Tuesday, May 20, 2003

A Modest Proposal

One of the fundamental problems with the operation of the Federal Government is that the spending of taxpayer money falls into what economist Milton Friedman described as “Category IV” of his famous “Four Ways to Spend Money.”

In the book “Free to Choose”, Milton and Rose Friedman note that spending attitudes depend largely upon 1.) whose money is being spent and 2.) who is receiving the benefit of the spending. In most cases, you are spending your money on yourself and, therefore, you have a high incentive to gain the maximum value for your money; this is Category I spending. Category II is like buying Christmas presents: you still want a bargain but you don’t care so much about how the recipient feels. Category III is the “expense account” scenario: you want to maximize your benefit on somebody else’s dime (thus, the lobster dinner charged to the company credit card). Finally, there’s Category IV which entails spending somebody else’s money on somebody other than yourself. There’s little incentive to economize and you really don’t care that much about the value of the product or benefit received. All government spending falls into Category IV.

My proposal to imbue some accountability into government spending is to link Congressional salaries to the budget surplus and/or deficit. Right now, Senators and House members receive a kingly $154,700 to endure three-day workweeks for several weeks a year. For the purpose of this proposal (and to simplify the math) let’s raise Congressional paychecks to $200,000 a year. However, this is not a fixed salary, but a floating one, depending on the spending habits of Congress. If the federal budget is balanced, everyone gets their 200 Gs.

But let’s say it’s 1990. In that fiscal year, the U.S. government ran a deficit of $221 billion on total outlays of $1.253 trillion dollars, or a 17.6% overrun. Under my proposal, everyone in Congress forfeits that percentage in salary ($35200) to bring the Congressional salary down to $164,800. Conversely, let’s take 2000 FY numbers when the government ran a $236 billion surplus on $1.788 trillion in spending. Now Congress has shown the fiscal responsibility to gain themselves a 13% pay raise, bringing the salary for that year up to $226,000. Easy, no?

The idea is that, in some small way, Congress should aspire to the same instinct towards fiscal responsibility as everyday Americans. It’s a way to interject some Category I behavior into the federal government’s propensity to tax and spend. The sacrifice of millions of taxpayers would be felt (in a minor way) by those spending the taxpayers’ money.

The salary cut itself is probably insignificant to a Congressperson. However, the pay cut (or raise) is the kind of tangible metric that Americans can latch onto as a kind of job assessment. Think of “Congressional Pay Cut” as a side-by-side measurement with “Tax Freedom Day.” And this is important: tax policy would be forever tied to the compensation policy. Congress couldn’t easily raise taxes without explaining why this isn’t a facile way to increase their own salary on the backs of the taxpayers (in the same vein, this would be the case for drastic budget cuts). A tax increase would be viewed as a failure by Congress to engage in fiscal discipline. The compensation policy would also influence spending policy since Congress would have to face up to morsel of Category I spending every time an expenditure bill is passed.

To be sure, there are national emergencies (war, recession) that require deficit spending. In these cases, the stigma of overspending in Congress would be mitigated based on the extraordinary times. However, in times of peace and prosperity, there is little excuse for Congress to avoid the hard decisions of Category I spending faced by Americans in their household budgets on a daily basis.

No comments: