UPDATE 5/31/2017: This is now more vital than ever. The Trump budget meets the Golden Rule guidelines, but what will Congress do with that bit of leadership from the President?
Milton Friedman knew what the answer to growth and prosperity was. And today Cato Institute’s Dan Mitchell is following in Friedman’s steps with Mitchell’s golden rule on spending. Mitchell explains that it is the size of government that matters above all else because it tells citizens how much national income is being redistributed and reallocated by Washington. Mitchell suggests not fixating on deficits and debt. Instead, Dan advises that Americans must ensure that the size of government spending over time grows at a slower rate that does the private economy. As a model, Dan Mitchell looks to the voter-imposed Swiss spending cap that successfully went into effect early last decade. Here is Dan’s analysis in detail. A true small government politician like Senator Rand Paul will find Mr. Mitchell’s research the perfect template for success.
The current debate between advocates of “austerity” and “growth” is frustrating for anyone who supports limited government. Austerity folks assert that deficits are economic poison and that balanced budgets, largely achieved with higher taxes, should be the goal of fiscal policy. So-called growth advocates believe more government deficit spending will boost economic performance.
Both miss the point. What matters, as Milton Friedman taught us, is the size of government. That’s the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it’s financed by taxes or borrowing.
Rather than fixating on deficits and debt, I suggest another goal: Ensure that government spending, over time, grows more slowly than the private economy. Evidence from economies around the world shows this is the best path to bring down deficits and nurture prosperity.
“What matters, as Milton Friedman taught us, is the size of government.”
Call it the golden rule of fiscal policy. Here’s how it would work in the United States. The White House projects nominal GDP will climb 4.7% annually over the next 10 years, while the Congressional Budget Office estimated average growth of 4.5% over that time period. The golden rule simply requires that the burden of government spending climb at a slower rate. Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.
A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.
Originally posted April 8, 2014.