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Wednesday, December 28, 2016

How HJ2 Comes Home to Roost

Our state government's budget crisis is getting bigger by the day. In just a few weeks the official deficit forecast has increased from a $400 million in 2018 to $720 million in 2020 to $1.8 billion in 2022.

The first two numbers are real. The $1.8 billion is a scarecrow that is supposed to make you write a blank tax check to the state. 

When our legislators come to Cheyenne for the 2017 session, the deficit will give them more than a handful to deal with. They have to put together a fiscal-policy strategy that combines two hugely important goals that are not easily aligned: to get our state's economy back to growth, and to bring the state budget back on solid fiscal ground. This will require intelligent spending reforms, implemented over a number of years with unwavering commitment to fiscal conservatism.

They can do it. But even if they get all the spending reforms right; even if they do all the deregulation exactly as needed; there is a threat to our state that we have only limited control over. 

The federal budget deficit. 

Ever since President Lyndon Johnson in his 1964 State of the Union speech declared "unconditional war on poverty", the federal government has been chronically unable to pay for all its expenses out of current revenue. With the exception of President Clinton's second term, we have seen nothing but deficits in the federal budget. 

The debt pile that Congress has built over the past half century is now as tall as our GDP.* Every good forecast points to endless debt growth, which is worrisome, to say the least. No country can reach the stars with its debt pile; there always comes a day when that pile weighs down the economy to a point where it brings about an urgent fiscal crisis. 

We have escaped that crisis thanks in good part to our strong currency. Now that... 
  • we have printed more of it than needed to destroy any normal currency; 
  • our corporate taxes have become the highest in the industrialized world; 
  • we have far more people on the government dole than we can afford; and 
  • our nation's credit rating remains second-tier after Obama's first term; 
we have solidly exhausted every means of long-term funding of our deficit. 

Only two options remain. The first is to status-quo ourselves straight into the fiscal apocalypse (think an America-sized Greek crisis) which will destroy the outlook on life for generations of Americans. (For a realistic account of what that fiscal crisis could look like, check out this ebook.)

The second option is fiscal reforms to the federal government that are so big, and so impactful, that they reverse half a century of War-on-Poverty welfare-state expansion. Such reforms start with a major overhaul of the federal budget process. One way to start that overhaul is to institute a balanced-budget mechanism forcing Congress onto a path of fiscal sanity. 

Since 1980 members of Congress and activist groups have proposed a couple of dozen of proposals for a balanced-budget constitutional amendment (BBA). Most people tend to believe that all BBAs are the same; they are not. Not by a long shot. 

Some are good, some are bad, some are downright ugly.

In the bad-to-ugly category we find amendments that would force Congress to balance its budget every year. Currently there is a bill ready for consideration by the Wyoming state legislature, HJ2, that proposes such an amendment. 

Superficially, a BBA that enforces an annually balanced budget seems like a good idea, does it not? 

Well, let us take a second look at what HJ2 would do to the Wyoming state budget - and to the Wyoming economy - if it was passed by the legislature.

HJ2 calls for a constitutional convention that would gather enough votes from enough states to amend the U.S. Constitution under Article V. The BBA, proposed under HJ2, would then create a mechanism by means of which Congress cannot leave a single fiscal year without having balanced its spending with tax revenue.

While looking good in the showroom, this car would drive us, here in Wyoming, straight into the fiscal ditch. Here is how. 

According to forecasts by the White House's Office of Management and Budget, the federal budget deficit will average $506 billion per year over the next four years. Suppose that the BBA proposed by HJ2 goes into effect with the start of FY2018 (October 1, 2017). This is now the first fiscal year for which Congress must balance its budget.

With half-a-trillion dollars to remove from the budget, or collect in the form of new taxes, where should Congress start? What taxes would they raise? How should they balance spending cuts vs. tax increases? 

I have exhaustively searched for answers to these questions from the sponsors of HJ2. So far, I have not found one. 

I therefore invite all HJ2 sponsors to explain, right here on this blog, exactly how they think Congress should close a $500-bn deficit in one year. I will publish answers unedited from Representatives Lindholm, Barlow, Clem, Harshman, Hunt, Laursen, Miller and Winters; and Senators Bebout, Boner, Case, Driskill, Hicks, Perkins, Peterson and Wasserburger. 

To make my point about their BBA proposal absolutely clear, let me tie the questions about annual budget balancing right back into the Wyoming state budget. 

Suppose Congress decides to split the efforts between spending cuts and tax increases. This means a static revenue increase of $250bn. As of today, 80 cents of every federal tax-revenue dollar comes from personal incomes; how much higher personal federal income taxes do the HJ2 sponsors think that Wyoming taxpayers can afford?

Then we get to spending cuts. In our scenario, Congress needs to reduce outlays by $250bn in one year. One of the biggest items that would go on the chopping block is Federal Aid to States. Suppose Congress cuts it by $100bn, or 16 percent. Suppose, also, that we spread this money evenly, so that all states take a 16-percent cut.

For Wyoming, this means approximately $200 million in one year. 

What would the HJ2 sponsors do if Congress cut federal funds for Wyoming schools - which purportedly are going to be in a $1.8 billion budget hole in just a few years? What would they do if they lost $100 million, or even $50 million, in federal Medicaid money?

Spending cuts are necessary to close the deficit gap in the state budget. However, such cuts must be done in an orderly fashion, with a clear long-term goal to permanently reduce government spending - and combining budget-balancing with the return of tax revenue to taxpayers. These are prudent, thoughtful spending cuts (and can take place in education as well as health care and Medicaid). 

HJ2, on the other hand, ties the hands of the legislature, forcing them to act as fiscal henchmen for Congress. That is the exact opposite of what we need here in Wyoming.
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*) Some people would disagree and point to the share of the federal debt owned by the general public. That, however, is misleading: every dollar owed requires interest payments regardless of to whom Uncle Sam owes that dollar. If I owe $100,000 and $18,000 of that is owed to my uncle, does that mean that I only have to count $82,000 as my "actual" debt?

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