Pelosi and Reid's "Pay-Go" is a "No-Go"

Ideal Candidate believes that it is important to tell Democratic voters when our Congressional leadership have been wrong. The so-called "Pay-go" rules that the Pelosi-Reid leadership imposed on itself at the beginning of the 110th Congress is a good place to start.

The idea was that the Democrats could win over so-called "fiscal conservatives" by criticizing Bush and the Republican leadership as "spend and spend" if not "tax and spend." The awkwardness was always that Democrats historically have been committed to the activist use of government for progressive ends. So the "fiscal conservative" t-shirt did not quite fit.

Once control of Congress returned to the Democrats, the problems increased. Every spending increase had to be paired with some sort of revenue increase, to "pay for it." The trouble is that no large institution other than the federal government accounts for its finances this way. When private or public entities want to build an asset, they borrow money (the bigger the institution the more likely they issue bonds rather than borrow from a bank) and count the spending as capital expenditure. Capital expenditures are depreciated over time, with only a small amount of the spending included as expenditure in any given year. Business corporations do it. Public entities, such as transit authorities and school boards do it. The federal government doesn't. Since the Reconstruction Finance Corporation was wound up in the 1950's the federal government has saddled itself with a budgeting system that accounts the money spent to build a road the same way as it does money spent in reimbursing hospital bills through Medicare. Both types of spending get counted towards the annual "budget deficit" that newspapers like the Washington Post teach us is "out of control."

Now that Pelosi and Reid are working with the White House to pass a "fiscal stimulus"bill, our leaders are in the embarrassing position of having to explain why this stimulus should not be "paid for" under "pay-go" rules. The truth is that the "pay-go" promise made no sense to begin with.

Ideal Candidate believes that receipts should balance expenditures for things that are in the nature of consumption-- here today gone tomorrow. But the fiscal balance should not include spending on infrastructure assets, which by their nature will make the economy perform better in future years. This spending needs to be accounted for differently. Also when the private credit markets are not working properly and bankers are not responding to lower interest rates by increasing lending, Congress needs to spend money and not concern itself with "paying for it." This is Econ 101.

Ideal Candidate is intrigued by ideas for going back to the model pioneered by FDR in the 1930's to build infrastructure and repair credit markets: the RFC. For a discussion of the RFC model please see this article in the Philadelphia Jewish Voice.

Hopefully any "real" candidates that emerge will want to join this discussion.