"Cut Cap And Balance": Scam Or Real?

Let's look at the proposal:

1. Cut - We must make discretionary and mandatory spending reductions that would cut the deficit in half next year.

2. Cap - We need statutory, enforceable caps to align federal spending with average revenues at 18% of Gross Domestic Product (GDP), with automatic spending reductions if the caps are breached.

3. Balance - We must send to the states a Balanced Budget Amendment (BBA) with strong protections against federal tax increases and a Spending Limitation Amendment (SLA) that aligns spending with average revenues as described above.

Ok, so we go from ~$1,700 billion in deficits to $850 billion this coming fiscal year.

That's somewhere between $750 and $850 billion in spending cuts right now, depending on how you're looking at the deficit numbers (that is, if you're cheating or not.)

That will result in at least an immediate 5% hit to GDP. Is the GOP willing and ready to accept that? If so, let's see a statement on that, because this is the outcome of such a cut in government spending. The reason is simple: GDP is defined as "C + I + G + (x-i)" and you're proposing to cut "G" by 5% of GDP. Bingo. The flow-through on that will result in an even larger decline (and economists can fight over how much that multiplier is, but it's greater than "1")

The cap does not enforce a maximum deficit size. It therefore is defective in that the GOP can simply pass tax cut after tax cut and yank deficits back up to "stimulate", which makes the problem worse.

"Balance" fixes it, of course, but is a Constitutional Amendment and requires passage in both houses plus ratification. It is thus not a "right now" solution.

With one modification I would support "CCB" without reservation: In year two and beyond total government debt, including public and intergovernmental, may not grow faster than GDP, with automatic spending reductions of double any violation if it does. I would leave only one exception: In the event of Congressionally-declared war, in which case the exception would have to be voted upon and passed by a 2/3rds majority every six months. Yes, this means that if GDP is declining debt must decline faster (that is, the government must run a surplus!)

The GOP is close on this. Not there, but close. Make that one change above and you're actually addressing the problem in a way that will fix it.

Incidentally, if you make that change you permanently fix the problem and avoid S&P and Moody's rating action.

Be aware, however, that such a plan, if enacted, will bring short-term economic pain, and lots of it. You had better be prepared with a fundamental tax, "free trade" and medical system overhaul because that has to happen in short order once this goes into place as a buffer.

This plan, however, is progress compared to what we've heard from Congress and especially Obama thus far.