A Credible First Step Toward a New Budget Strategy?

Last week the Senate voted down the House proposal (HR1) to slow the growth of spending in the current fiscal year 2011. Now alternative plans are being laid to slow the growth of spending in 2011 by roughly the same amount as HR1, possibly through a series of shorter continuing resolutions prorated at $2 billion per week. Simultaneously the House is developing a budget resolution for 2012 with the aim of reducing spending growth and the deficit in later years. Hence, the 2011 budget actions should be viewed as a first step of a longer term budget strategy. This first step is crucial. It establishes the credibility of the whole strategy.

Would a step any smaller than HR1 be credible? The following chart tries to present the basic facts in a simple way. It shows federal outlays from FY2000 to FY2011 as a share of GDP with and without HR1. The data are from CBO.

First note the remarkable explosion in government outlays in the past few years. In 2007 outlays were 19.6 percent of GDP. In 2011 outlays will be 24.7 percent of GDP.

Second, note the very modest effect HR1 would have on total outlays as a share of GDP in 2011: outlays would be 24.6 percent rather than 24.7 percent of GDP. (According to CBO, HR1 would reduce outlays by $19 billion or .12 percent of GDP in 2011).

So HR1 is a small first step, especially compared to the binge of the past two or three years. It is hard to see how a first step could any smaller and still represent a credible start on a new strategy. Anything much less would not even be visible on the chart. For a budget strategy to be credible it has to start with real actions, not just promises of future actions. An actual step at least this large is essential for restoring credibility and increasing economic growth. Reasonable people can disagree about particular programs, but they should be able to agree that a step of this size is the bare minimum needed to get on with the important task of a budget strategy.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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