Tax Trigger? Debt Trigger? The Dead Hand Solution

The U.S. Senate Committee on Finance held a hearing Wednesday to consider “budget trigger” proposals as a preferred way to reduce the current federal deficits and national debt. The Trigger is essentially a mechanism to set budgetary limits tied to specific measures of the economy. A limit would be set and if reached would trigger an automatic response.  There would then be an automatic across-the-board reduction in spending, an increase in revenue or some combination thereof.

These automatic, mindless responses are akin to a dead hand on the throttle and reflect the lack of political determination to address the debt issue. These proposals are a smoke screen, an excuse, a ruse, misguided policy, ineffective, an abrogation of responsibility and just plain old deceptive.

Here are a few of these Triggers being floated. The President has proposed a mechanism called the Debt Failsafe Trigger, forcing spending cuts or tax increases if the debt is not declining as a percentage of gross domestic product after 2014. Another put forward by Senators Bob Corker (R-TN) and Claire McCaskill (D-MO.) would cap spending at 20.6 percent of Gross Domestic Product within ten years.  A breached limit would mean automatic, across-the-board spending cuts. Four years or ten years makes little difference as they are far away and the Federal deficit is going to be $1.65 trillion give or take in this fiscal year. Congress has already put more than $4 trillion of new debt on the ledger sheet since President Obama assumed office. Also adding to the Trigger mix is the so-called “gang of six” rumored to have a trigger mechanism in its yet to be unveiled proposal. (Is anyone else sick of the ”gang of name-that-number” besides me?)

There are many technical issues associated with the Trigger. What index is used and at what level? What about the lag time?  Is Federal spending to be reduced on everything? If not, what is exempt?  Is revenue to be included and if so, how are taxes to be adjusted and on whom? When all this is sorted out, has the economic situation changed?  What insures the levels will be effective, enforceable? What about national emergencies?

To illustrate the ineffectiveness of debt limits and triggers, take a look at the Balanced Budget and Emergency Deficit Control Act passed in 1985. This is known as the Gramm-Rudman-Hollings Act. By the way, it was passed in connection with raising the national debt ceiling. Sound familiar?  The GRH law established declining deficit targets with the overall goal of a balanced budget in 1991. In the event the targets were not made, automatic spending cuts and tax adjustments were required. The law was challenged in the Supreme Court but even with further revisions, it failed to achieve its goal. Like they say, “How did that work out for you?” Ironically, former Senator Gramm was a witness at this week’s hearing.

Let’s face it. This kind of policy is a gimmick. It is designed to allow politicians to say they are for deficit reduction and curbing federal spending or for more taxes without actually having them. It is a waste of time to even debate this kind of nonsense. Senate Finance Committee Chairman Max Baucus (D-MT) is a serious man and knows of the financial perils ahead. I can only surmise that he is willing to consider these types of proposals to provide political covers for his timid colleagues.

The clock is ticking and it is getting louder. The law of economics cannot be defied forever. Time to get serious. Members of Congress were elected to make choices, even difficult one, not hide behind some automatic dead hand.