. 

So for those who argue against a debt limit, I would just say that 

if we did not have the debt limit, as Senator Lee points out, we 

could be Greece. So I am grateful we are having the discussions. 

They are not easy to have. They are sometimes painful internally 

and externally, but I am grateful we are doing it. 

We woke up this morning to the news that General Electric was 

moving some of its imaging jobs over to China. And there have 

been various theories put forward as to why that might be happening, but I think when we get beyond the discussion of the debt 

limit and what happens with our spending, the bigger problem that 

we have of course is the joblessness that has been pervasive for the 

last two-and-a-half years and shows no sign of abating. 

And, you know, I am from Texas and we are not doing as badly 

as other parts of the country, but I would like us to do a lot better. 

And I certainly want my country to do a lot better. When you look 

at the joblessness of the 20-year-olds, that is startling that we have 

a whole generation that may never know the value and reward of 

work. 

When you look at particularly the young people who are minorities, the joblessness rate is absolutely staggering. So now we are 

seeing jobs from a large, revered American company going over to 

China. And one of the reasons postulated is that it may be the Tax 

Code that is creating this impetus for this company to move those 

jobs. 

I was just wondering, Dr. Mitchell, do you have an opinion about 

that? 

Dr. Mitchell. There is no question that the U.S. corporate tax 

rate is among the highest in the world, sort of neck-and-neck with 

Japan for the dubious honor of the highest corporate tax rate 

among industrialized nations. 

I remember that President Bush had a tax reform panel—I forget 

what the formal title of the tax reform panel was—but one of the 

testimonies to that panel, I think, was from the tax vice president 

at Intel who said that the biggest difference in the cost of locating 

a plant in the U.S. versus—I think Malaysia was their other 

choice, but I assume China would be similar—was not labor costs; 

it was taxation. That would be the number one advantage for them 

to build a plant overseas. 

20 

Now obviously maybe it would be different in a labor-intensive 

plant versus a high-tech plant, but I do think that our tax system 

is extraordinarily punitive to savings and investment in general, 

our corporate tax rate is very, very high, and is the statutory tax 

rate that acts as the marginal tax rate on new investment and new 

profits for companies. So I do think it is important to look at that 

statutory corporate tax rate. It is just punitive and self-destructive. 

Representative Burgess. So raising that rate, elevating that 

rate to add revenues to the Federal Treasury would be counterproductive? 

Dr. Mitchell. Well Kevin Hassett at the American Enterprise 

Institute—I think along with Alex Breaux, estimated that the revenue-maximizing corporate tax rate was closer to 25 percent over 

the long run. So not only would it be self-destructive to competitiveness and job creation in the U.S., but it very likely might have 

negative impact on the amount of revenue government collects. 

The greater danger is most likely not so much a higher corporate 

tax rate—I have not heard too many people talk about that; the 

greater danger is in increased double taxation of saving and investment through increased double taxation of dividends and capital 

gain. And those of course have an impact on the decisions of people 

to defer consumption and to save and invest. I think that is probably a greater danger. Although it is indirect, it could be just as 

injurious to our competitiveness. 

Representative Burgess. Representative Maloney talked about 

the fact that the tax rate, effectively 15 percent of GDP, and that 

needs to be corrected. Wouldn’t normally that correct over time? 

Dr. Mitchell. If you look at the CBO 10-year forecast, they assume a baseline of current law, which means the Bush tax cuts 

would expire, and revenues would climb to over 19 percent of GDP 

by the end of the decade. If you assume that the 2001 and 2003 

tax cuts are extended or made permanent, you would still have revenues climbing up to about 18 percent of GDP, which is the longrun average. 

So if you look at our long-run fiscal imbalance, it is not because 

revenues, at least in the medium- and long-term will be below their 

historical levels; it is because spending has risen above its long-run 

levels. Historically we had 20 percent spending, 18 percent revenue. Well revenues are going to climb back up to 18 percent, and 

that is without any rosy scenarios. CBO’s estimates do not show 

any great growth. It is the spending that has skyrocketed. 

Representative Burgess. Let me just quickly ask Dr. 

Reischauer a question, if I can, in my remaining time. 

Dr. Reischauer, we hear a lot of talk, and you spoke about the 

social safety net to some degree. Representative Maloney talked 

about the stress being put on Medicare. Now proposals have been 

put forward. There has been a lot of discussion about them. 

Can you tell us, is there a substantial difference between a 

voucher and a program of premium support? 

Dr. Reischauer. This has become a semantic issue of some importance to people. I was under the impression that premium support, and I have some responsibility for coining the term in an article Henry Aaron and I wrote back in 1995, associates the payment 

21 

to the underlying cost of the service being delivered. Whereas in a 

voucher that not necessarily was the case. 

As Chairman Ryan’s proposal suggests, that would be associated 

with price increases, general price increases, not medical price increases. So that is the distinction that some people make. 

Representative Burgess. And do you feel that it is a worthy 

distinction? 

Dr. Reischauer. Oh, I think it is a very important one. You 

know, especially when we are dealing with health care which has 

tended to rise in our measured inflation much faster than other 

goods and services. 

I for one think that we have a bit of confusion in this because, 

whereas as inflation is usually measured as the increase in the 

price of a good or service adjusted for qualitative change, more 

often when we talk about medical care there are huge improvements in quality or in the nature of the service. We can do things 

now that we could not do 10 years ago, and those are not factored 

in appropriately. 

But our expectations as a Nation are that everyone should benefit from whatever improvement and new technology comes on the 

market. 

Vice Chairman Brady. Thank you very much. 

Representative Burgess. I thank the Chairman for his indulgence. 

Vice Chairman Brady. No, no, that’s called ‘‘deficit questioning’’ when you go beyond the five minutes. 

[Laughter.] 

Can I ask, what lessons have we learned from past fiscal rules 

Congress has put in place to restrain spending? There is a mixed 

record. What has worked? When has it not worked? And what 

would we do differently to create the guardrails to create discipline 

around future spending? What should we keep in mind as we do 

that? 

Dr. Mitchell. I would echo what Dr. Miller said, that I think 

Gramm-Rudman worked. It was grossly unsuccessful compared to 

the ideal, but compared to what might have happened without 

Gramm-Rudman, I think it was one of the few things I can look 

back on and think, okay, that made a difference in terms of how 

Congress behaved. 

We did of course have discretionary spending caps in the 1990s. 

That to me was a little bit like having a 50-mile-an-hour speed 

limit in a school zone. Yes, they were by and large adhered to, but 

I thought they were too high. But that is just a matter of judgment, 

of course. But for the most part, we just have not really done much 

budget process. We have had budget deals. We have had budget 

summits. We have had budget agreements. But those are just sort 

of just packages of legislation that tend to have a very short halflife anyhow. 

Budget process reform? There is really not much real-world evidence to look at—unless you are going to other countries, or looking at the states as Jim was mentioning. 

Vice Chairman Brady. Dr. Miller. 

22 

Dr. Miller. I think what we have learned is that if you put these 

in place, or these restraints in place, and follow them, they work. 

If you violate them, they do not work. 

The legislation that established, among other things, the budget 

resolution that is supposed to be done by April and has a whole set 

of time limits, works when it is followed by Congress. But of course 

it has not been followed by Congress in decades. 

And the Gramm-Rudman-Hollings, as Dr. Mitchell was mentioning, did work and it brought the deficit down dramatically, but 

then it was violated by Congress. So you have got to stick with 

them. 

And these other—the other evidence from the states is that they 

work, so long as they are not violated. And keep in mind there are 

these avenues even under the MAP Act as written, there would be 

these avenues for getting around the restraints by increasing the 

amount of government regulation, or Federal regulation, but also 

the use or abuse of tax expenditures. 

Vice Chairman Brady. Thank you. 

Dr. Reischauer. 

Dr. Reischauer. There is more agreement on this panel than I 

expected. I believe that the Gramm-Rudman-Hollings procedures 

modestly held down the growth of spending, kept this as a frontburner issue so the Congress and the President were fighting it 

every year, but it was a terribly designed process. 

I think the discretionary spending caps allowed us to reduce defense spending very significantly, and that probably would not have 

occurred to the degree that it did had we not had those caps. 

I think the PAYGO procedures that we had during the 1990s 

were very important at stopping proposals that members had for 

expanded mandatory programs or tax cuts. I was running CBO 

during that era, and the number of times things came to us to look 

at, and when we gave our score to them they never appeared—they 

died—was quite impressive. 

The volume of ‘‘good ideas’’ that came rushing forth, attractive 

things, you know, was hugely reduced. So I think all of these 

things can make a small amount of difference, but the real question goes back to Dr. Miller’s point. 

He said, if you adhere to these they will work. So what can you 

enact that will help you adhere to them when the going gets tough? 

When the American people do not want the cuts? They want the 

tax cuts. They want the spending increases. And this is very unpopular. And that is really a question I think for you to try and 

answer. 

Vice Chairman Brady. Thank you, Doctor. 

Dr. Miller. Could I give you just a quick set of metrics here? 

Vice Chairman Brady. Yes. 

Dr. Miller. In fiscal year 1987 the forecast for the deficit was 

something like $221 billion. That was the deficit. And this was on 

total spending of almost $1 trillion. 

The next year it came down to $108 billion, cut in half. So I 

mean that was Gramm-Rudman-Hollings. So it does work. But 

then of course the following year is when the Congress passed and 

the President had to sign—it’s a long story—basically a redefining 

of those targets. 

23 

Vice Chairman Brady. Thank you, Doctor. 

Representative Campbell. 

Representative Campbell. Thank you. I will just ask you all 

just one simple question, since it is something that is kind of boiling out there right now, the debt limit is. A balanced budget 

amendment that is so-called ‘‘clean’’ or ‘‘straight up’’ or however 

you want to do it, no supermajority for taxes, no spending limit attached, a supermajority to override clearly but otherwise just a 

straight balanced budget amendment, in each of your opinions is 

that a worthy thing to have? Does it help the situation, or not? I 

will start with you, Dr. Miller. 

Dr. Miller. Yes. 

Representative Campbell. Well that was quick. Dr. Mitchell. 

Dr. Mitchell. I will be a little more loquacious. It is a doubleedged sword. One of the reasons I like Senator Lee’s balanced 

budget amendment is because it, in reality, is more of a spending 

limit amendment. It is just called a balanced budget amendment 

because that is one of the features it has. 

I do worry because we have 49 out of 50 states with balanced 

budget requirements of some kind, and that obviously has not 

stopped some states from taxing and spending themselves into a 

fiscal ditch. 

Representative Campbell. That would include my home State 

of California. 

Dr. Mitchell. I was not going to point that out, but if you are 

willing to say so—— 

[Laughter.] 

Representative Campbell. I point it out all the time. 

Dr. Mitchell. The Mostra Criteria in Europe, where these rules 

were 3 percent of GDP deficits and 60 percent of GDP debt, has 

not stopped the Europeans from taxing and spending themselves 

into fiscal crisis. 

So in my gloomier pessimistic moments, I worry that just a plain 

vanilla watered down balanced budget amendment would be seen 

as a Constitutional obligation to raise taxes, which I think would 

simply be like a dog chasing its tail. So I am leery about that. 

But I can certainly see that, well, if we did nothing else, we may 

have no choice but a plain balanced budget amendment. But it is 

not my preference. 

Representative Campbell. Okay, Dr. Reischauer. 

Dr. Reischauer. It will not surprise you that my answer to the 

question is: No. And one reason why I would say that—it is certainly better than the alternatives, but still not acceptable in my 

view—a balanced budget amendment to get through the Congress, 

to define all of the issues that I talked about, and to be ratified by 

the states, probably would take until around 2020, which I think 

is long after we have to settle this set of issues. And were we to— 

and pass through the Congress, a balanced budget amendment, the 

tendency of legislators I think would be to say, well, we have done 

that. Let’s relax. And international markets are not going to let us 

relax. 

We have to face up to this issue in the next year or two. 

Representative Campbell. And I could not agree with you 

more on that point. However, I would love to think that this would 

24 

be the last fiscal crisis the country will ever have; but I think that 

is not likely to be the case. 

So just for what it is worth, I mean, you are right. It would not 

have any impact. We are going to, in my view, we are dealing with 

a statutory debt limit. I talk about the real debt limit, which is the 

point out there at which markets no longer will buy our debt except 

at a severely higher interest rate. 

And unless we make progress on the real debt limit soon, the 

statutory debt limit is not going to matter very much over time. 

But you are right, we have to solve this problem much quicker 

than that. But it would at least maybe help future crises—future 

Congresses from getting to this point in decades ahead from now. 

I will yield back, Mr. Chairman. 

Vice Chairman Brady. Thank you, Congressman. Representative Maloney. 

Representative Maloney. I would like to ask all the panelists, 

I am really concerned, and we seem to be more challenged than I 

thought we would be at this point in passing something. 

What would happen if we did not raise the debt ceiling? What 

would happen if we defaulted? And would we not be self-inflicting 

a wound, increasing our required payments to service our debt, and 

making our debt problem worse? And are these immediate problems that we face, is it worth this to get a budget deal done by August 2nd? 

I would just like to ask the same question to all of you. This is 

really the question of the day. This is what is before Congress and 

what is being debated. We have all read the press reports, and we 

are in serious challenges right now. 

So what would happen? Do you want to start, Dr. Miller, and go 

down? 

Dr. Miller. Thank you, Congresswoman. 

First, as I laid out in an op ed piece in The Hill recently, the debt 

ceiling is much more forgiving than I think people have talked 

about. 

Also, it is not a ‘‘cliff’’ as the kind of debt ceiling we had in the 

Reagan Administration where the ceiling is here (indicating) and 

then it falls automatically unless extended. It just continues. The 

current one just continues. In the case of the cliff, it is rather catastrophic because you cannot roll over any of the debt as it comes 

due. 

What you have to do would be to make the kinds of decisions any 

family would make if their credit card company called them up and 

says: You have hit the limit and you cannot have any more. That 

means that you have to make choices. 

So I mean the President will of course realize that the money 

coming in, the revenues coming in, are far more than what is required to pay the interest on the debt, far more than is required 

to pay Social Security, and pay Medicare, and most of the other entitlement programs, to pay our Armed Forces, and probably to pay 

most of the Federal employees. 

But you would have to make some hard decisions on the programs. And it would be relatively easy for awhile. You could also 

sell some assets. I’ll just tell you a secret here: When I was Budget 

Director I wrote a memo to the President when we were facing one 

25 

of these things and said: Well, Mr. President, if it comes down to 

the worst, you could sell the gold in Fort Knox. I got a note back 

from him that says: We’re not selling the gold in Fort Knox. 

But there are a lot of ways that you can do something to ameliorate the problems. But it will not last very long. So it will be increasingly costly for the Congress and the President to have gridlock. 

Dr. Mitchell. The only thing I would add to what Professor Mil- ler said is that spending is projected to be, $3.7 trillion or so; revenues $2.2 trillion. So obviously if we can no longer borrow, it would 

require overnight, a 35, to 40 percent reduction in government 

spending compared to what we have projected and promised for the 

year. 

As was just mentioned, there is obviously more than enough 

money to pay interest on the debt. So I do not think default is a 

real possibility. 

But there is no question that a 35 to 40 percent reduction overnight means real disruption. It means hospitals not getting their 

Medicare reimbursements. It means grants not going out to state 

and local government. It would mean all sorts of things like we 

have seen in the State of Illinois where vendors were going six 

months, nine months without payment. 

So as much as I want a much smaller government, that is probably not the best way to do it. 

Dr. Reischauer. I think my colleagues have made this sound a 

lot more ‘‘doable’’ than in fact it is. All of Dr. Mitchell’s reactions 

would occur, but there are economic consequences. 

And if this lasts let’s say more than a week or two, you are going 

to see economic activity begin to shrink. You are going to see 

spreading hardship among those who are getting a partial check 

when they expected a total—a large check, or applied for unemployment benefits and were denied them because there was no 

money. 

You know, besides that, once it occurred and was remedied, the 

tail would exist for a long time. Contractors in the Federal Government would say ‘‘there’s a risk I’m not going to get paid in a timely 

way, I’m going to charge a little more for this.’’ 

Lenders to the United States will say: You know this is not the 

safest bet in the world. I want a little higher interest rate. And we 

will be paying large amounts of money, tribute in a sense, for our 

failure to act in a responsible way when the time came. 

Representative Maloney. Thank you. My time has expired. 

Vice Chairman Brady. Thank you. Congressman Burgess, for 

the final question. 

Representative Burgess. Thank you. Dr. Reischauer, you were 

talking about the effect of the balanced budget amendment on 

some of the social safety nets, and you specifically referenced Social 

Security. 

Now I am sitting here addressing three high-powered economists, 

and I’m just a simple country doctor, but as I understand the Social Security Trust Fund and the way it was designed—now true 

enough, the Federal Government would have great difficulty in 

having to monetize the debt that we owe to the Trust Fund—but 

Social Security payments would continue because they are taken 

26 

out of the Trust Fund, not out of the General Treasury. Is that correct? 

Dr. Reischauer. What I was talking about is some of the balanced budget amendments that say you cannot spend more in any 

single year than the revenues coming into the Federal Government. 

Then, to draw down the Trust Fund you are going to have to reduce other spending of the government. I mean, you could. I said 

it would make it more difficult, especially if you were sort of up at 

the limit, meaning you had passed appropriation bills and mandatory spending and all that that equaled, you thought, what the revenue stream would be during the year. 

Representative Burgess. But there are still dollars owed to the 

Trust Fund that would be available to pay the beneficiaries’ Social 

Security? 

Dr. Reischauer. Yes, but every dollar you drew you would have 

to reduce some other spending. It is not that it is impossible; it is 

just that it is more difficult. 

Representative Burgess. There are certainly some that would 

argue that we should have never been spending the money collected for Social Security as general revenue in the first place; that 

that was a mistake to allow the commingling of assets. And were 

we a private law firm, we might all go to jail for having done that. 

But at the end of—if the Trust Fund at some point in the future 

becomes exhausted, what then happens to the benefits paid to people who are receiving Social Security at that point? Are the benefits 

not limited to the amount of money that is collected with the Social 

Security Tax? 

Dr. Reischauer. Yes, they are. And I believe under current law, 

rather than have a ratable reduction in benefits of something 

around 25 percent, as would occur, you would delay payments to 

individuals. I think that is the way the legal structure works. 

Representative Burgess. But there will be consequences. 

Dr. Reischauer. There certainly will. 

Representative Burgess. And, you know, I have not been here 

a long period of time, but long enough to have lived through the 

previous Administration’s discussion of let’s do something to improve the long-term solvency of Social Security. It has come up 

from time to time. It becomes a political football. But in truth, we 

are not being honest with people by simply saying the status quo 

will allow these benefits to be paid in perpetuity with no negative 

consequence to the benefits paid. Is that correct? 

Dr. Reischauer. That is correct, but I think the Trustees Reports, which I have some responsibility for, state that very clearly 

and have for many years. 

Representative Burgess. As you know—— 

Dr. Reischauer. Few people read it. 

[Laughter.] 

It is not bedtime reading, to pick up the Trustees Report. 

Representative Burgess. But the truth—there’s the old saying: 

A lie can get around the world twice before the truth gets a chance 

to put his pants on. And that is a problem. 

And yet, despite the political downside, I think this is something 

which we need to be honestly discussing. And unfortunately a lot 

of the rhetoric that surrounds the Ryan budget, and Medicare, and 

27 

a lot of the rhetoric that surrounded when President Bush was 

talking about trying to save Social Security, it becomes a huge distraction and Congress has not done its work. 

And as a consequence, at some point in the future there is going 

to be a very, very serious price to be paid. And I will just never 

forget the day 20 years ago when, as a young 40-year-old physician 

I am in an audience listening to Paul Tsongas the day after President Clinton gave his health care speech to a Joint Session of Congress, not a dry eye in the house as reported by Senator Tsongas, 

because President Clinton described five new entitlement programs 

and we cannot pay for the ones that we have now. 

And if we did not do something, in 20 years’ time, if we did not 

do something to address the crisis coming in entitlements, in 20 

years’ time there likely could be an intergenerational conflict the 

likes of which this country has never seen. That was 20 years ago 

when I was 40. That seemed so far off and so theoretical, why 

worry about it? The problem is, it is 20 years later and that time 

now is at hand. And it is important that this Congress face those 

facts and deal with those hard problems because they are not going 

to be easier 10 years from now. 

Thank you, Mr. Chairman, for your indulgence. I will yield back, 

unless, Doctor, you wanted to make a comment on that? 

Dr. Reischauer. Your call for action is one I agree with completely. 

Vice Chairman Brady. There is no substitute for political will 

in getting our financial house in order. Fiscal rules done right can 

matter, can help. And I so appreciate, we all do, the experience of 

this panel in dealing with real-world experiences in trying to get 

a handle on this. 

Dr. Miller, Dr. Mitchell, Dr. Reischauer, thank you for taking the 

time from your very busy schedules to share your insight with us 

today. We have got a lot of work to do, as you know, going forward. 

So do not be surprised if we are calling on your insights and advice 

and counsel as we move forward as well. 

So thank you, very much. 

Dr. Mitchell. Thank you. 

Dr. Miller. Thank you. 

Dr. Reischauer. Thank you, Mr. Chairman. 

Vice Chairman Brady. The meeting is adjourned. 

[Whereupon, at 11:43 a.m., Wednesday, July 27, 2011, the hearing was adjourned.] 

(29) 

SUBMISSIONS FOR THE RECORD 

30 


Insert offset folio 5 here 70855.005
31 


Insert offset folio 6 here 70855.006
32 


Insert offset folio 7 here 70855.007
33 


Insert offset folio 8 here 70855.008
34 


Insert offset folio 9 here 70855.009
35 


Insert offset folio 10 here 70855.010
36 


Insert offset folio 11 here 70855.011
37 


Insert offset folio 12 here 70855.012
38 


Insert offset folio 13 here 70855.013
39 


Insert offset folio 14 here 70855.014
40 


Insert offset folio 15 here 70855.015
41 


Insert offset folio 16 here 70855.016
42 


Insert offset folio 17 here 70855.017
43 


Insert offset folio 18 here 70855.018
44 


Insert offset folio 19 here 70855.019
45 


Insert offset folio 20 here 70855.020
46 


Insert offset folio 21 here 70855.021
47 


Insert offset folio 22 here 70855.022
48 


Insert offset folio 23 here 70855.023
49 


Insert offset folio 24 here 70855.024
50 


Insert offset folio 25 here 70855.025
51 


Insert offset folio 26 here 70855.026
52 


Insert offset folio 27 here 70855.027
53 


Insert offset folio 28 here 70855.028
54 


Insert offset folio 29 here 70855.029
55 


Insert offset folio 30 here 70855.030
56 


Insert offset folio 31 here 70855.031
57 


Insert offset folio 32 here 70855.032
58 


Insert offset folio 33 here 70855.033
59 


Insert offset folio 34 here 70855.034
60 


Insert offset folio 35 here 70855.035
61 


Insert offset folio 36 here 70855.036
62 


Insert offset folio 37 here 70855.037
63 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY, VICE CHAIRMAN, JOINT

ECONOMIC COMMITTEE

The United States is on the precipice of a financial crisis because Washington 

spends too much relative to the size of our economy. Under President Obama, federal spending has grown far beyond the ability of our tax system to generate revenues from American families and businesses sufficient to pay for Washington’s overspending. The resulting large budget deficits are causing an unsustainable accumulation of federal debt. 

Business investment in new buildings, equipment, and software drives job creation, not federal spending. Today, both large corporations and entrepreneurs are 

not investing because of uncertainty. They fear higher taxes and new burdensome 

regulations. Consequently, job creation is anemic, the unemployment rate remains 

stubbornly high, and American families are suffering. 

As entrepreneur Steve Wynn, a self-identified Democrat, observed, ‘‘[T]his administration is the greatest wet blanket to business and progress and job creation in 

my lifetime. . . . Everybody complains about how much money is on the side in 

America. You bet. . . . [T]he business community in this country is frightened to 

death . . . ’’ 

Overspending cannot be cured by a so-called ‘‘balanced approach.’’ A study, Spend 

Less, Owe Less, Grow the Economy, published by JEC Republican staff on March 

15, 2011, found that successful fiscal consolidations by our global competitors were 

composed of at least 85 percent spending reductions with additional revenues largely from non-tax sources such as asset sales. Balanced approaches that included both 

spending reductions and tax increases failed in other countries. 

Instinctively, Americans know that federal spending must be reduced. Nevertheless, Washington has demonstrated that it cannot maintain a spending diet. Public 

choice economists have identified many biases in our political system against fiscal 

restraint and for higher federal spending. 

When I became Vice Chairman, I asked the JEC Republican staff to examine 

what constitutional and statutory tools our global competitors and our states use to 

control their government spending. The results were published in the study, Maximizing America’s Prosperity, on June 21, 2011. 

This study found that our global competitors capped the spending of their national 

government relative to the size of their economy to put their fiscal house in order. 

Washington must do the same. 

Washington should also consider using a number of tools that our states employ 

to control their spending, including the item-reduction veto and sunset laws. The 

item-reduction veto allows state governors to reduce specific items in appropriations 

bills without vetoing an entire bill. Sunset laws require the periodic review of all 

state agencies and programs. State agencies and programs expire if the legislature 

does not renew them before their sunset date. 

Interestingly, the study found that effectiveness of state tax and expenditure limitations have varied greatly based on their design. In particular, expenditure limits 

tied to measures of a state’s actual GDP have been breached during recessions when 

mandated spending cuts proved to be politically unsustainable. 

Today’s hearing will examine how these lessons can be applied to the federal government. Like our global competitors, Congress must establish spending caps. Yet, 

from our states, we have learned that the durability of spending caps through business cycles depends in large part on their metrics. 

In my opinion, caps should be placed on federal non-interest spending. Congress 

can control discretionary and entitlement spending through legislation. However, interest spending is a function of past fiscal decisions, the Federal Reserve’s monetary 

policy, and financial market conditions largely beyond the control of Congress. 

Clearly, any spending caps should be related to the size of the economy over time. 

However, actual GDP poses a problem because it fluctuates with the business cycle. 

Therefore, spending caps based on actual GDP allow rapid spending growth during 

booms only to force large, politically unsustainable spending cuts during recessions. 

A better choice is potential GDP. Potential GDP is a measure of what GDP would 

be at full employment without inflation. It is a well understood and a widely used 

economic concept. For example, Stanford University economist John Taylor uses potential GDP in the ‘‘Taylor rule’’ to estimate what the Federal Reserve’s target rate 

for federal funds should be. The Congressional Budget Office already calculates potential GDP for its 10-year budget window. 

Potential GDP is the GDP family’s smarter brother. Using potential GDP provides 

a more stable path for non-interest spending through time, eliminating the spending 

blowouts on the upswing and preventing draconian spending cuts or the downswing 

that have not proven to be politically sustainable. 

64 

Given the differences between Republicans and Democrats on the size and scope 

of the federal government, it is unlikely that we will agree on the level of spending 

caps. However, I hope that we could agree on the metrics used to design spending 

caps. 

I look forward to hearing the testimony of today’s witnesses. 

PREPARED STATEMENT OF SENATOR BOB CASEY, CHAIRMAN, JOINT ECONOMIC

COMMITTEE

Thank you Vice Chairman Brady for holding today’s hearing on how fiscal rules 

can help the federal government control spending and get our finances in order. The 

absence of steady, responsible fiscal stewardship over the past decade has gotten us 

into a deep financial hole. 

Our federal debt has skyrocketed. Publically held federal debt increased from 33 

percent of GDP in 2001 to 62 percent of GDP in 2010. The Congressional Budget 

Office projects that our publically held federal debt will reach 70 percent of GDP 

by the end of this year and exceed 100 percent of GDP in ten years. That’s no way 

for the United States to operate. 

In the past weeks, as the leaders of both parties have worked to put together a 

deficit reduction package and extend the debt ceiling, the challenges of forging 

agreement on spending cuts and revenue increases have been clear for all to see. 

As we approach the August 2nd debt ceiling deadline, the first order of business 

must be to avoid default that can hurt the economy and job creation. The United 

States defaulting on its commitments would have catastrophic global consequences. 

It is not an option. 

Majority Leader Reid’s proposal will allow us to raise the debt ceiling through 

2012, providing certainty to world markets and businesses and consumers. It is a 

smart plan that balances the need to sustain the recovery in the immediate term 

with significant deficit reduction in the longer term. 

The Congressional Budget Office scored Senator Reid’s proposal and concludes it 

will reduce the deficit by $2.2 trillion over the next ten years. CBO estimates that 

nearly $1.8 trillion of that deficit reduction comes from savings in discretionary 

spending. The deficit reduction achieved by the Reid plan is more than twice as 

great as the deficit reduction included in Speaker Boehner’s proposal, according to 

CBO. 

Additionally, the Reid plan includes no changes to revenue and all of the spending 

cuts have been previously agreed to by Democrats and Republicans. It protects 

Medicare, Medicaid and Social Security. In my view, it is the most viable plan under 

consideration. 

By contrast, Speaker Boehner’s short-term plan would require Congress to revisit 

and vote again on the debt ceiling issue next year. We’ve also learned that the 

Boehner plan could trigger a downgrade of the United States’ AAA credit rating. 

Such a downgrade would lead to higher borrowing costs for businesses and consumers and slow the pace of economic growth. For example, consumers will face 

higher costs of financing on everything from refrigerators to houses—and Retirement Accounts could take a drastic hit if the financial markets slip. 

While there is a shared commitment in Washington to reducing our deficit and 

stabilizing the debt, we have not yet been able to reach a consensus on how best 

to do it. In the next few days, Washington must put partisan politics aside and come 

to agreement on a plan that will enable the United States to avoid default and make 

a significant down payment on reducing our deficit. How we forge this bipartisan 

agreement is also important, as it can provide a model for future cooperation and 

reassurance to so many who have grown understandably tired of partisan posturing. 

I believe strongly that the federal government should balance its books. But, 

Washington must be careful not to impede the economic recovery. How we reconcile 

the need to get our fiscal house in order while preserving the federal government’s 

ability to step in during times of economic emergency is a central question for today’s hearing and for this Congress. 

I look forward to the discussion this morning. I’m interested to learn more about 

how individual states’ experiences and fiscal rules can apply at the federal level. 

We have terrific witnesses who have dedicated their careers to thinking about the 

federal budget and fiscal rules and I’m sure you all have great insights into how 

to get our federal government back onto a sustainable fiscal course. 

65 

1The author served as Director of the U.S. Office of Management and Budget (1985–1988) 

and is currently a Senior Advisor to Husch Blackwell, LLP, Chairman of the Executive Committee of the International Tax and Investment Center, Senior Fellow at both the Hoover Institution (Stanford University), and Distinguished Fellow at the Center for Study of Public Choice 

(George Mason University). 2The rough approximation of the relationship shown on the next page is taken from the author’s Monopoly Politics (Stanford: Hoover Institution Press, 1999), p. 9. Obviously, the economy 

is larger today than it was then. For further discussion of the nature of the curves depicted, 

see ibid., pp. 9–11. 

PREPARED STATEMENT OF JAMES C. MILLER III 1

Mr. Chairman and Members of the Committee: thank you for inviting me here 

today, and thank you for addressing this important legislative proposal. The Maximizing America’s Prosperity (MAP) Act sets forth an important goal, and goes about 

accomplishing it in an efficient manner. I welcome the opportunity to discuss this 

with you and with my distinguished fellow panelists, Bob Reischauer and Dan 

Mitchell. 

The goal of the MAP Act is prosperity, and the focus is on government spending. 

Why is that? The reason is that there is an acknowledged relationship between size 

of government and prosperity, and spending is the most common measure of size 

of government. 

Only the most naive conservative among us would argue that prosperity is enabled by having no government (spending) at all, and only the most naive liberal 

among us would argue that prosperity is enabled by having government account for 

all spending. Thus, as shown in the graph,2 prosperity is maximized somewhere in 

between these two extremes. Initially, as the public sector grows, total output does 

as well, as property rights are established, as contracts are enforced, as important 

infrastructure is put in place, and so forth. But past some point, the public sector 

adds less and less value, and in a sense crowds out the private sector, and total 

output and income per capita actually fall, even though government’s share of the 

economy continues to rise. 

As you know, at just what point between the two extremes prosperity is maximized is the subject of debate among economists. The prevailing opinion is that 

prosperity is maximized at a smaller size of government than we have today. That’s 

a basic rationale for trying to control spending and to bring down the ratio of spending to GDP. 

We ought to ask as well why government spending tends to exceed levels that 

maximize prosperity. The answer is that inherent in the political budgeting process 

is a propensity to spend far beyond what is justified—and to be wasteful with 

spending as well. Like everyone else, elected officials respond to incentives, and 

when the incentive structure is biased toward ever-larger-government, that’s what 

you get. Moreover, I conjecture, the larger government grows, the larger are the incentives to grow government even further. 


Insert offset folio 4 here 70855.004
66 

For this reason, it is imperative that any solution to the problem of overspending 

address the issue of incentives, either by changing the incentives directly or by limiting the excesses produced by the system—which, of course, is another way of 

changing incentives. The MAP Act does some of both. It places limits on non-interest spending as a proportion of potential GDP, and it provides for institutional 

changes that will make it easier to meet spending limits in an efficient manner. 

Specifically, it requires the President’s budget submission to comply with the overall 

spending limits, it gives the President an item reduction veto, it provides for sequestration of budget resources in case spending is likely to exceed limits, and it establishes a commission to recommend sunsetting of agency functions and an expedited 

procedure for consideration of these recommendations by Congress. 

This is an excellent proposal. It incorporates spending limits that are in accord 

with what would be most beneficial to the economy as a whole and thus to prosperity in general. It adopts measures to assure meeting those targets with institutional reforms that would be effective and efficient in the sense of assuring that priorities are addressed. 

That said, let me make three additional points for your consideration. 

First, alternative and/or supplementary approaches to meeting spending limits do 

exist. For example, the recent House-passed ‘‘cut, cap, and balance’’ bill puts before 

the state legislatures for approval or disapproval a requirement that the federal 

budget be balanced. Although in a perfect world the federal government would incur 

deficits at times and surpluses at times, the world is not perfect, and a balanced 

budget requirement would lead to more prosperity. A major reason is that the failure of citizens and their elected representatives to fully ‘‘capitalize’’ the cost of borrowing reduces the perceived cost of government and leads to harmful increases in 

spending. 

Second, the cost of government includes not only spending but the cost of regulation as well. At some point you may wish to consider incorporating the cost of federal regulation in a revised cap. Probably the best way of doing this would be to 

establish a ‘‘regulatory budget,’’ with a legislative process that parallels the fiscal 

budget process. 

Third, the cost of government is disguised, to some extent, by ‘‘tax expenditures.’’ 

As you know, these are dispensations in the tax code that accomplish government 

goals through the revenue side of the fiscal equation instead of the spending side. 

Without question, these ‘‘expenditures’’ are just like direct spending, and you may 

want to include them in a revised cap. 

Fourth, without meaning to cast aspersions on anyone, let me emphasize that 

even under the current MAP Act’s restraints on spending, strong incentives will 

lead to efforts to circumvent it’s provisions. As implied by my last two points, you 

may well experience a rise in regulatory activity as a substitute for spending and 

also an increase in tax expenditures as another way of growing the size of government. Thus, you may wish to address these possible ‘‘loopholes’’ by including regulatory and tax-expenditure costs within the cap or to limit them by some other 

means. 

Mr. Chairman, that completes my statement. I shall be happy to address any 

questions you and your colleagues may have. 

PREPARED STATEMENT OF DR. DANIEL J. MITCHELL, SENIOR FELLOW, CATO

INSTITUTE

PROCESS REFORMS TO RESTRAIN LEVIATHAN

In the past 10 years, the burden of federal spending has jumped from 18.2 percent 

of GDP to about 25 percent of GDP. But that’s just the tip of the iceberg. Over the 

next several decades, the combination of demographic changes and poorly designed 

entitlement programs could cause the burden of federal spending to double as a 

share of economic output. 

This fiscal tsunami already has resulted in record deficits. Left unchecked, it suggests even more debt, along with rising tax burdens, in the future. And since the 

academic evidence is very clear that there is a negative relationship between the 

size of government and economic performance, this does not bode well for American 

prosperity and competitiveness. 

The only solution is to restrain the growth of spending, and today’s hearing is 

very well designed, asking us to consider ‘‘How fiscal rules can restrain federal overspending.’’ 

67 

WHAT ARE WE TRYING TO FIX?

This is a critical question. Many people think deficits and debt are the problem. 

Excessive red ink surely is not a good thing, as places such as Greece and Portugal 

demonstrate, but deficits and debt generally should be seen as symptoms, while the 

real problem is that governments are too big and spending too much. 

The true fiscal tax is the amount of money that government diverts from the productive sector of the economy. In other words, government spending—at least beyond a certain level—undermines economic vitality, and that is true if the spending 

is financed by taxes and that is true if the spending is financed by borrowing. 

This doesn’t mean that ‘‘deficits don’t matter.’’ It just means that ‘‘taxes also matter,’’ and that the real issue is the overall burden of government spending. 

REALISTIC GOALS

Perhaps the most important caveat in my presentation is that no process reform 

will be perfect. The appropriate analogy is that fiscal rules are like anti-crime mechanisms. Locks on your doors are a good idea, but they don’t guarantee that you 

won’t be victimized. Bars on your window, an alarm system, and gun ownership also 

would help deter crime, but even those steps are not a guarantee. 

But the perfect should not be the enemy of the good—particularly when the alternative is to let the nation slowly sink into Greek-style fiscal chaos. 

In addition, my testimony will focus only on policies that might make a difference 

in restraining spending. There are many proposed reforms, such as biennial budgeting, that would be akin (with a full-time legislature) to rearranging the deck 

chairs on the Titanic. 

BALANCED BUDGET AMENDMENT

The ultimate budget process reform would be some form of balanced budget 

amendment. But the devil is in the details. How would such an amendment be written? How would it be enforced? And, most important, is it realistic? 

These are not simple questions. A balanced budget amendment can be a watereddown requirement that says nothing more than deficits (in peacetime) require a 

supermajority vote. Or a balanced budget amendment can be a comprehensive package that requires supermajorities for both taxes and borrowing, and thus is really 

a spending limit amendment. Senator Lee’s proposal is a good example of such a 

proposal. 

Enforcing a balanced budget is another challenge. Is it self-enforcing, meaning 

that the supermajority requirements are all that’s needed? Is it necessary to have 

something in place for the period of time between an amendment being approved 

by Congress and its ratification? 

Last but not least, there is a special challenge with reforms that require changes 

to the U.S. Constitution. Simply stated, it is extremely difficult—and deliberately 

difficult—to amend the Constitution. A proposal has to achieve 2⁄3rds support in 

both the House and Senate, and then it must be ratified by 3⁄4ths of the states. 

LINE-ITEM VETO

Over the years, there have been many proposals to give presidents some sort of 

line-item veto or enhanced-rescission authority. Interest in these proposals often is 

stimulated by stories of corrupt earmarks and specific wasteful spending items. And 

there is some evidence that governors have effectively used such authority to trim 

spending. 

But, just as is the case with a balanced budget amendment, the details are important since not all proposals are created equal. It also appears that such an initiative 

might require a constitutional amendment, which imposes a very high bar to its enactment. 

CURRENT SERVICES BUDGETING

There is a form of funny math in Washington. Lawmakers can increase spending, 

but then tell voters that they cut spending because outlays didn’t rise even faster. 

Let’s take the Ryan budget as an example. Legislators and journalists routinely talk 

about that proposal imposing trillions of dollars of cuts, yet CBO numbers show that 

spending would rise by an average of 2.6 percent each year if it was implemented. 

This is because Congress starts with an assumption that all spending should 

automatically increase for reasons such as inflation, built-in program expansions, 

and changes in beneficiary populations. 

All of that information is very useful in the budgeting process, but it is dishonest 

to tell the American people that spending is being cut when it is being increased— 

68 

particularly when that process is used to frighten people into thinking that proposals to slow the growth of spending are actually plans filled with ‘‘savage’’ and 

‘‘draconian’’ cuts. 

Some form of zero-based budgeting would address this problem. If spending is rising by, say, 3 percent next year, that’s the information that should be presented. 

And by giving the American people accurate data, that will alleviate the current 

system’s bias for bigger government. 

SPENDING CAPS

I would like to spend most of my time on the issue of spending caps. This is the 

notion that there will be an upper limit on spending for some—or all—parts of the 

federal budget. The spending cap(s), whether broad or narrow, would be enforced 

by a process known as sequestration, which is an automatic spending cut if outlays 

rise above the cap. 

As with the BBA and line-item veto, it’s very important to specify how a spending 

cap would operate. There are two important decision points—how is the upper limit 

defined and what spending will be covered by the cap. 

DEFINING A SPENDING LIMIT

There are two ways of defining the upper limit of spending. The first option is 

to select a nominal spending target and the second is to require that spending not 

exceed a certain percentage of GDP. In theory, both options generate similar results, 

but lawmakers generally have gravitated to proposals that specify that spending 

should not exceed a certain share of economic output. 

But once that decision is made, there’s another important choice: How to define 

GDP. The obvious answer is to use GDP, but which GDP? If you select estimates 

of future GDP, you create an opening for gimmickry since lawmakers might pressure CBO or OMB for an exaggerated estimate to facilitate more spending. 

Another option would be to use an average of the past couple of years of GDP. 

That would give a firm number, but it might create complications if the economy 

is coming out of boom or recovering from a downturn. This is why ‘‘potential GDP’’ 

might be the best option. Potential GDP is a technical concept based on what GDP 

would be at full employment without price inflation. It is a widely used number that 

CBO calculates for 10 fiscal years into the future. 

Why use ‘‘potential GDP’’? A spending cap based on traditional GDP allows spending to rise rapidly under booms only to force large spending cuts during recessions. 

That tends to be politically unsustainable, as we saw under Gramm-Rudman. Moreover, state spending caps tied to some measure of state GDP have largely failed because of this reason. Potential GDP eliminates this problem by smoothing out the 

fluctuations of the business cycle and thus curbing excessive spending growth during booms and not attempting to force politically difficult spending restraint during 

recessions. 

DEFINING WHAT SPENDING TO CAP

The other key decision is what parts of the budget should be subject to cap. Some 

lawmakers focus only on so-called discretionary spending—i.e., annual appropriations. Considering the massive increase in spending in this category over the past 

10 years, there certainly is a strong argument for discretionary caps. 

But America’s real fiscal problem is entitlements. So-called mandatory spending 

already is the lion’s share of the federal budget and entitlement programs will consumer ever-larger shares of our economic output as the baby boom generation retires and outlays skyrocket for Social Security, Medicare, and Medicaid. A cap that 

only applies to discretionary spending would be akin to visiting a doctor after an 

auto accident and getting treated for a sprained wrist while ignoring a ruptured 

spleen. 

So does that mean a spending cap should apply to all spending? That certainly 

would be a better option than a discretionary cap, but that means net interest— 

payments to service the publicly-held debt—would be included. Notwithstanding recent threats by the Treasury Secretary to deliberately and unnecessarily default on 

those obligations, interest on the debt is the one part of the budget that is truly 

uncontrollable. 

It is more reasonable, therefore, to target ‘‘primary spending,’’ which is everything 

other than net interest. One big advantage of this approach is that a cap on all 

spending creates a ‘‘tax trap’’ that may prevent the extension of current tax policy 

or future tax cuts. This is because a tax cut will be scored as a spending increase 

thanks to higher interest outlays. In other words, including interest in the spending 

cap hinders good tax policy. A non-interest cap on primary spending not only focuses 

69 

*The views expressed in this statement should not be attributed to the Urban Institute, its 

sponsors, staff, or trustees. 

lawmakers on the spending they can control, but it also avoids creating an inadvertent obstacle to good tax policy. 

Moreover, it’s also worth noting that, with a total spending cap, Congress and the 

President may press the Federal Reserve to have an overly loose monetary policy 

that keeps interest rates artificially low in order to lower interest payments on the 

debt and allow for increased spending on discretionary and entitlement programs. 

A noninterest spending cap eliminates this perverse incentive for inflationary monetary policy. 

CONCLUSION

Thank you for the opportunity to testify. I would be happy to answer any questions. 

PREPARED STATEMENT OF ROBERT D. REISCHAUER, PRESIDENT, URBAN INSTITUTE *

Chairman Casey, Vice-Chairman Brady, and members of the committee, I appreciate this opportunity to discuss with you the efficacy of fiscal rules that many believe can help to restrain federal spending. 

Over the past few years it has become abundantly clear that the nation is careening down an unsustainable fiscal path and that we will have to restrain the growth 

of spending significantly to put the federal budget on a more viable trajectory. Notwithstanding the growing realization that long-run spending restraint is imperative, 

elected policymakers find it difficult to curb both outlays and tax expenditures. 

There is no mystery behind why this is the case. While it is easy to give speeches 

embracing unspecified spending cuts, the termination of low-priority, wasteful or duplicative programs, the elimination of fraud, and the streamlining of the bureaucracy, it is another matter to vote to cut something that has an appropriation account 

number be it NIH research, veterans’ health, or NASA. It is even harder to vote 

to change authorizations that guarantee Social Security recipients a certain sized 

benefit, reimburse states for Medicaid expenditures they have already made, or pay 

hospitals-only partially at that-for the costs they have incurred treating Medicare 

beneficiaries. Such votes engender opposition from affected constituents and interest 

groups who, no matter how broadly the sacrifice is shared, argue that some different 

distribution of the cuts would be more in the nation’s interests, fairer, and better 

for the economy. 

Despite the rhetoric, there is no significant constituency for deep spending cuts 

that are specific. The pain from such cuts is immediate, significant and measurable 

and those affected are identifiable. The benefits of the fiscal restraint such cuts 

would generate are distant, uncertain in magnitude, and diffuse. When they materialize they will be difficult to identify and no one will reward those who made the 

tough decisions. If history is any guide, many of those lawmakers will have ‘‘moved 

on’’ involuntarily to other careers. 

Given this situation it is reasonable to ask whether there are some fiscal rules 

that might create a more hospitable environment for those who must make unpopular but unavoidable decisions involving fiscal restraint. Among the measures that 

have been put forward to do this are proposals that would: 

• Transform the concurrent budget resolution into a joint resolution, 

• Impose statutory spending caps, 

• Reinstitute strong PAYGO rules, 

• Give the President expedited or enhanced rescission authority, and 

• Amend the Constitution to require a balanced budget. 

JOINT BUDGET RESOLUTION

The Congressional Budget Process was established to allow the legislative branch 

to set its own budget priorities, look at the budget comprehensively and with a 

multiyear perspective, set fiscal policy by considering the interdependence of the 

budget and the economy, provide structure and discipline to congressional budget 

decisions, and reduce Congress’s dependence on the executive branch for fiscal information. The concurrent budget resolution establishes the framework for accomplishing these objectives. If the concurrent budget resolution were replaced with a 

joint resolution requiring the President’s signature, Congress would be giving up its 

independence on these matters. In years when the House, Senate and White House 

70 

are in hands of a single party, this might make little difference; at other times implications would be profound. For example, Congress would almost certainly have 

to rely on OMB scoring of its actions. 

For many years, formulating and passing a budget resolution in the timeframe 

called for by the Congressional Budget Act has been a challenge. More recently, the 

two chambers have not even been able to agree on a common resolution. Adding the 

President to the mix would undoubtedly slow down the process and would make it 

even more likely that a consensus budget resolution could not be fashioned. A joint 

resolution would also fog the responsibility for failure as few would be able to judge 

whether the House, Senate or White House was most intransigent. 

DISCRETIONARY SPENDING CAPS

Statutory caps can be imposed on discretionary spending and enforced through sequestration. They are not an effective way of controlling mandatory spending because such spending is affected by many factors over which lawmakers have little 

or no control such as the strength of the economy, weather, college attendance rates, 

new developments in medical technology, and interest rates. 

Many have argued that spending caps are a tool that has been proven to work 

and, therefore, a heavy emphasis on such caps should be part of any deficit reduction plan enacted to resolve the debt ceiling crisis. First imposed by the Budget Enforcement Act of 1990, discretionary spending caps, in one form or another, existed 

through the early years of the 21st century. However, after budget surpluses appeared in 1998, adherence to them waned and they were frequently waived or circumvented. 

Before placing too much emphasis on this mechanism for our future salvation, the 

record of the past should be examined carefully. On the surface, the discretionary 

spending caps of the 1990s look very successful. Between 1990 and 2000, total discretionary spending in constant 2005 dollars fell from $784 billion to $737 billion— 

or almost 6 percent. As a fraction of GDP, the fall was even more dramatic, from 

8.7 percent to 6.3 percent of GDP, which is a drop of over one-quarter (27.5%). But 

this successful record was largely a story about the defense budget and rapid and 

sustained economic growth during the last half of the decade. 

The Berlin Wall came down in the fall of 1989 and the Soviet empire collapsed 

soon after. Our military budget, which had been justified by the Cold War, had to 

be rethought and there was widespread support for cashing in on the peace dividend. Because of the changed environment and spurred on by the spending caps, 

defense outlays in 2005 dollars declined from $463 billion to $362 billion—or by over 

one-fifth-between 1990 and 2000. Relative to GDP, the fall was 42 percent (from 5.2 

percent of GDP to 3.0 percent). 

The story was different on the non-defense side of the discretionary budget. In 

constant 2005 dollars, non-defense discretionary spending increased by 17 percent 

over the 1990-2000 period (from $321 billion to $375 billion). While non-defense discretionary spending as a percent of GDP declined slightly-from 3.5 percent to 3.3 

percent of GDP-this was largely a reflection of rapid GDP growth during the last 

half of the 1990s, a portion of which the collapse of the Dot-com bubble revealed 

to be illusory. 

The lesson to be taken away from the 1990-2000 experience with spending caps 

is that this tool can be effective if there exists a broad and bipartisan consensus 

that a certain budget function or a specific large program should be scaled back. 

While today there is widespread support for reducing spending on the military conflicts in Afghanistan and Iraq, more uncertainty surrounds the pace and the extent 

of the possible drawdown than was the situation when the Soviet Union collapsed 

in 1990. As was the case in the 1990s, there is little consensus concerning deep cuts 

in the non-security portion of the discretionary budget. 

Spending caps are relatively easy to agree to because no one knows how they will 

play out over time, that is, which specific programs will be reduced disproportionately. Therefore, there is a real risk that more will be promised than can be delivered and that the caps will prove to be unsustainable. Some will try, as they did 

at the end of the 1990s, to evade the caps by attempting to designate certain spending as an emergency. Advocates of programs that will be cut deeply in regular appropriations will try to stymie the process knowing that their accounts would be better off under an across-the-board sequestration of a continuing resolution. In short, 

spending caps represent general promises that are easier to make than to fulfill. 

PAYGO

Like discretionary spending caps, PAYGO rules were first introduced by the 

Budget Enforcement Act of 1990. In the original formulation, PAYGO required that 

71 

the impact on the deficit of all direct spending legislation and all changes to the 

tax code enacted during a legislative session not increase the deficit. In the aggregate, increases in direct spending or decreases in revenue had to be offset by other 

spending decreases or revenue increases or a sequester would be imposed on a select 

set of mandatory programs to make up the difference. 

Unlike spending caps, which can be used to lower future deficits, PAYGO procedures can only ensure that new mandatory or revenue legislation does not make the 

deficit situation worse. In that role PAYGO was effective at restraining mandatory 

spending initiatives and new tax cuts during the decade of the 1990s. In the current 

situation, PAYGO, with a more balanced sequestration process that included selected tax expenditures and protected low-income mandatory programs, would be an 

essential component of any deficit reduction plan. 

ENHANCED RESCISSION AUTHORITY

The Budget Control and Impoundment Act gives the President the authority to 

propose rescissions of all or parts of items within appropriation bills and to delay 

obligating the relevant budget authority for up to 45 days while Congress considers 

the request. The Congress has no obligation to take up the President’s requests and 

usually they are ignored. 

Enhanced rescission authority would require the Congress to vote up or down the 

President’s rescission requests, without amendment, within a fixed number of continuous legislative days. Some proposals would limit the President to one package 

of rescissions per spending bill and require that the request be made within a fixed 

number of days following enactment of the spending bill. 

Spending bills are amalgamations of many items, some large and others quite 

small, some directed at national concerns and priorities, others quite narrow and 

parochial in nature. Enhanced rescission would give the President a strengthened 

ability to weed out narrow, special interest allocations that do not have widespread 

congressional support. It is doubtful, however, that large amounts of budget authority would be rescinded under this tool. Furthermore, to ensure that the rescinded 

amounts reduced overall spending rather than were redirected to other accounts 

through subsequent appropriation bills, mechanisms to reduce the budget resolution’s budget authority allocations by the rescinded amounts would have to be 

adopted. 

Enhanced rescission would shift budget power marginally in the direction of the 

executive branch. It would improve transparency and accountability. Extending the 

reach of the process to mandatory spending legislation and to bills that provide targeted tax benefits would increase the deficit reduction potential of this tool. 

BALANCED BUDGET AMENDMENT TO THE CONSTITUTION

A balanced budget amendment to the Constitution may well dampen the growth 

of spending but this would come at an extremely high price. The automatic stabilization role that the federal government now plays for the economy would be seriously undermined. When economic weakness caused federal revenues to fall and expenditures on unemployment insurance, SNAP benefits, Medicaid and Social Security to rise, other programs would have to be cut precipitously or the spending on 

these essential safety net programs would have to be curtailed significantly. Economic downturns would be both deepened and prolonged. 

Under a balanced budget amendment, the federal government would lose much 

of its flexibility and ability to respond quickly to unexpected events. It would become 

more difficult to respond to natural disasters such as hurricanes and Tsunamis be 

they at home or abroad and to mitigate the consequences of events like terrorist attacks. 

Balanced budget amendments that require revenues to equal or exceed spending 

on an annual basis would not allow Social Security or the government’s military and 

civilian worker pension systems to draw down the reserves they have built up over 

the years to pay benefits unless the remainder of the budget was running an equalsized surplus. A similar constraint would face the FDIC, the PBGC and the many 

government insurance and loan guarantee programs, effectively eliminating the reason for their existence. 

While the wording of the many proposals being considered by the Congress seems 

simple, clear and straight forward, all of these balanced budget amendments would 

raise many questions involving definitions, implementation and enforcement, which 

the courts would be reluctant to resolve. For example, answers would have to be 

found for such questions as, ‘‘What is the budget? Is Congress or the President responsible for achieving balance and through what processes? What remedies would 

be imposed if balance were not achieved and on whom?’’ 

72 

To have any chance of achieving a balanced budget amendment’s objectives, Congress would probably have to cede much of its short-run authority over the budget 

to the President and OMB. Those who do business with the government and those 

who receive government benefits would have to expect some uncertainty with respect to when they would receive expected payments or benefit checks. 

In the short run, the volume of federal spending cannot be controlled with any 

precision. Millions of actors-individuals, states, federal contractors, hospitals and so 

on-make decisions that result in outlays. Unless the budget included a significant 

surplus for contingencies, the President would probably have to be given authority 

to vary taxes somewhat during the year. 

CONCLUSION

Fiscal rules and procedural innovations can help to frame and organize budgetary 

decisions, influence expectations and provide a bit of political cover for those who 

must take difficult votes, but they can’t force lawmakers to support policies they 

strongly oppose or ones they believe will end their political careers. In short, fiscal 

rules cannot create political will. 

Fiscal rules that are found to be too stringent will be ignored, waived, evaded, 

circumvented or repealed. Activities can also be moved ‘‘off-budget’’ to escape the 

discipline of a fiscal rule. Recent experience suggests that there exists a bottomless 

well of budget gimmicks that lawmakers can draw from to avoid the discipline implied by the fiscal rules they have endorsed but cannot find the will to impose. 

In conclusion, it is worth noting that spending is not the only route lawmakers 

can take to achieve their objectives. Denied the ability to respond to the nation’s 

needs through spending programs, Congress and the President will turn to the other 

tools they have available to achieve their objectives such as regulations imposed on 

businesses, unfunded mandates placed on individuals, states and localities, and tax 

expenditures. In most cases these approaches are less effective, less transparent and 

more difficult to control than is spending. 

Æ