The Golden Rule

by Dave Schuler on April 7, 2014

In an op-ed at The Wall Street Journal, Daniel Mitchell makes an interesting proposal:

Rather than fixating on deficits and debt, I suggest another goal: Ensure that government spending, over time, grows more slowly than the private economy. Evidence from economies around the world shows this is the best path to bring down deficits and nurture prosperity.

He goes on to explain how it would work and cites the examples of how something like his proposal has worked in Canada, Sweden, and Germany, not exactly havens of anarcho-capitalism.

While I think his ideas have merit, I’m still skeptical as to their practicality. For one thing, I’m skeptical of any attempt at central planning. I don’t think they can ever be administered quite as well as their proponents believe.

Additionally, private sector growth is always an after-the-fact determination. How would he propose that the government deal with the inevitable miscalculations and is that politically possible?

Finally, how would his “Golden Rule” operate in cyclical downturns? He appears to want the operative words in his prescription to be “grows more slowly” but I think they’re actually “over time”. To me his proposal would require a very different balance between discretionary spending and entitlement spending than actually prevails.

I don’t think our most serious fiscal problem is that government grows during and immediately after recessions. I think it’s that government grows during and immediately after recessions, long after the recovery is well under way, while the recovery is peaking, and ever after.

I think there’s a name for all of this and it’s “time inconsistency”. What would motivate politicians to behave as he’d want them? Statesmanship? That’s a good one.

{ 10 comments… read them below or add one }

steve April 7, 2014 at 1:20 pm

We actually did this fairly well until 1980. We know what happened then. But, to be fair, health care spending would have created problems even without the Reagan revolution. Until we fix health care spending, we cannot have govt grow slower than the private sector. (I favor countercyclical government spending. The problem is that once out of the recession we get taxes cut or spending not held back enough.)

Steve

Dave Schuler April 7, 2014 at 1:37 pm

But, to be fair, health care spending would have created problems even without the Reagan revolution.

It had already caused problems. The late 70s-early 80s was when Congress woke from its slumber, panicked over the cost overruns that had overtaken the Medicare system, and began tightening the belt. That’s what ended the glory days of rapid cost increases in healthcare (down from 6% per year in real terms) and it happened before Reagan was in office. I also have a vague recollection that Democrats had rejected a Medicare-for-all scheme and a proposal for the federalization of Medicaid but those are only vague recollections.

Guarneri April 7, 2014 at 3:59 pm

steve you seem to be hung up on Reagan. But a number of economic issues people decry have inflection points in the 70′s or earlier. Major industries under duress. Income inequality. Dave’s citation of government involvement in health care beginning in the 60′s. The last balanced budget was during the Kennedy Administration for christs sake. The coming ice age due to CO2………..oh, wait, they had to morph that into global warming later. Now they have it right; at least the propaganda. Both up and down temps are covered – “climate change” and “extreme weather” you know. Only the “solutions” – taxes, government intervention and transfer of money to developing nations stay the same……..

Guarneri April 7, 2014 at 4:07 pm

But I digress. If politicians had pure motives countercyclical or prolonged stimulative economic policy might have a chance of being evaluated, or even effectual. But when both economic ups and downs only serve as the grist for gathering power and money to shower to the benefit of your constituents, well…….. I hear Iowa lawmakers recently took a bold and risky stance and voted unanimously for continued ethanol subsidy and mandate. SOS

Ben Wolf April 7, 2014 at 5:29 pm

Mitchell comes across as ignorant, in that he seems to believe government budget balances are discretionary. How does he plan for spending to grow more slowly than GDP if the country is running a $500 billion trade deficit?

Is everyone accounting challenged?

Dave Schuler April 7, 2014 at 5:44 pm

That was my take, too, Ben. That’s what I meant by this:

To me his proposal would require a very different balance between discretionary spending and entitlement spending than actually prevails.

I can only speculate that he wants a mulligan on the last 80 years of American political history.

Ben Wolf April 7, 2014 at 8:10 pm

Unfortunately none of us here write op-eds for the Wall Street Journal, which is a damned shame as I think most would be more knowledgeable.

... April 8, 2014 at 7:29 am

Perhaps, Ben, but it isn’t about being knowledgeable, it’s about promulgating the official line.

Dave Schuler April 8, 2014 at 8:10 am

There’s a key point here that I think is worth exploring. For an economy at full employment government spending in excess of private economy growth would be, shall be say, non-productive.

One of the implications of our present policies in combination, consequently, is that employment below full employment is “baked in” to the system. It would just produce inflation or displacement or both. Eventually, it would produce a loss of confidence in the currency. It would also produce deadweight loss.

Ben Wolf April 8, 2014 at 3:47 pm

Pump-priming has the effect of preserving old industries and obsolete skill-sets. It’s also environmentally destructive, so I agree with you that it isn’t an optimal solution.

Leave a Comment

Previous post:

Next post: