Goodbye, Budget Control Act

Congress just passed the FY 2022 Omnibus Bill to finance the government over the remaining year.  In that resolution, there is no mention of the spending limits in the 2011 Budget Control Act (BCA).  The reason is that those spending limits capped federal spending for FY 2012–2021, and Congress has chosen not to extend the spending caps.  While the spending caps were poorly designed, they did constrain the growth in federal spending over those years. 

It is not unprecedented for Congress to suspend spending caps.  The spending caps imposed by the 1990 Enforcement Control Act were allowed to expire in 1997.  However, there is a huge difference in the macroeconomic policies pursued in the 1990s during the "Great Moderation."  At that point, the United States achieved a soft landing with low inflation and unemployment; the budget was balanced, and the debt to GDP ratio was below 40 percent and falling.

This year, Congress has allowed the spending caps in the BCA to expire amid a debt crisis.  For the past two decades, Congress has incurred deficits, responding to each economic crisis with massive bailouts funded by debt.  The debt-to-GDP ratio has increased to more than 100 percent and is projected to grow to more than 200 percent by 2050.

Abandoning the spending limits in the BCA has occurred with virtually no debate in Congress and almost complete silence in the media.  It is difficult to explain this sanguine attitude toward debt, but part of the blame lies with progressive economists.

Indeed, Larry Summers, among others, has told us for years that debt is not a problem and that we should just carry on with business as usual.  Although Summers has recently seen the light as we gag on more red ink, the damage has already been done.

Progressive economists tell us we should not worry about debt because of low interest rates.  They assume that as the Federal Reserve begins to increase interest rate to tamp down inflation, we can achieve a soft landing like that during the "Great Moderation."

Yet the soft landing in the 1990s was achieved after several decades of prudent monetary and fiscal policies.  On the other hand, Federal Reserve chairman Jerome Powell is attempting this feat after several decades of unconstrained federal spending supported by accommodative monetary policies.

With the inflation genie now out of the bottle, Powell will probably have to increase the discount rate to 6 percent or more, as the Fed did during the "Great Moderation."  If so, it will be impossible to achieve the Fed's target rate of inflation without significantly increasing unemployment.  The most likely outcome of tighter monetary policies will be stagflation like that experienced in the 1970s.

Some progressive economists argue that we can achieve a soft landing with significantly higher economic growth rates, but few people are buying that magic trick.  The United States has experienced slow economic growth over the past two decades, and even less growth is projected over the long term.

Today, we are confronting a debt crisis caused by a broken budget process and failed macroeconomic policies.  By letting the spending caps in the BCA expire, Congress is throwing in the towel, abandoning rules-based fiscal policy and any serious attempt to address the debt crisis.

The only hope for solving the debt crisis now is to follow the path chosen by Switzerland and many other European countries.  The Swiss "debt brake" is a fiscal rule incorporated in their constitution through referendum, imposing spending limits on all levels of government.  Their constitutional rule has been enforced and has allowed the Swiss to cut their debt-to-GDP ratio in half.  Similar debt brakes have been adopted successfully by other European countries and have been incorporated in fiscal rules by the European Union as well.

American citizens should demand that something similar to the Swiss "debt brake" be implemented in the United States.  Based on our present economic trajectory, it is absolutely imperative that we right America's economic ship, or else we risk it sinking.

Barry W. Poulson ( is emeritus professor at the University of Colorado Boulder and senior fellow with The Heartland Institute.  

Image: Pixabay.

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