Saturday, June 16, 2012

Principled Spending

Well, it took me a lot longer than I had thought it would to come back to this but I did want to return to the principled view on taxes and spending.  As I said I would, let's start with spending and what the principles are that we might use and what they might mean.

So what are the principles we could use for spending?  I'd say there are really only 3.
  1.  Government spending should grow no faster than the historical rate of inflation plus “relevant population growth.”  It is critically important to argue that government should be on a COLA the same way that our seniors are.  Why should government be able to expand its budget faster than anyone else simply because it perpetually borrows the difference?
  2. Government may still institute “emergency” spending during recessions but this spending will be accounted for separately and brought to zero as the economy improves.  Explicit countercyclical spending should in fact be accounted for separately.  Failure to do this is what has allowed the budget to expand under President Obama.  The stimulus was baked into the baseline, a terrible mistake from the standpoint of fiscal responsibility.
  3. This COLA approach (excluding any emergency spending) will form the new baseline for government spending from which we will attempt to drive even greater efficiency.  In other words, the COLA approach serves as a ceiling rather than a floor for spending (ex-emergencies).

Let's explore these a bit more in depth.  As to the first, we should ask our politicians to set some threshold that isn't a baseline for how fast government should grow.  As a cost center, government shouldn't need to grow faster than the population it serves plus the rate of inflation.  In fact, growth at inflation plus population more or less assumes no positive returns to scale.

Principle 2 is equally important for fiscal sustainability.  The government should differentiate emergency spending from baseline spending with the assumption that emergency spending will be reduced to zero once the emergency has ended.  Overseas Contingency Operations (the wars) are a good example of this but so are automatic stabilizers (like extended unemployment insurance).  Without an assumption that these emergencies go to zero, we never can differentiate whats "in the base" from what's "temporary."  Putting things in the temporary bucket ties them to external events.

Finally, the third principle is what we the people ultimately ask government to do on our behalf.  The more efficiency we demand from government (or the more economies of scale we believe exist), the more we should ask for a rate of growth below the "COLA baseline."

These principles may seem small but in point of fact their application would dramatically improve our fiscal position, a point I will cover after we cover tax principles in the next post.

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