Reps. Jeb Hensarling (R-TX), Mike Pence (R-ID), and John Campbell (R-CA) recently unveiled a proposal to impose a limit on federal spending of 20 percent of Gross Domestic Product (GDP). This proposal serves as a necessary reminder that current federal spending is out of control and certain to grow further if nothing is done.
The sponsors of the amendment explain that the limit “would force Congress and the President to prioritize various spending needs and provide transparency to the difficult decisions and trade offs necessary to ensure that the federal government once again lives within its means.”
A limitation of 20 percent of GDP on total federal outlays can accommodate sufficient defense budgets. Even following the 9/11 attacks, the total defense expenditures (which includes several accounts in addition to what goes to the Department of Defense), have exceeded 4 percent of GDP only since the surge in Iraq, according to the Department of Defense’s “Green Book.”
Through most of this decade, total federal spending has been in the general vicinity of the 20 percent benchmark. There are several elements which determine that defense expenditures would be adequate under the broader spending limitation.
The first regards economic growth. Federal expenditures that exceed the 20 percent limitation to a significant degree are very likely to create economic stagnation. Defense expenditures will be a casualty of such stagnation, just as the Soviet and later Russian defense budgets, admittedly in a more dramatic fashion, were in the late 1980s and early 1990s. Furthermore, the limitation would create a dynamic where Congress will first have to find ways to grow the economy if it wants to increase spending. This is a healthy dynamic. A healthy defense budget is ultimately dependent on a healthy and growing economy.
Second, it is necessary to forecast the circumstances the defense budget will find itself in if entitlement and interest payments stay on their current trajectory. Under this scenario, where the total federal budget could consume 30, 35 or 40 percent of the economy, it is not at all likely that defense will receive 4 percent of GDP. Rather, the defense budget could, at best, receive 1 or 2 percent of GDP.
Finally, the entitlement mentality is seizing control of the defense budget itself. Deferred and in-kind benefits, particularly for health care, are increasing on a per capita basis in the military and are projected to continue to increase.
Finally, the authors of the spending limit amendment include a stipulation that the limit can be waived in the case of a declaration of war or a two-thirds vote in Congress. This gives lawmakers the flexibility to exceed the spending ceiling on national defense in the case of a true defense emergency. Of course, this is not to say that Congress will necessarily make the right choice concerning the defense budget under the spending limitation amendment. No procedural proposal can guarantee that outcome. Rather, it is to say that Congress is at least as likely to take a responsible stand regarding the defense budget under the limitation as it is without it.
The amendment sponsors stress that the “extreme borrowing on the part of nations is a direct threat to their national security.” A spending limit is not simply a responsible suggestion for restoring America’s fiscal sustainability, but could also mean greater security for defense budgets as well.
It has been a little over one year since the stimulus package was passed through Congress in order to spur private consumption and to decrease high unemployment, and a recent article published in the Wall Street Journal by Harvard economist Robert Barro discusses the impact the stimulus has had on the economy.
The article argues that the government’s method of mass spending to improve economic conditions is an inefficient way to spend taxpayer money, and that the questions about whether the stimulus moderated the recession are complex – more complex than government organizations and committees might want people to think.
In his article, Barro states that:
[Answers about the impact of the stimulus on the recession] require more than merely counting the quantity of goods and services that the government purchased or the number of people that the government hired. We need to ask whether the government’s spending reduced or enhanced private spending and whether public-sector hiring lowered or raised private hiring… [M]y own analysis makes me skeptical about the numbers they’ve reported about GDP increases and saved jobs.
This statement is a direct challenge to White House reports and government reports that simply state the amount of jobs that were created, and that do not report whether jobs created were in the public or private sectors. It is easy to see and understand how jobs can be created in the public sector when money is handed out for these jobs to be created. The real question is this: will these same jobs last when the money runs out, thus creating a permanent impact on local economies, or will the jobs disappear the same time that the money is no longer available to pay workers their salaries, resulting in only a brief, fleeting jolt of stimulus? According to Barro, the answer to this question is the true benchmark of the effectiveness of the stimulus on spurring our economy.
Barro’s analysis also touches on economic output. For a whole-picture view, we must also consider by how much the $862 billion stimulus outlay will raise future GDP. He uses spending multipliers to estimate this impact. Barro says
[Si]nce the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports… When one factors in the typical relationship between tax rates and tax revenue, the multiplier is around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion” (emphasis added).
His results might help to explain why the White House’s report on the impact of the stimulus was not a true analysis of policy. What the report did was to simply subtract forecasts from the actual data, and attribute the difference to their policies. The truly analytical approach undertaken by Barro produces unpleasant results, and thus the White House opposed taking this approach.
When analyzing effects of the stimulus bill in Barro’s pragmatic manner, it becomes clear that the bill has created stimulus through borrowing at a higher price for the private sector. Barro comes to this conclusion because “viewed over 5 years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.”
As was stated in Fact Sheet #50, Congress is deliberating yet another multi-billion-dollar stimulus bill that features tax breaks for companies that hire new workers. The Heritage Foundation and Barro both agree that this new stimulus is not a good way to spend taxpayer money. To finish on this note, Barro concludes his article by saying “[t]he fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.”
Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm