Thursday, January 27, 2011

Promo for PAYGO

We had a great discussion last night about the federal budget, especially around the Washington Post chart that showed the 2010 federal budget income and expenditures. There was a general sense of astonishment when it was clear that the amount of revenue coming in was only enough to cover the mandatory spending portion of expenditures. “How did we get here?” one of my classmates asked.

On the Washington Post website I found an additional chart that shows a historical look at federal deficits. According to the text on the chart, 2010 marked the highest annual gap between spending and revenue since WWII (as a percentage of the overall economy). Notice the trend in the deficit from 1980–1992, during the era when conservative political rhetoric began promoting tax cuts as a better way of life. Tax cuts may make for good campaign fodder, but it’s clear by looking at the chart that if you don’t take in as much as you spend, you’re going to get into trouble.

The first "pay-as-you-go" rule was enacted in 1990 ( "The pay-as-you-go rule, also known as PAYGO, is designed to encourage Congress to offset the cost of any legislation that increases spending on entitlement programs or reduces revenues so it doesn't expand the deficit. Under PAYGO, Congress must pay for such legislation by reducing other entitlement spending or increasing other revenues" (

As you can see by the chart included in Professor Zhao's deck for week 2 (slide 18), this rule began to reduce the annual deficit beginning in 1993. From 1997-2001 we enjoyed annual budget surpluses. PAYGO was allowed to expire in 2002, and we've had a deficit each year since then. Although a new version of PAYGO was enacted in 2007, it doesn't have the same restrictions as the 1990 law. "PAYGO doesn't force lawmakers to make the tough decisions needed to reduce the deficit, but it restrains them from making deficits worse or undercutting deficit-reduction efforts they have already enacted" ( When added together, all the annual deficits make for a mountain of national debt. The so-called Great Recession and the cost of bailouts compound the problem.

I believe it is imperative for the federal government and the American people to come to terms with the fact that there is no free lunch. We need to pay today for the programs and services we need, value and use, and stop borrowing from future generations.


  1. Great post and summary of PAYGO. Do you (or does anyone else) know the reasons why the new version of PAYGO doesn't have the same restrictions as the new version? I would assume it was a political move, any other reason?

  2. Becky, the link to "historical look at federal deficits" is not correct. Could you fix it? In addition, the graph is small -- if you send me the link I can find a way to get a better graph with higher resolution.

  3. Lyssa, nice question! I guess it is hard to adopt a stringent PAYGO policy because elected officials are all reluctant to make the hard choices of either (1) "reducing other entitlement spending" or (2) "increasing other revenues."