Overspending is also a systemic risk

May 14, 2010

The Senate has been debating a financial reform bill that is supposed to help prevent another crisis in the financial sector.  The extent to which it will help or hinder financial markets is being debated right now.  The measure includes one new entity, the “Financial Stability Oversight Council,” that is specifically charged with looking out for practices and problems that pose a systemic risk to the financial system and broader economy. If the bill becomes law, it will entail reams of new regulation and rules requiring greater transparency in an attempt to head off future economic crises.

We think it’s worth asking: if Congress is going to create an entity focusing on identifying systemic risks to our economy, shouldn’t that body begin with examining Congress’s spending habits?  Certainly, Washington’s reckless overspending and the exploding national debt threatens to undermine our global competitiveness and potential to grow.

Ironically, in the process of creating this very legislation, Congress is demonstrating that it shouldn’t be giving financial planning advice to anyone.  This legislation is estimated to cost $17 billion, and should be subjected to PAYGO rules, but bill sponsors are looking for ways to avoid making changes to comply with PAYGO.

It was just two months ago that Congress passed PAYGO — legislation that requires that that Congress offset new spending by reducing other outlays or raising revenue.  It was heralded as evidence that Washington is fully committed to fiscal responsibility. As the President put it:  “It’s pretty simple. It [PAYGO] says to Congress … You can’t spend a dollar unless you cut a dollar elsewhere. This is how a responsible family or business manages a budget. And this is how a responsible government manages a budget, as well.”

Yet since that time, Congress has regularly blown off PAYGO, and the same politicians that championed PAYGO have demonized those who have tried to enforce it.

Today, many warn that the U.S. is on the road to economic disaster as our debt explodes to unprecedented levels. What’s happening in Greece could happen here. If Congress is really worried about “systemic threats” to our economic system, it should reduce spending to levels that facilitate growth.

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