Restrain federal spending, expand personal wealth

Posted: Jan 26, 2004 12:00 AM

As people who know me well can attest, I have never worshiped at the shrine of balanced budgets. Rather, I define my fiscal goals as strong economic growth and full employment at a stable price level. That's why I have always been willing to tolerate reasonable temporary deficits if they result from tax rate reductions or the removal of distortions from the tax code that increase the economy's capacity to grow. The economy's very positive response to President Bush's tax rate reductions demonstrates how tax rate reductions and tax reforms can increase economic growth and raise revenues over the long run.

Neither have I ever been one to advocate cutting government programs simply for the sake of reducing the size of government. Government programs that don't deliver what they are supposed to should certainly be cut and, in many cases, eliminated. And there is no doubt that beyond a certain level, the cumulative burden of government spending, which diverts capital and labor away from productive uses in the private sector, becomes so great that the absolute size of government should be reduced. After a three-year spending binge that increased federal outlays nearly 25 percent, we are almost certainly at that point presently.

But even now, it would be ill-advised simply to start hacking away at government programs. Instead, I think we need to create long-run systemic control on the growth of spending so that as economic growth picks up and is sustained over the course of the recovery, the relative size of government shrinks relative to the private sector. "Growing the government smaller" in this way offers the best hope for political success, as well.

Many younger members of Congress won't recall how the first Bush administration approached spending control. It was a version of what I just described - Bush 41 called it the "flexible freeze." The freeze component capped the overall growth in spending at a rate something less than the rate of economic growth. The flexible component, however, allowed some programs to grow faster than the economy, some to grow slower and some to be eliminated altogether. It is time to revisit this approach to controlling the growth in government spending.

Under increasing criticism from both the left and the right, Bush pledged in his recent State of the Union address to "cut the deficit in half over the next five years." With all due respect, we don't need a deficit strategy; what we need is a strategy to control spending growth.

The Wall Street Journal put it this way: "To make a priority of deficit reduction only plays into the hands of Democrats who will say that taxes must be raised to accomplish it. The real problem is spending, which will lead to future tax increases unless it is reined in. Ronald Reagan always made that distinction."

The good news is that the Progressive Personal Account Plan put forth by Social Security guru Peter Ferrara and officially scored by the Chief Actuary of the Social Security Administration, provides a perfect way to combine spending-growth control with Social Security reform. PPAP helps pay the transition from the current tax-and-transfer redistribution retirement program to a fully funded personal saving-and-investment plan by slowing the growth of federal spending by 1 percentage point a year. This modest spending limitation gives workers a huge incentive to support spending-growth restraint because every dollar in spending savings realized under the speed limit on spending growth flows automatically and directly into workers' personal retirement accounts, building their personal wealth and providing for their retirement security and prosperity.

If Bush follows through as he is proposing to freeze discretionary spending growth to 1 percent or less next year - a version of the "flexible freeze" - overall spending growth would fall from the 6.2 percent currently projected by the Congressional Budget Office to 3.2 percent. Such savings would surpass the PPAP spending restraint by a factor of three. It would set the stage for creating and partially funding large personal retirement accounts with savings from controlling the growth in other federal spending.

By employing even a modest spending limitation, such as the one included in the PPAP, it would be possible not only to prevent Social Security from plunging off a cliff when the baby boom retires, but also it would represent a huge step toward empowering and enriching American workers. Under the PPAP plan, every worker would be permitted to use the savings from reducing other government spending to place into his or her personal retirement account 10 percent of the first $10,000 they earn and 5 percent thereafter up to the cap on Social Security taxes. That amounts to $2,000 a year for someone earning $30,000.

Ironically, the run-up in federal spending that has occurred during the past three years may be just the catalyst that starts a virtuous chain reaction of building personal wealth by slowing the growth of federal spending. The spending baseline has been ratcheted up so much that it should prove a popular undertaking to reduce the future growth of government from this base in order to devote the savings to help fund large personal retirement accounts. It is a rare opportunity this president should grab. He isn't likely to get a second chance.