Moneybox

The Dumb Obama-Era Law That Might Force Democrats to Slash Medicare if They Add to the Deficit, but Probably Won’t, Explained

Obama wears a face mask and flashes a thumbs-up.
Barack Obama: great on some things, but not this thing! Patrick Semansky/Pool/AFP via Getty Images

At the moment, Senate Democrats seem ready to push ahead with a rather large coronavirus relief bill, using procedural tactics that will allow them to pass it on a party-line vote instead of haggling endlessly with Republican moderates who would prefer a much more modest package. But already, some Washington budget wonks are warning that this hard-nosed approach could lead to unintended consequences (cue lightning, blood-curdling screams, and a synthy, pulse-pounding John Carpenter soundtrack).

What sorts of accidental repercussions, you ask? If the Democrats’ aid bill adds to the deficit, it could theoretically trigger massive, automatic spending cuts to popular programs like Medicare and farm subsidies under an obscure law known as the Statutory Pay-As-You-Go Act of 2010. “The cuts would be huge,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, recently told NBC. “It’s a critical issue, which, at some point, is going to have to be dealt with.”

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I personally doubt any of this will come to pass, since there are a couple of obvious ways that Democrats could scoot around these cuts. But some of are more straightforward than others. And since we’ll probably have to talk about this dumb law now—and I cannot overemphasize how dumb it truly is—here’s what you need to know.

Why the heck is there a law that automatically cuts Medicare if we aren’t careful about the deficit?

I want to transport you back to a time in American politics that feels unrecognizably alien to those of us living in 2021—an era known as the early Obama administration. This was a moment when Democrats desperately wanted to paint themselves as the true party of fiscal responsibility. They had spent years hammering George W. Bush for ballooning the national debt by cutting taxes while launching a pair of wars. Many Democratic House members belonged to the fiscally conservative Blue Dog Coalition, which was genuinely concerned about the country’s red ink. What’s more, the president himself had promised to bring some budgetary responsibility to Washington while campaigning for the White House.

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The financial crisis and economic collapse complicated those plans, but didn’t halt them entirely. The president passed an unprecedentedly large stimulus bill that triggered all sorts of nasty backlash from deficit fanatics (Rush Limbaugh, who actually mattered back then, liked to call it the “Porkulus”). The Tea Party, which was nominally (I repeat, nominally) a grassroots small-government movement focused on cutting government spending, started gaining momentum and dominating headlines.

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And so, in June of 2009, even as the economy continued to groan under the rubble of the Great Recession, President Obama decided to get ahead of deficit concerns and called on Congress to restore what was known as Statutory PAYGO. This mechanism for fiscal restraint had been created in 1990, but lapsed in 2002. Advocates believed that reviving it would force Washington to pay for big new tax cuts or spending proposals in the future. Later, the Blue Dogs threatened to vote against hiking the federal debt limit unless PAYGO was enacted. By February, it was law. “Now, Congress will have to pay for what it spends, just like everybody else,” Obama said during a web address, thus perpetuating the classic, false analogy between a sovereign government with the power to print money and a financially constrained household.

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I’m confused. I thought I read somewhere that PAYGO was just a rule Congress made for itself. Is this different?

You’re right to be confused. The House and Senate set their own, separate PAYGO rules, which are also controversial, but include some big exceptions and can be pretty easily waived. Statutory PAYGO is different. It’s a law we’re stuck with for now.

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You sound unhappy about that.

I am. It’s dumb. It’s all very deeply dumb.

OK. But before you go on a rant about how much you hate this thing, how does it actually work?

The basic idea is that whenever Congress passes legislation that either increases or decreases the deficit, the money gets added to a PAYGO “scorecard.“ At the end of each year, the White House Office of Management and Budget is required to tally up the net total. If the deficit rose, it must then impose across-the-board spending cuts within 14 days, known as a sequester, to balance out the new red ink.

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In theory, Congress can exempt spending from the scorecard by designating it as emergency legislation. But that requires 60 votes in the Senate. Since Democrats are most likely planning to pass their COVID relief bill through the budget reconciliation process, which essentially requires a bare majority, that’s not an option.

What programs could be cut?

The biggest program on the chopping block, which headline writers tend to focus on for obvious reasons, is Medicare. But it’s important to read the fine print there: The PAYGO sequestration can reduce the program’s spending by no more than 4 percent, and the cuts only affect payments to doctors; patient benefits would remain the same. Plenty of hospitals and physician groups would go ballistic if the axe actually fell, but in the grand scheme of things, it probably wouldn’t lead to a lot of human suffering or dysfunction.

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Another bit of good news: Most of the government’s crucial safety-net programs for the elderly and poor are actually exempt from the cuts. Social Security, Medicaid, the Children’s Health Insurance Program, food stamps, Temporary Assistance for Needy Families, and Supplemental Security Income—none of those get touched, mercifully.

All of that said, lots of important budget items would be subject to devastating cuts. Farm support programs; U.S. Customs and Border Patrol; the risk-adjustment payments to insurers that help keep Obamacare’s insurance exchanges stabilized; the Social Services Block Grant Program, and more would all be in danger.

How big would the cuts be?

Quite big! Other than Medicare, these programs would have to be completely eliminated. Just zapped out of existence, at least for the time being.

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Here’s some basic arithmetic. If Democrats jack up the deficit with their coronavirus bill, the White House will have to spread the money over a five-year and 10-year scorecard, then calculate the size of the sequester based on whichever is larger come January. So, let’s assume Biden signs a $1.9 trillion aid package, and the government spends most of the money immediately. That would average out to $380 billion per year allocated over a half-decade period. That’s how much we’d have to slash from the annual budget when it came time to PAYGO the piper in January of 2022.

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The problem? If you took 4 percent of Medicare spending and combined it with all of the other programs covered by the sequester, they only added up to about $92 billion in 2018, which was around the last time anybody was kind of worried about this issue. Today, I’ve been told the total would probably be somewhere in the $100 billion to $110 billion range. That’s obviously a lot less than $380 billion, which means the Biden administration would be obligated to zero out all the programs fully subject to sequestration.

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Which is absurd. We would just, like, no longer have a farm subsidy program or border agents (I guess the customs line at airports would move a lot quicker?). Obamacare would once again be in trouble; so would the student loan program, since the White House would be required to increase origination fees on borrowers. It’d just lead to a bizarre grab bag of cuts that’d leave certain crucial functions of our government in chaos. I honestly laughed the first time someone explained it to me, because the whole thing sounded so preposterous.

That’s nuts. Why have I never heard about this before?

Because sequestration has never actually happened under Statutory PAYGO. Every time it has come up, Congress has just decided to waive the cuts, because doing anything else would make everybody extremely unhappy. (The Obama administration did have to deal with budget sequestration back in 2013 after the deficit reduction supercommittee flopped, but that was due to a different law and landed on a different pot of spending; Washington just really likes the word “sequester.“). Back in 2017, for instance, there was a lot of chatter that the Republican tax cuts would force automatic spending reductions; instead, Congress just averted the issue by quietly inserting a waiver into some end-of-the-year spending legislation. When Democrats and Republicans passed their big coronavirus relief bills in 2020, they also just waived the PAYGO requirements, for obvious reasons.

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Of course, now that Democrats are in office, people are concerned that Republicans might choose not to cooperate.

Are you worried?

Not especially.

How come?

Mostly for two reasons. First, my guess is that in the end, Republicans will actually agree to stop the sequester. Democrats will probably try to attach a waiver to some sort of must-pass, year-end spending bill like defense appropriations or government funding, and if Republicans want to filibuster it, they’ll be forced to either defund the military or shut down the government. What are they going to say? We sold out the troops and closed the national parks in order to force Democrats to cut Medicare and blow up the farm subsidy program? Their voters are older, rural Americans. That doesn’t seem like it’d end well.

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Second, even if Democrats somehow fail to make Republicans pass a waiver, they might still have a another out. It’s a stupid, silly, groan-inducing out—a legislative Rube Goldberg device jerry-rigged into a perpetual motion machine. But it could work, at least temporarily. Basically, if we get to next January and Congress is facing sequestration, they could pass another party-line reconciliation bill adding back all the funding they’d be required to cut. That spending would end up on the next PAYGO scorecard, so they’d have to do the same trick the next year, and the year after that, and the year after that, on into infinity until everyone got exhausted by the routine and agreed on a permanent solution.

Yeah, that sounds dumb.

Indeed. All of this would be a lot simpler and less stressful if Democrats just nuked the filibuster so they could just repeal this silly law and stop having to worry about it. Instead, we’re doomed to watch them shoot these weird legislative bank shots, like they’re in a game of HORSE. (From Joe Manchin’s office, off the Senate parliamentarian’s desk, onto the backboard, and into the net, money for the unemployed!) Maybe, one day, they’ll get sick of this preposterous game.

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