No Magic in PAYGO

PAYGO was the mantra in Washington this week.  "Paying for what you spend is basic common sense. Perhaps that's why, here in Washington, it's been so elusive," President Obama intoned last Tuesday.

From the 1990 Andrews Air Force Base budget summit until the end of 2002, Congress was bound by statutory PAYGO, which used draconian automatic budget cuts to "pay for" any tax cuts or direct spending increases that threatened to add to the deficit.  Together with annual spending caps, it provided the bulwark that led to four years of budget surpluses beginning in 1998.

However, PAYGO by itself just offsets new spending with spending cuts or tax increases, it doesn't lower existing spending or deficits.

According to the Congressional Budget Office, the fiscal 2009 deficit will be $1.677 trillion with no change in law and $1.845 if President Obama's proposals are adopted.  In August, CBO is expected to revise those estimates to nearly $2 trillion.

On top of that, sweeping health care reform is moving through Congress that could add  $1.2 trillion over the next 10 years to provide health care for 47 million Americans without health insurance.  Everyone from President Obama on down swears health care reform will be fully "paid for," but his proposal to limit itemized deductions was dead on arrival, as was a soda tax, and limiting the employer health insurance deduction is proving very unpopular with unions and employers alike.  Eliminating flexible savings accounts and raising alcohol taxes are all that remain, and, together, they would "pay for" only $130 b. of health care reform.  OMB Director Peter Orszag promised to supply another $200 b. or more of "pay fors," but that will fall short as well.  Medicare Advantage savings will help, but most of health care reform would remain unpaid for unless the Congressional Budget Office scores a lot of savings from wringing out health care inefficiencies.

In the past, when Congress was caught between public demands and raising the deficit, it let the deficit rise and reached for the "smoke and mirrors."