Corker Spending Cap: An Automatic Destabilizer

May 4, 2011 at 10:30 am

Testifying before the Senate Finance Committee today on the limitations on reducing deficits through changes in the budget process, Senior Fellow Paul Van de Water explained that Senator Corker’s proposed federal spending cap would (among other things) make the economy less stable:

Imposing an arbitrary limit on federal spending would risk tipping faltering economies into recession, make recessions deeper, and make recovery from a recession more difficult. Spending for some important federal programs — including unemployment insurance, food stamps, and Social Security — increases automatically during a recession, when the need for assistance grows.  Since GDP [Gross Domestic Product] also shrinks during a recession and remains below its trend level during the early stages of recovery, federal spending increases significantly as a share of GDP during periods of economic weakness.  This automatic response softens the recession’s blow not only for the programs’ beneficiaries but also for the economy as a whole by maintaining total purchasing power.

Former Federal Reserve Vice Chairman Alan Blinder made the same point recently.  As a Bloomberg story explained:

Blinder said the McCaskill-Corker proposal would destabilize the economy by making recessions worse.  That’s because government spending typically climbs during downturns as more people apply for unemployment benefits, food stamps, Medicaid and other types of federal aid.

Those so-called “automatic stabilizers” help support consumer spending during recessions and “you don’t want to short-circuit that,” he said.

That’s hardly the only problem with the Corker proposal.  As Center analyses have shown, it fails to account for basic changes in society and government and would force deep cuts in Medicare, Medicaid, and Social Security (see table).

Cuts in Medicare, Medicaid, and Social Security Over the Next Decade Under Corker-McCaskill's Automatic Mechanism (in billions of dollars)

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