Chastity Belt Is Needed to Keep U.S. Budget Pure

May 3 (Bloomberg) -- Gramm-Rudman or something like it.

That's the consoling phrase I keep hearing as lawmakers talk about implementing an automatic control on government spending in the style of the 1985 Gramm-Rudman plan. President Barack Obama, for example, has called for a "debt failsafe" that would cut spending and raise taxes if the ratio of the federal debt to gross domestic product doesn't stabilize by 2014.

Top Senate Democrat Harry Reid advocates a limit on the deficit, a law binding Congress to reduce the deficit when it reaches certain levels. Others are proposing simple caps on spending that make it harder for committee chairmen to push through extra outlays when no one is looking.

Of course the calm counsel on the need for devices is supposed to distract us from the fact that the devices are being put forward as part of a wild package that would increase the debt ceiling well above the appalling and unsober level of $14 trillion.

But what was Gramm-Rudman and what did it accomplish? A look back a quarter century makes clear that some of today's consolation Gramm-Rudmans might yield the opposite of the result their advocates intend.

The first Gramm-Rudman gesture was, just as now, a gesture of contrition. Spending seemed to be out of control, everyone blamed Congress. "It is 1985," said a Wall Street Journal editorial, "there's congressional government, and there's chaos."

Threat of 'Sequesters'

There were proposals to raise the debt ceiling to the then-dreadful sounding level of $2 trillion from $1.8 trillion. Three senators, Phil Gramm of Texas, Warren Rudman of New Hampshire and Ernest Hollings of South Carolina proposed an amendment to the debt ceiling increase: a plan setting deficit targets for each year from 1986 to 1991. Under the rule, failure to meet those deficit limits would trigger equal spending cuts, called "sequesters," for defense and non-defense expenditures.

Gramm-Rudman contained no tax increases; the punishment hit the spending side alone. As Gramm, who will testify before the Senate Budget Committee tomorrow on the current debt ceiling, recalls, "by threatening across-the-board cuts, it gave congressmen and senators an incentive to make hard choices and provided a shield against those who criticized their choices."

The law permitted the Senate to halt an automatic cut by a vote of 60 or more. Emergencies like wars or recessions were considered valid pretexts for suspension.

Reality Check

These exceptions weakened the device; by 1990, there was both recession and the first Iraq war, and Gramm-Rudman became history.

Nonetheless, Gramm-Rudman didn't fail. Spending growth indeed slowed in the late 1980s. The device's very presence served as a sort of reality check that discouraged new entitlements. The only big new entitlement of the Gramm-Rudman period was catastrophic coverage of Medicare.

Pundits usually depict this step as a failure. They enjoy recalling the humiliation of House Ways and Means Chairman Dan Rostenkowski when angry seniors assailed him over the coverage's upfront premium tax.

But the catastrophic coverage event was in its way a model of civics. Congress was honest about the costs of a program and didn't conceal those costs in the out-years; voters were honest about what they wanted to pay and killed the program. In short, Gramm-Rudman's statutory rules may have emphasized the deficit and helped keep the federal government smaller than it otherwise might have been, and the private sector, larger.

Tighter Restraints

Fast forward to today and evaluate new plans in this context. The failings of Gramm-Rudman suggest that this time undoing the automatic mechanism ought to be tougher. Gramm has suggested that the House and Senate both require high majorities to halt a sequester. These days wars and recessions come annually, or even weekly, rather than once or twice a decade the way they used to.

This time, lawmakers might think twice about writing a law that permits suspension of the mechanism in case of war or economic contraction.

More important though is to decide what the goal here is, mere budget balancing or government cutting. A new constraint mechanism that includes tax increases may indeed check government growth, or even shrink it. Such a trigger plan, however, may also allow the House and Senate to prance around claiming they are demonstrating discipline even as they expand government. It is, after all, possible to maintain a large balanced budget. My preference would be for a mechanism whose sole aim is to make government smaller, where any spending increases triggered spending cuts of double the size.

Smaller Government Goal

The same beneficent "shield" effect that Gramm describes in relation to budget cuts would here, in relation to tax rate increases, work perniciously. Congressmen would be able to say raising taxes wasn't their fault, and therefore would find them easier to permit. This is especially likely if the tax increases come years after the outlays, as would be the case under the Obama formula.

A constraint mechanism that contains triggers for budget cuts alone will by contrast impose pressure on everyone for smaller government.

"Something like Gramm-Rudman" sure sounds good. The details matter, and should be scrutinized by both lawmakers and voters, even though both groups find it easier to bask in the shame of recent expenditures.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of "The Forgotten Man: A New History of the Great Depression," is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2011 Bloomberg

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