WHAT TO MAKE OF PAYGO?

On Tuesday, the President announced his support for making PAYGO rules, adopted informally by Democrats who took over congress in 2007, into law. Pay-as-you-go is a budgetary ruleset designed to ensure any new entitlement programs or tax cuts are deficit neutral -- that is, paid for -- over a six and eleven year window (the current fiscal year plus five and ten year forecasts). It was originally adopted during the Clinton years but were loosened during the surpluses of the late nineties and abandoned during most of the Bush presidency. I spoke to the Center for Budget and Policy Priorities Jim Horney to get a sense of what this means.

What's the actual impact of making these congressional rules in to law? Since both rules have emergency waivers (designed for situations, like the current recession, where running a deficit is a good idea, but often abused by congress), Horney says that making the rules into law "doesn't make an enormous amount of difference. If you've got the votes to waive the congressional rules, you've probably got the votes to waive the statutory rule. [But] It heightens the visibility for [and] makes it a little bit harder for members of congress to vote for waiving the statute. The main question is whether that somehow builds more support for living by the pay-go rule. Get people to commit to living by it."

Will this affect the president's budget? Probably not, according to Horney, who believes that after accounting for the baseline Bush budget policies, the president's budget proposals fall under pay-go rules. "The president's budget is not inconsistent with pay-go once you have built in all of this policy extensions," he says, for instance, "the president is very clear that health care reform be paid for."

Who opposes this measure? While the rules were initially bipartisan, "most Republicans in recent years have decided that they don't think tax cuts should be paid for, and they objected to efforts in recent years to establish pay-go rules that were two-sided, [affecting both] tax cuts and spending; instead, they want a one-sided spending rule. [On the other hand, some] Democrats would say that expanding health care is more important than keeping the deficit down. If it becomes impossible to pay for the bill, [then deficit concerns might be forgotten.]"

Is this a step towards ending the deficit? Not really. Horney characterizes the policy as "don't dig the hole any deeper." While following these rules will likely prevent the deficit from growing, to move it in the other direction will require increases in revenue, cuts in spending, or some combination of both. And in this case the rule is less important to whether members of congress believe following it is important. "The real test is whether there is a real commitment to living by the pay-go principal."

The significance of this act is its political signalling; the president is letting deficit hawks, moderates in both parties and our foreign creditors know that deficit reduction is still on his mind and fiscal responsibility is still important. In his remarks supporting the rule change, he observed that "it is no coincidence that this rule was in place when we moved from record deficits to record surpluses in the 1990s -- and that when this rule was abandoned, we returned to record deficits that doubled the national debt." But it wasn't necessarily the rules that caused this, though they certainly helped -- it was leadership and a commitment to smart budgeting. Despite criticism, Obama has been a responsible budget-maker thus far -- but he's been making a budget for a recession and an explosion of new policies -- and still cutting the deficit in half over four years. But to really see how much of a deficit hawk he can be will have to wait for the next fiscal year's budget.

Important Related reading: Yesterday's column by David Leonhardt on the origins of the current deficit and the lack of clarity on how to fix it.

-- Tim Fernholz