Pelosi’s Perverse PAYGO Play

AP Photo/J. Scott Applewhite

Speaker of the House Nancy Pelosi speaks on Capitol Hill in Washington. 

Nancy Pelosi has done an outstanding job of keeping a fractious House Democratic Caucus together and sending a consistent progressive message. She has been brilliant at helping newly muscular progressive legislators, while keeping Blue Dogs and New Dems from defecting to Republicans. She’s my hero, and I offer even gentle criticism with trepidation—but here goes.

There is one weird anomaly in Pelosi’s game. That is her embrace and relentless enforcement of the pay-as-you-go budgeting rule, known as PAYGO. When the new Democratic House majority enacted the rules for this session of Congress in January, Pelosi whipped the Caucus so that skeptical progressives, with only a few dissenters, voted for PAYGO despite widespread misgivings.

But in era when even Larry Summers, who sided with austerity hawks back when he had real power, feels compelled to make the case for deficits, PAYGO is archaic, and worse. It is a totally needless and self-defeating fiscal straitjacket at a time when most Democrats are at last thinking expansively. It doesn’t work, and it sends the wrong message.

Basically, PAYGO requires that any increase in outlays be offset by either a cut in some other outlay or by a tax increase. The effective premise is that the existing deficit, whatever it happens to be, is sacrosanct. The fantasy, disproven over and over, is that PAYGO somehow restrains Republican tax cutting.

Technically, there is a PAYGO law, which applies to the budget as whole, and a separate House PATGO rule—the one that Pelosi forced through the Caucus—that allows a point of order to be raised against individual spending or tax measure that increases the deficit. 

The subtext is that all right thinking people should be for budget discipline. But Republicans know how to manipulate this dance, and Democrats don’t.

Some history is in order to understand how the Democrats got painted into this corner. If you have been residing on earth for the past three decades and even vaguely paying attention, you may have noticed the following pattern:

Republicans take power and drastically cut taxes, promising that the cuts will pay for themselves (Reagan). They then notice that deficits in fact result, react in horror, and cut social spending. 

Democrats come back in, playing the role of fiscal boy scouts (Clinton). They heroically raise taxes and cut spending, reducing the Republicans’ deficit, and in Clinton’s case pushing the budget all the way to surplus. For this they get no appreciation from the voters—zero, zip, zilch.

The Republicans get this. So they just cut taxes and increase deficits again (Bush II).

And then the Democrats, in their green eyeshade role, come in and perform the politically thankless task of raising taxes and cutting taxes yet again (Obama.) And then—wait for it—Republicans pull the same stunt all over again. That would be Trump’s $1.6 trillion tax cut.

Somebody notice a pattern here? And it gets worse. In 2009, The Obama Administration was so obsessed with the deficit (which had been swollen not by reckless spending but by the financial collapse and resulting deep recession) that they began planning for fiscal retrenchment while unemployment was still around 10 percent.

In that drama, Speaker Pelosi was heroically with the expansionists. She pushed for a second stimulus bill of $254 billion; using all of her legislative genius, she got it narrowly through the House over the objections of the White House. Obama was happy to let it die in the Senate.

By then, the president and senior advisers like Summers convinced themselves that what they wishfully branded as Recovery Summer (2010) was just over the next hill. In his 2010 State of the Union Address—the one announcing the Bowles-Simpson austerity commission, Obama said this:

Families across the country are tightening their belts and making tough decisions. The federal government should do the same. ... Starting in 2011, we are prepared to freeze government spending for three years. ... Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will.

This pledge not only flunked Keynesian Economics 101. It flunked politics. Like Clinton, Obama got no credit for being fiscally responsible. But he reaped plenty of blame for the slow and uneven recovery that partly resulted from budget austerity.

In that era, Obama agreed to an automatic “sequester” formula, and the House passed another PAYGO rule. (The first version of PAYGO dates to Bush I.) Eventually, the economy recovered but not robustly enough for millions voters who switched their allegiance from Obama to Trump. The deficit subsided--and was promptly inflated again by the Trump tax cut.

During this long era of Republican fiscal soak-and-repeat, it got engrained into the souls of centrist Democrats that they were supposed to be budgetary “grownups in the room.” Various iterations of PAYGO did not prevent Republicans from playing the game of cut taxes and let deficits be damned. 

Indeed, when Republicans took back the House in 2011, in no small part because of the slow recovery, they coyly changed the rule to “CUTGO.” Under that rule, spending that increased the deficit would be impermissible, but tax cuts that increased the deficit would be just fine, because, you know, the economy would grow.

Did Republicans pay a political price for this sin? Well, some budget wonks were mightily upset. In a secret ballot, Republicans would have lost the votes of staffers at CBO.

Given this history, Democrats’ restoring a PAYGO rule ignores a three decades history of getting fleeced, and is worse than nothing.  It is like wearing a sign that says to Republicans, “Kick me.” To the broad voting public it signals nothing at all.

We are about to have a titanic struggle over how to rebuild America for working families. That will entail restoring taxes on the rich, and then some. It will include some borrowing for a needed infrastructure program. Deficits will probably increase on net, as they should (Even Larry Summers says so.)

Punch line: The exact mix of tax hikes, spending increases, and the use of public debt will be the result of great legislative battles. They will not be the product of a fiscal formula.

I asked several members of the House, on background, whether they thought Speaker Pelosi had insisted on a PAYGO rule because centrist New Dems and Blue Dogs in the Caucus demanded it, or because she had internalized the arguments that Democrats needed to play the role of fiscally prudent party. It was clearly the former; some thought it was also the latter. Let’s hope not.

The PAYGO rule not just a relic of another era, but of an era when Democratic assumptions about fiscal politics were revealed as self-deceptions. The sooner PAYGO is jettisoned, the better.

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