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On February 3, 2010, Rep. Earl Pomeroy (D-ND), at podium, and members of the Blue Dog Coalition applauded then–House Majority Leader Steny Hoyer (D-MD), far right, for his support of PAYGO.
As Democrats negotiate among themselves to fill in the details of President Biden’s $3.5 trillion Build Back America plan via the budget resolution, one little-appreciated piece of fiscal conservatism makes their job much harder. It’s called Pay as You Go, or PAYGO for short.
This is a little bit wonky, but well worth getting your mind around, because PAYGO is deeply conservative and creates a structural and tactical advantage for Republicans and Blue Dog Democrats. Basically, the PAYGO rules require that any new outlay must be “paid for”—that is, it must not increase the projected deficit. In practice, this means that additional spending has to be offset, either by increased taxes or by cuts in other spending.
The current PAYGO law dates to 2010, the era when Democrats were trying to play the role of fiscal Boy Scouts—at a time when deficit reduction was the last thing a deeply depressed economy needed. PAYGO’s predecessors date to Bill Clinton, who began the Democrats’ march to fiscal prudence über alles.
In theory, pay-as-you-go rules should restrain Republican moves to cut taxes as well as Democrats’ efforts to increase spending. This was the whole logic of the Obama budget deal of 2010 that included PAYGO, and Clinton’s pay-as-you-go agreements before that. But—keep your hand on your wallets, folks—it never works out that way.
Exhibit A of just how perverse PAYGO is in practice is Donald Trump’s $2 trillion tax cut of 2017. This was enacted under that year’s budget resolution, at a time when Republicans had majorities in both houses.
The tax cut increased the deficit by $2 trillion, so Republicans had to find $2 trillion either in spending cuts or in other tax increases, right? In theory, yes. But in practice, Republicans just vote to waive the PAYGO rules. And here’s the best part of the story. In 2017, Democrats joined Republicans in voting to waive the PAYGO rules to enable Trump’s tax cut, lest PAYGO trigger mandatory cuts in social spending.
PAYGO, in short, represents the discredited assumptions of the past restraining the expansive imperatives of the present and the future.
Got it? PAYGO allows Republicans, whenever they have the votes, to cut taxes as much as they like and to hold social spending hostage. But when the shoe is on the other foot, Republicans never support waivers to protect spending. So PAYGO is in principle evenhanded, but in practice is a one-way ratchet.
But hold on, don’t Democrats have the majority now? Can’t they vote to waive PAYGO so that not all of Biden’s investment program is offset, dollar for dollar, by tax hikes or spending cuts? In theory, they could. But the Democratic caucus includes Blue Dogs and other corporate Democrats who are stuck in the fiscal and political assumptions of 2010.
Just to make legislating even more difficult, the House and Senate each have their own PAYGO rules, on top of the statutory PAYGO.
PAYGO, in short, represents the discredited assumptions of the past restraining the expansive imperatives of the present and the future. We should be investing in the human and physical potential of the economy, not obsessing over deficits. Keynes, as often is the case, said it best: “Anything we can actually do, we can afford.”
In practice, there is some disguised wiggle room in the budget deal. In the instructions to the committees that are now assembling the several pieces of the reconciliation package, the tax-writing committees were told to come up with tax cuts combined with new taxes that were roughly deficit-neutral. But the spending committees were not required to produce dollar-for-dollar offsets. So the package as a whole could increase the deficit somewhat.
The fiscally conservative Committee for a Responsible Federal Budget has warned that the instructions could increase the federal deficit by as much as $1.75 trillion. These warnings get echoed by fiscally conservative Democrats, jeopardizing the entire package. So the PAYGO requirement, even when partly waived, creates norms and assumptions that give leverage to the fiscal right wing.
A further problem is the Congressional Budget Office and the politics of budget “scoring.” The CBO, which views itself as keeper of the austerity flame, refuses to count benefits of public investments that produce offsets in the form of increased revenues. To some extent, this is a throwback to the days when supply-siders touting massive tax cuts tried to pressure the CBO to use what was then called “dynamic scoring,” to count promised revenue benefits (that never materialized).
The latest test of the supply-side claim of increased revenue was Trump’s 2017 tax cuts. None of the promised revenue gains occurred.
A further problem is the Congressional Budget Office and the politics of budget “scoring.”
But the CBO, like the proverbial cat that sits on a hot stove and never again sits on a cold one, refuses to score the very real economic gains that flow from increased investment in physical infrastructure and human capital.
The pity is that the stars have never been better aligned for PAYGO reform or repeal.
Biden, after the fiscal drag of the Clinton and Obama years, appreciates the need to go big, and not get rolled either by Republicans or by budgetary conservative Democrats.
The key congressional committees are also in friendly hands. Usually, the key players on the House and Senate committees on budget are fiscal conservatives. It just happens that the current chairs are John Yarmuth of Kentucky in the House and Bernie Sanders in the Senate.
Yarmuth, in an interview, told me that he flatly favors repealing PAYGO. He is also a big fan of Modern Monetary Theory, which holds, with Keynes, that government budget deficits are limited only by the economy’s potential capacity.
Yarmuth has made only modest headway in trying to persuade the CBO to at least count the direct benefits of public investments such as the Child Tax Credit in reducing projected outlays for, say, food stamps and Medicaid.
Revisions to PAYGO itself are not in order as part of the budget resolution. Nor is PAYGO reform or repeal likely until we get a more progressive Congress and a larger working Democratic majority.
In the meantime, even as Joe Biden tries to meet the moment and govern in the spirit of FDR, PAYGO functions as the dead hand of the more recent past, one more perverse legacy of the fiscal era of Clinton and Obama.
