Obama's Pay-Go Flameout

If President Obama thought he'd score some easy political points by endorsing new PAYGO legislation to control deficit spending, he was sadly mistaken. Although PAYGO--budget-speak for "pay-as-you-go"--seems to limit Congress' ability to cut taxes or raise spending, the initial reviews were unkind and sometimes harsh.

"This is like qutting drinking, but making an exception for beer and hard liquor," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, an advocacy group.

Don Wolfensberger, head of the Congress Project at the Woodrow Wilson Center noted that 48 percent of Americans already disapprove of Obama's handling of budget deficits (46 percent approve). "Obama will have to convince lawmakers that his own legislative ambitions will not exceed their political will or ability to increase taxes or cut entitlement benefits,"  he said.

Senator Judd Gregg (R-NH) and Congressman Paul Ryan (R-WI), the ranking Republican members of the Senate and House Budget Committees, were predictably critical, arguing that "waving the PAYGO banner has served as a convenient political cover for the majority as it exploits loopholes and continues its big-government spending ways."

But even Senator Kent Conrad (D-ND), chairman of the Budget Committee, was unenthusiastic. PayGo, he said, "does not address the deficits and debt projected under existing policy."

PayGo is one of concepts that sounds great on paper--but means much less in practice. Under the PayGo law that was in effect from 1991 to 2002, Congress was required to pay for any new tax cuts or new entitlement benefits (in say, Social Security or Medicare) by either raising other taxes or cutting other entitlement spending. In theory, this seems a guaranteed way to balance the budget. Obviously, it isn't. The Congressional Budget Office has projected that Obama's budgets would run a collective deficit of about $11 trillion between now and 2019.

Why doesn't PAYGO work? For starters, the Obama proposal has huge loopholes. It would exempt a) renewing the 2001/2003 Bush tax cuts; b) patching the Alternative Minimum Tax (AMT); c) updating doctors' Medicare payments; and d) changing the estate tax. It was these ommissions that inspired MacGuineas' objection. "Exempting these measure from PAYGO would increase the ten-year deficit by over $2.5 trillion," she said. With interest, the figure could be $4 trillion, according to Conrad.

But even without Obama's exceptions, PAYGO is often toothless against budget deficts.

For starters, it applies only to tax cuts and and entitlement spending--programs like Social Security, Medicare, food stamps, agricultural subsidies or unemployment insurance when recipients automatically qualify for benefits by fulfilling eligibility requirements (by being unemployed, for instance). Totally exempted is "discretionary spending" for defense, education, environmental protection and many other programs. In 2008, discretionary spending totaled $1.135 trillion, or 38 percent of federal spending.

Next, normal increases in entitlement spending (more beneficiaries, higher health costs, etc.) also aren't covered. So, for example, most of the increase in Social Security and Medicare spending resulting from the impending retirement of baby boomers doesn't count for PAYGO. All that counts are increased benefit levels from existing legislation: If Congress raised Social Security benefits, those increases would presumably be subject to PAYGO.

Finally, when PAYGO becomes a political nuisance, Congress suspends it. According to analyst Brian Riedl of the conservative Heritage Foundation, Congress waived the requirements repeatedly in the 1990s. "Entitlement spending actually grew faster during the 12 years of PAYGO (1991-2002) than in the 12 previous years (1980-1991)," he says.