Obama exaggerates role of "pay as you go" in balancing federal budget

President Barack Obama has been singing the praises of "pay as you go," a budget approach that is supposed to force lawmakers to offset new spending with an equal amount of revenue or budget cuts.

In his April 25, 2009, radio and video address, Obama said, "We need to adhere to the basic principle that new tax or entitlement policies should be paid for. This principle— known as PAYGO — helped transform large deficits into surpluses in the 1990s. Now, we must restore that sense of fiscal discipline."

He repeated the claim on May 7, 2009, in a speech at the White House when he unveiled the details of 2010 budget.

"One important step is restoring the "pay as you go" rule — and I've called on Congress to do exactly that," he said. "This rule says, very simply, that Congress can only spend a dollar if it saves a dollar elsewhere.  This is the principle that guides responsible families managing a budget.  This is the principle that helped transform large deficits into surpluses in the 1990s."

We wondered if he was correct about PAYGO's role in balancing the federal budget in the 1990s.

We found that Obama is correct that Congress operated under a PAYGO law that was in effect from 1990 until it expired in 2002. When the Democrats took control of Congress after the 2006 elections, they established a PAYGO rule, but it has been waived for some of the most expensive bills, such as the economic stimulus bill. Fiscal hawks are urging Congress to replace that rule with a new law that would have more impact and be more binding.

Obama is also right, of course, that the federal budget was balanced by 1998 and ran four years of surpluses before plunging back into deficit. The question is how much to credit PAYGO for those surpluses.

To find the answer, we interviewed budget analysts and examined reports on the deficit and the impact of PAYGO. We found a general consensus that PAYGO was a factor that reduced the deficit, but most said it was not as important as the two biggest forces that led to a balanced budget— the increase in tax receipts from the booming economy and defense cuts made possible by the end of the Cold War.

Still, there was a range of opinion on how much the rule helped.

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Alice Rivlin, budget chief under President Bill Clinton, characterized PAYGO as a significant factor. She said in a recent interview on PBS's Frontline that PAYGO and other budget rules "made it easier for the Clinton administration to work on the budget deficit." 

She said the PAYGO rule provided discipline so policymakers could resist tempting but expensive programs. The rule "meant that the president could say no, and the Congress could say no to a lot of good-sounding ideas, including Medicare prescription drugs" that would have made it difficult to balance the budget.

That's backed up by a report from the nonpartisan Congressional Budget Office that said, "Between 1991 and 1997, most new revenue and mandatory spending laws that were enacted were consistent with the PAYGO requirement to be deficit neutral; end-of-session balances on the PAYGO scorecard consistently showed zero or net reductions in the deficit."

Josh Gordon, policy director for the Concord Coalition, a group that advocates fiscal responsibility and was founded in the midst of the PAYGO movement in 1992, said PAYGO provided some important discipline for members of Congress even if it was not as big a factor as the booming economy and the defense cuts. "There always needs to be a check on irresponsibility in Congress and PAYGO provides that," he said.

But Brian Riedl, a budget analyst for the conservative Heritage Foundation, said PAYGO's importance has been exaggerated. "There is this grand myth that we passed PAYGO and then we got this balanced budget. But we got the balanced budget because the Cold War ended and a bubble temporarily pushed revenues through the roof."

He said that PAYGO didn't provide as much discipline as some claim because Congress repeatedly used gimmicks or took steps to ignore it.

So back to Obama's claim. He said the PAYGO "is the principle that helped transform large deficits into surpluses in the 1990s." He is correct that it is a basic principle behind the effort to balance the budget, but his statement leaves the impression that it was the biggest factor. It wasn't.

Yes, PAYGO rules provided some discipline that might have restrained Congress from adding more spending or new tax cuts, but the economy and the defense cuts were the biggest factors that led to the balanced budget. So we find his statement Half True.