Voters Expect the GOP To Actually Reduce Spending

President Obama is supposed to send his budget proposal to Congress today and the word is that he wants an increase of $74 billion in discretionary spending above the sequester level that is the current legal baseline for spending. This would be a seven percent increase above current levels. While seven percent sounds like a very large increase, the $74 billion might not sound all that large. However, it is only the tip of the iceberg.

Based on the most recent projections from the Congressional Budget Office, mandatory spending is expected to increase by $220 billion in the next fiscal year and net interest expenses are predicted to rise by $49 billion. Thus, what President Obama is really proposing is a spending increase of $343 billion. That would be an increase of over 9 percent above this year's levels and would result in the first $4 trillion budget in American history.

More relevantly, perhaps, with economic growth running at about 3 percent, the economy is adding about $530 billion to GDP annually. If you think about that as the new income that could go to either the private sector or the government, President Obama is proposing that the government take charge of 65 percent of the new money available in the economy.

Given that state and local government spending is likely to grow some as well, if Republicans pass such a budget they are agreeing to allow government to have two thirds of this year's economic growth, leaving only one third for the private sector. Think of that as if the entire economy is facing a marginal tax rate of 67 percent.
If Republicans actually believe in smaller government, the private sector, and free markets as they claim, they cannot allow such a budget to be adopted.

While President Obama may think it is perfectly fine for government to take two thirds of what the private sector has produced, no Republican should agree to such a deal.
If the Republicans are to hold the growth of government to some reasonable level, they need to not just oppose the proposed increase in discretionary spending but also find a way to slow the growth in mandatory spending. After all, even with no increase in discretionary spending the budget would grow by $269 billion, soaking up more than half of the year's economic growth.

A 50 percent tax rate is better than a 67 percent one, but it is still far from optimal.

Trying to come up with a way to reduce the growth in entitlements in just a few months will be nearly impossible, but there is one step Republicans could probably complete during this year's budget process.

President Obama has repeatedly signaled his willingness to use the chained CPI for increases in mandatory spending programs. Because the chained CPI produces lower estimates of inflation by accounting for how people adjust their purchasing patterns as prices rise, this would reduce the rate of increase in programs such as Social Security, Medicare, and Medicaid. The savings would only be an estimated $5 billion or so in the first year, but it would be a start and would be a chance for Republicans to work with the President on something. Symbolically, we would at least be moving in the right direction.

Republicans were elected to a majority in the Senate and a bigger majority in the House because voters expected them to do something. The something is not to give the government two thirds of all the economic growth. With growth finally back to a more normal pace the temptation to allow government spending growth to resume will be gnawing at all politicians. However, focusing on the recent restraint in discretionary spending misses the fact that mandatory spending is growing 10 percent annually.

Politicians may like to pretend that the mandatory spending budget is not under their control, but that is not true. Mandatory spending programs simply continue under a permanent law until Congress passes a new one. Congress can change the course of these programs at any time, as they frequently do when they pass the "doc fix" to prevent Medicare payments from falling to the levels specified under the permanent law.

Even if the Congressional Republicans live up to the highest possible expectations on shrinking the size of the federal government, the best they can likely do with the fiscal year 2016 budget would be to hold the line on discretionary spending and make a tiny bit of progress on mandatory spending as a down payment on future progress.

After all, a journey of a thousand miles begins with a single step.