A Modest Fiscal Proposal
How to stop the government from devouring the economy


Jim Lacey

This state of affairs is easily explained: Governments have no money. Every penny government spends has to be taken from citizens and out of the productive economy. The government’s assumption is that it will spend this money more wisely than individuals or business. The evidence says otherwise.

Simply put, the priorities of the American people as expressed in the 2010 elections, and those of their elected officials, are misaligned. Americans want a growing economic pie, while Congress is myopically focused on taking for itself as much of the current pie as possible. Short of a national bankruptcy, the only chance we have of aligning these interests is a constitutional amendment limiting the spending and taxing power of the federal government.

Sounds impossible, but there may even be a simple way to do this. As the graph below demonstrates, no matter what the tax rate, individuals adjust their behavior to limit government revenues to under 20 percent of total GDP, with an optimal amount being about 18 percent. Furthermore, since the end of World War II, this country has been most prosperous when the government limits its spending to under 20 percent of GDP. In fact, until recently, it was rare for government spending to exceed this threshold.

A constitutional amendment limiting expenditures to 20 percent of GDP would put an immediate brake on runaway spending. However, as Congress has demonstrated a remarkable degree of cleverness in getting around pay-as-you-go rules, we must assume they will be equally clever in avoiding constitutional spending limits. It is easy to envision Congress employing tricks that move trillions of dollars off the federal balance sheet so it is not counted as “true” spending. Therefore, this same amendment would also place a 20 percent of GDP limit on revenue collection. This would have the same effect as cutting up the credit cards.

It is difficult to run massive deficits if creditors know there are limits to how much the government can extort so as to pay off what it owes. By attacking the problem on both ends — spending and revenues — government’s needs will finally be aligned with those of the citizenry. Congress and the administration, knowing that they could increase revenues and spending only by growing the pie, would focus with laser intensity on passing laws and implementing policies to do so. Such an amendment should, however, have enough flexibility to meet an unknowable future. For instance, in the event of a national emergency, such as a major war, Congress, by way of an annual two-thirds vote of both houses, will be permitted to collect and spend whatever is required to see the country through the crisis.

If Congress cannot find within itself the restraint to live off 20 percent of a $15 trillion economy then the American people must do it for them.

— Jim Lacey is the professor of strategic studies at the Marine War College and author of the forthcoming The First Clash.