06/29/2011 04:20 pm ET | Updated Aug 29, 2011

Squashing the Debate Over Spending Caps

The debate over the debt limit has taken on a life of its own, with many lawmakers taking the stance that they will oppose any increase to the debt ceiling if Congress doesn't pass a balanced budget amendment and/or spending cap legislation. A number of spending cap ideas aimed at reducing government spending have been floated so far this year. Each would force dramatic budget cuts that could potentially decimate programs serving millions of Americans.

Capping government spending would not only force damaging cuts to important social programs, it would also threaten our government's ability to respond to an economic crisis. For example, the CAP Act proposed by Sens. Bob Corker (R-Tenn.) and Claire McCaskill (D-Mo.) would cap spending at significantly lower levels than would be necessary to provide basic government services and an adequate social safety net, and it would force cuts of $3.5 trillion over the next decade. And the CAP Act isn't the only policy proposal on the table that would impose such a drastic ceiling on spending. Many proposals, supported by a range of policymakers, propose limits near or even below that proposed by Corker and McCaskill -- caps that would all but force the types of changes to social programs championed by federal lawmakers such as Wisconsin Rep. Paul Ryan in his budget plan.

Some say that statutorily enforced spending levels are needed in order to force our government to follow responsible spending practices. While that rhetoric may sound responsible, the actual consequences of such spending caps would be anything but. Last week, we found that a spending cap could be extraordinarily harmful not only to programs like Medicare and Social Security, but also to the departments of Transportation and Education, the National Institutes of Health, and even the FBI. This non-security discretionary portion of the budget could see cuts of almost $400 billion over 10 years. Social Security and Medicare would fare even worse -- to comply with the proposed caps, those programs could be cut by around $1.5 trillion combined over the next decade, even as the elderly population dependent on these programs increases by nearly a quarter. If Social Security and Medicare were protected from such cuts, other parts of the budget would be hit even harder, with the non-security discretionary portion of the budget -- the portion that funds most agencies and departments -- forced to shave 26.2% from their operations by the end of this decade.

Last week, we released a report that focused solely on the impacts such a spending cap could have on Social Security, which is unequivocally the most effective anti-poverty program in the United States. If Social Security were subject to cuts under the cap, the program would be significantly affected, likely seeing an annual cut of around 13.6% by the end of the decade. The large cuts projected would not only impact employment levels by sucking private demand out of the economy, but could also significantly reduce Social Security benefit levels. We found that in 2017, benefits could be cut by up to $2,000 per medium earner in one year alone, and that by 2036, the year the Social Security Trust Fund is expected to expire, the benefit cut could grow to around $9,300 for a medium earner.

Spending caps would clearly force massive cuts to important programs. But how would the economy fare? Spending caps or balanced budget restrictions that could only be waived by supermajorities in both chambers of Congress would deprive the government of the ability to step in and act during a recession. That would derail economic recovery by preventing the government from pursuing expansionary fiscal policies -- the most effective policy option available to fill the recessionary gap in private-sector demand for goods and services.

In fact, we found that had a spending cap similar to the one proposed by Senators Corker and McCaskill been enacted 15 years ago and thus been in place during the current economic downturn, it would have been even more dire than it has been. A case study included in this paper finds that if the CAP Act had been in place in 2009 -- when the economy bottomed out and began to recover -- the spending cap would have counterproductively required a $424 billion cut, which would have led to millions of additional job losses in that year alone, on top of the job losses already seen during the Great Recession. The 2009 Recovery Act, estimated to have saved 3-4 million jobs, would have been all but ruled out. The unemployment rate in 2010 would have been 10.5%, and we project it would have risen to 10.9% this current fiscal year.

A spending cap may sound responsible rhetorically, but in reality it would be quite detrimental. Besides forcing significant cuts to programs, a cap would make it nearly impossible for our country to recover from an economic downturn. Safety net programs, economic growth, and employment levels would all suffer. Lawmakers should be mindful that what may sound like good budgeting rhetoric often translates to horrible budget and economic policy.

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