The Return of PAYGO

I have talked about the problems of PAYGO in the past, and why the concept is flawed. However, President Obama doesn’t seem to read my comments. So let me apologize in advance for repeating myself, but people need to understand what the politicians are talking about when PAYGO is mentioned.

PAYGO, or pay-as-you-go, is a concept of matching each dollar of spending with each dollar of income. This is typically the way you and I live our lives and manage our expenses. By living within our means, we avoid issues like bankruptcy, foreclosure, and so on. Additionally, when we are faced with periods of no income, we have set aside funds in savings to cover our needs. So why would this be a bad thing on the national level?

Say that you just had a decrease in your income due to the current economy. You are proactive and start to trim discretionary spending to make ends meet. As time continues to pass with that reduced income, you start tapping into your savings to cover your mandatory expenses, such as your car, your home, and groceries. But after a while, your savings runs dry, requiring you to use your credit card or seek a loan from the bank.

This tapping of credit is the role of the government during a down economy. When the economy is strong, the government collects large sums in tax revenues that fund our national programs. In an economy like we have now, when the revenue streams are slashed, the “Federal Credit Card” pops out to inject money into the economy to maintain necessary programs while covering the shortfalls that the individual states might be facing.

Under PAYGO, the ability for the Federal Government to practice debt spending is severely limited. In past incarnations of PAYGO and similar legislation, debt spending could only be allowed in cases of emergency spending. We can all accept that some of the increased spending over the past year would qualify as “emergency spending,” so that would be acceptable under PAYGO. However, much of the “stimulus” spending would not.

For Congress to approve spending on the projects under the “stimulus bill” using PAYGO rules, funding would have to be taken away from other non-mandatory spending items. There is a lot of waste in the government, but would there be enough to offset the difference of the stimulus bill? And in a down economy as bad as this one, when it is likely that tax revenues will continue to drop, could Congress afford to cover the mandatory spending items, such as entitlement programs like Social Security and Medicare?

Social Security highlights another problem with PAYGO. Entitlement spending continues to increase, meaning that even in years of economic prosperity, it is likely that the government would have to increase taxes just to cover the difference in entitlement expenses from the prior year. Tax increases is what we can expect since, with the announcement of PAYGO by President Obama today, he also called for passing national healthcare reform. This reform is going to increase the entitlement liability on the government. Without being able to keep cutting non-mandatory spending items, tax increases is the only likely action that could be taken.

I am all for fiscal responsibility on the part of the government. In my view, we could easily cut 15% of the current non-emergency federal spending since they cover projects that serve no real national interest or could be funded by state and/or private financing. But even if Congress were to make these cuts before implementing PAYGO, I would still be against it.

Until Congress can reform Social Security to make it a program that is self-sufficient or eliminate it, PAYGO will only put a financial crunch on the federal budget or on the taxpayers’ wallet. Additionally, any implementation of PAYGO should include or be preceded by the revamping of our IRS. If we abolish the existing tiered tax bracket system and a code book full of unnecessary deductions and replace it with a simple flat tax program, Congress would be able to easily adjust the tax rate up or down each year based upon revenue receipts. These adjustments would be easier for the taxpayer to conceptualize and they can adjust their spending as needed.

PAYGO is the opposite of what our nation needs. The federal government should be spending more in lean years and less in robust years, just as our credit card activity would reflect in our own lives. PAYGO rules would limit our nations’ ability to adjust to the ever-changing economy to meet the needs of the nation. The intent might be noble, but intent rarely aligns with reality.