In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty

SUMMARY
Congress often moves slowly to change tax and spending laws when circumstances change, but there are ways to design legislation to anticipate and prevent the tendency towards “policy drift.”

Enactment of major pieces of legislation tends to be followed by periods of legislative stasis, even when economic conditions change. Policies during the Great Recession are an example of this. The Great Recession proved significantly deeper than forecasters had predicted, when the American Recovery And Reinvestment Act was enacted, but but as new information became available, Congress did little to alter the fiscal stimulus in response, other than to continue some expiring provisions.

There are ways to design legislation to anticipate and prevent the tendency towards “policy drift.” This paper identifies four mechanisms: delegation of legislative authority to administrative agencies, triggers that either automatically adjust policy for changed circumstances or try to force an issue onto Congress’s agenda, expirations of legislation that sunset laws on a predetermined date, and indexing to adjust policy in discrete increments in response to changes in conditions.

Each has its advantages and disadvantages, but on balance, triggers that automatically adjust policy to new circumstances tend to be most effective in preventing policy drift, particularly for countercyclical policy and Social Security. When economic conditions deteriorate, triggers could be in place that would automatically adjust levels of aid to states and federal infrastructure spending, provide tax cuts, and adjust the length of eligibility for unemployment benefits. In order to maintain the solvency of Social Security, benefits and taxes could be indexed to changes in estimates of the program’s solvency over 75 years. When there is a projected shortfall or surplus, the law could trigger adjustments in benefits and taxes to compensate.

With respect to Medicare, a combination of indexing on the revenue side, and increased delegation on the spending side is recommended. Medicare revenues would be indexed to health cost growth through a combination of payroll taxes and income taxes in order to maintain the current mixed financing system. To keep payments in check, mechanisms like the Independent Payment Advisory Board could be expanded and strengthened.