Pay as You Go Rules Represent a False Paradigm

Posted by Michael A. Kamperman on February 18, 2010

It’s chic to be against increases in the federal deficit these days.  People on the right are clamoring for spending cuts without tax increases.  People on the left are clamoring for raising taxes on the rich to support more social spending.  These positions come from natural responses to either the impulse that Washington is taking too much of my money and I don’t want to send them anymore, or the impulse that people in our community are suffering and the federal government needs to step up and help them.  I find myself drawn to both positions.  I certainly don’t want my taxes raised one more damn dime, and I don’t care what reason they’re wasting way too much of my hard earned money right now.  Also, I think it is unconscionable that the federal government is not doing more to help those that are down and out through no fault of their own.  For example, the average adult on foods stamps qualifies for $144 per month, which means they have to eat on less than $5 per day.  It costs more than $5 to get a Big Mac value pack for lunch at McDonalds.  So many who are either sympathetic to both positions, or who want to play chic anti-deficit politics, are talking about the importance of pay as you go rules.  Put simply, pay as you go means Congress is not supposed to pass additional spending for a new program unless they either cut spending for some other program, or raise revenue by closing some tax loop-hole.  All three of these positions represent a false paradigm.  If we were still on the gold standard and couldn’t print money, or if we had a growing mild inflationary economy like the one that existed up until recently in the post World War II era, then yes these simple rules would represent good guidelines.  But we are in the midst of a deflationary depression and the federal government can print money.  The phrase “you can’t spend your way to prosperity” may apply to micro-economics, but it doesn’t apply to macro-economics.  Economic growth by definition is spending.  Someone somewhere spends money and those transactions make the world go round.  Spending is good.  Spending gives people jobs, businesses profits, and governments tax revenues.  Being against spending not only places one as opposed to big governemnt, it also places one in oppposition to consumers having jobs and to small businesses having profits.  The consumer is tapped out and it is imperative the federal government become the spender of last resort.  Otherwise, get used to seeing anemic weekly jobless claims numbers that continue to leave the so called experts scratching their heads. 

Don’t just take my word that the consumer is tapped out and home budgets are under pressure.  “Customers remain cautious, especially in discretionary spending,” Vice-Chairman of Walmart Mr. Castro-Wright said, adding that sales of discretionary merchandise were softer compared to the period a year ago. “Personal finances remain the top concern facing consumers in our latest monthly research report. Concern about unemployment remains much higher compared to last year, followed by concerns about the cost of living and the economy.”  Unfortunately it is about to get a lot worse.  Congress cannot get its act together on a job creation bill and unemployment benefits for millions will expire over the next few months.  What will spending patterns at Walmart look like then?  

A recession has been defined as when your neighbor loses their job and a depression has been defined as when you lose your job.  But what do you call it when the one losing their job is your brother, or your mother, or your significant other?  The reason Pay as You Go rules represent a false paradigm is because they are based on the concept that the federal government is like you and me.  We make so much, we can borrow so much, and therefore we can only spend so much.  But the only entity in the world with the capacity to spend more money without impunity is the federal government.  Yet the entity entrusted with this magical power acts as though it doesn’t know it is a Genie in the Bottle and can grant us three wishes.  The federal government can end the depression by lowering our taxes, by spending more money, and by eliminating the need for Pay as You Go  by monetizing the debt.  Sadly, that is not the trajectory we are on.  Today, President Obama announced a bipartisan commission tasked with the responsibility of finding ways to cut spending, raise taxes, and cut entitlements like Social Security and Medicare.  Has anyone in Washington asked themselves why we want people working longer in life when we don’t have enough available jobs now?  President Obama’s get tough on the deficit rhetoric will only lead to more than one in eight Americans on food stamps, more than one in seven mortgages delinquent, more than one is six working adults unable to find a full time job, and more than one in five men aged 25 to 55 out of the workforce.  Where there is no vision, the people perish.