What Every American Needs to Know About the Congressional "Pay-For" Game (Part 3)
The only wining move is not to play
This is (I think) the final post in a three-part series on the Congressional "pay-for" game. If you missed the first two (shame on you, why haven't you subscribed?), you can find them here (Part 1 and Part 2).
My earlier posts focused on the fact that the "pay-for" game is a misnomer. Lawmakers pretend to "pay for" their spending by drafting legislation that—at least on paper—presents the Congressional Budget Office (CBO) with a "credible" (wink, wink) plan to zero out any budgetary impact from its spending. If you can keep the deficit from increasing, then you can claim that you have "paid for" your spending.
Bear in mind that this is a game. No one actually knows what the budget outcome will be next year, three years from now, or a decade from now. All lawmakers know is how much they're proposing to spend, say $3.5 trillion, and how they're proposing to offset the budgetary effects of that spending. What actually ends up happening to the deficit over time depends not only on deliberate changes to the tax code and planned spending but also on the future state of the (domestic and global) economy, the stock market, and a host of other unknowables.
CBO doesn't forecast recessions, but of course they're inevitable. And when the economy softens or goes into recession, the automatic stabilizers kick in, pushing certain federal outlays (e.g. unemployment insurance benefits) higher and tax receipts lower.1 That means that the revenue estimates that are used to "score" legislation today are only "paying for" proposed spending in the most tenuous sense of the phrase.
It's a numbers-on-paper game.
If the numbers turn out to be wildly off, so that the projected revenue never materializes, it doesn't even matter. The spending is baked in once the legislation becomes law. It's an ex ante "pay-for" game, meaning that lawmakers are just trying to tell a half-convincing story about how they plan to keep the proposed spending from adding to the deficit before they vote to authorize it.
Once the legislation passes—i.e. ex post— actual tax revenue can come in substantially lower than originally estimated. By that point, the game is over. The money will get spent regardless.2
Don't Call it a "Pay-For"
It's time to stop asking lawmakers, "How will you pay for it?" And it's time for members of Congress to stop responding to the question with a laundry list of so-called "pay-fors."
Why?
Because it obscures what the budgeting game is really about and because it traps us in the lexicon of the neoliberal household metaphor. It's bad economics masquerading as "sound finance" that constrains public policy by forcing members of Congress to act as if they need to budget like a household.
If you've read The Deficit Myth, then you know that the first chapter of the book is titled "Don't Think of a Household." I start there because the household budget analogy is at the root of so many other myths and misunderstandings about the way the budget works and what our nation can afford to spend. And since you're reading a newsletter called The Lens, you know that my analytical framework is filtered through the lens of MMT.
In MMT, we want to reveal (not obscure) the truth about the mechanics of government finance. To do that, we should avoid using terms and metaphors that work well when we apply them to currency users—households, businesses, provinces, or state and local governments—but have no applicability to a currency-issuing government like the U.S., China, the U.K, Japan, Sweden, Australia, Canada, and others.
Taxes are important in all of these countries, but not because they "pay for" what these nations spend on health care, education, the military, and so on. As Dean Baker put it:
"But we know the point of taxes is not actually to raise revenue, the point is to reduce consumption to decrease demand in the economy."
The Congressional "pay for" game gets this exactly backwards. Just think about it. Have you heard a single Democrat argue that the point of raising the corporate income tax rate, closing tax loopholes, or raising taxes on those making more than $400,000 is to dampen consumer spending in order to offset demand pressures in the economy?
I doubt it.
And that's because when you're playing CBO's budget scorekeeping game, the point of matching higher spending with higher taxes is to reduce pressure on the deficit. Whereas in MMT the budget outcome is never a target of concern. It might make sense, in the context of MMT, to pair higher taxes with higher spending, but not for the sake of keeping the deficit in check.
Instead of starting with the premise that all spending should be fully offset, MMT urges us to think harder about whether and how to offset any proposed new spending.
Let me give you an example. A few years ago, I worked with a team of economists to model the macroeconomic effects of student debt cancellation. Basically, we asked a hypothetical: "What would happen if all (then) $1.4 trillion in outstanding student loan debt was simply wiped away?" We could have modeled the policy assuming a wealth tax (or whatever) to "pay for" it, but that would have put the cart before the horse. Instead of assuming the need for offsets, we looked for evidence that the offsets were necessary to keep inflation in check. We didn't find it. Here's what the models told us:
"The inflationary effects of cancelling the debt are macroeconomically insignificant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody's model, the effect is even smaller, with the pickup in inflation peaking at a trivial 0.09 percentage points."
In other words, we found that there was ample "fiscal space" to cancel the debt without the need for offsets. Why? Because the impact on inflation was so trivial. Basically, the models told us that the economy could easily handle the induced increase in consumer spending so we wouldn't end up with "too much money chasing too few goods."
What if that hadn't been the case? What if our models had predicted a more worrying inflationary impulse? Well, that's when it makes sense to think about building in some offsets, not to "pay for" the spending but to keep it inflation-neutral. And that's where the hard work comes in. It's also where the MMT lens offers a distinct advantage over the conventional "pay-for" game.
When you're playing the conventional budgeting game, you're looking for big revenue raisers, like the so-called "ultra-millionaires" tax, which is estimated to bring in $3 trillion in revenue over 10 years. The problem is that a wealth tax makes a great (revenue) "pay-for" but a lousy (inflation) "offset."3
Here's how I put it in The Deficit Myth:
"There is a strong case to be made for taxing the rich, and we need to do it. But we need to do it strategically, recognizing that the purpose of the tax is not to pay for government expenditures but to help us rebalance the distribution of wealth and income because the extreme concentrations that exist today are a threat to both our democracy and to the functioning of our economy. Think about it. Jeff Bezos, the richest man in America, has an estimated net worth of $110 billion. How many fewer cars, swimming pools, tennis courts, or luxury vacations will Bezos purchase after 2 percent of his wealth is taxed away? The answer is not many. A small, annual tax on a fraction of his net worth isn't going to crowd out much of his spending. When it comes down to it, he's more of a saver than a spender. Billionaires save their wealth in the form of financial assets, real estate, fine art, and rare coins. A wealth tax might make the infrastructure bill appear fiscally responsible, but it makes a lousy offset…
The problem is that because this particular tax is levied on a tiny cadre of uber-rich people, it won't open up much (if any) fiscal space.
That doesn't make it a bad idea on other grounds! It just means it's not an effective way to mitigate inflation risk…
That's why MMT recommends a different approach to the federal budgeting process, one that integrates inflation risk into the decision- making process so that lawmakers are forced to stop and think about whether they have taken the necessary steps to guard against inflation risk before approving any new spending. MMT would make us safer in this respect because it recognizes that the best defense against inflation is a good offense. We don't want to allow excessive spending to cause inflation and then fight inflation after it happens. We want agencies like the CBO helping to evaluate new legislation for potential inflation risk before Congress commits to funding new programs so that the risks can be mitigated preemptively.
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So, you might say that MMT would have us replace the "pay-for" game with an "offset" game. It would force lawmakers to integrate inflation risk into the federal budgeting framework, and it would force them to be candid about the rationale for tax hikes or spending cuts.
Until then, look to people like House Budget Committee Chairman John Yarmuth (KY-03) and Senator Brian Schatz (D-HI) to lead the charge in moving us in the right direction.
"So, I don't play the pay-for game. I reject the pay-for game. After the Republicans did the $1.5 trillion in unpaid-for tax cuts, and as we're doing a bipartisan appropriations bill — which I support — which is also an increase in federal spending [that's] unpaid for ... I just reject the idea that only progressive ideas have to be paid for. We can work on that as we go through the process, but I think it's a trap…
One of the games that the Democrats do in response to, "How are you going to pay for it?" is you say, "Well, carried interest."
I could give you 14 things that would generate $1 trillion, but I just don't think we should be playing the pay-for game right now.
1Here is CBO looking at the effect of the automatic stabilizers on the federal budget.
2That's because the Federal Reserve stands in partnership with Congress and the Treasury—as the government's fiscal agent—facilitating the smooth clearing of all government spending via a complex set of institutional arrangements and facilitating practices.
3I should add that it only makes a great "pay-for" if you have the votes to pass it, and Democrats don't have the votes.
