Representatives Mike Pence and Jeb Hensarling appeared yesterday on “The Kudlow Report” to discuss their new plan to pass a constitutional amendment to limit federal spending.
This amendment proposed is to limit federal spending to 20% of the United States economy. The amendment will take 10 years for states to enact, and 5 years for congress to implement and the article shall take effect beginning the fifth fiscal year after ratification.
As Pence and Hensarling pointed out in their op-ed in the Wall Street Journal, the rapid pace of growth of the federal government has increased 24.7% from 19.9% of the economy. That is the highest level since World War II. The debt accrued in the past five years, is the total of debt summed up from President George Washington to Bill Clinton.
Can we grow our way out? Unfortunately, no. Although pro-growth policies like simplifying the tax code and lowering rates are critical components of any solution, they alone are insufficient. Mr. Walker estimated it would take double-digit economic growth every year for the next 75 years in order to close the fiscal gap.
Can we continue to borrow our way out of the problem? Borrowing of that magnitude would drive up interest rates to unimaginable levels, crowding out borrowing opportunities for families and businesses. As Greece and other European countries like Spain and Portugal face default for their excess spending, and China lectures us on our fiscal irresponsibility, the idea of borrowing at still higher levels seems inconceivable.
Without spending discipline only one option remains: monetizing the debt, also known as inflation. Although Federal Reserve Chairman Ben Bernanke has repeatedly said that this will not happen on his watch, many think it’s inevitable. If we do monetize the debt, inflation could be so high we may look back upon the Carter era with nostalgia.
Pence indicated to Larry Kudlow, with the rate the federal government is spending and the size it is projected to be, taxes will most likely double; and that projection of huge government growth is without counting Obamacare and additional stimulus spending. Another scenario will be a deep cuts in programs Americans are dependent on, or as Pence signaled as the most likely scenario, there will be dilution of the currency.
This is why this amendment is so vital.