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Magazine / Budget

Double Vision

President Obama’s budget throws into stark relief two competing worldviews of the federal government’s future size and shape. There’s not much middle ground to be found.

Shrink-wrap: Americans take for granted such routine government functions as delivering the mail, protecting air travelers, and inspecting beef, but long-term budget woes could make some of these tasks unsustainable.(AP Photo/Elaine Thompson)

photo of Nancy Cook
February 16, 2012

Under House Budget Committee Chairman Paul Ryan’s blueprint for the federal government, defense spending will take precedence over domestic programs such as highway projects, environmental protection, and bank regulation. Food stamps and public housing will go to people who hold jobs or agree to enroll in work-training programs. Senior citizens will buy their own health insurance, with the help of government subsidies.

Imagine your 80-year-old mother shopping online for private insurance, comparing deductibles and co-pays. This is the future, according to House Republicans: a smaller, leaner government machine with a shrunken social safety net that, in some cases, comes with strings.

Want to collect unemployment benefits? Get ready to take a drug test—or so said the House GOP during last fall’s payroll-tax debate. Want to sign up for Medicaid, the federal health insurance plan for low-income adults and children? You can, but only if your state happens to have enough money on hand to enroll you in the program.

 

This is a starker take on the notion of the welfare state. OK, scratch that: not starker. It’s an outright decimation of the Democratic Party’s ideals and of the kind of sweeping, many-things-to-many-people federal government that President Obama laid out in his proposed budget on Monday.

Ryan admitted as much in the spring of 2011 after unveiling his own budget: “The role of the federal government is both vital and limited,” he wrote. “When government takes on too many tasks, it usually doesn’t do any of them very well.”

The contrast between how the two parties would serve the American people and the menu of government services they would offer has never been clearer than it was this past budget week. The Republicans want to shrink spending and overhaul entitlements—and, by doing so, alter the fundamental relationship between Americans and their government. The Democrats appear to be banking on a misty fantasy left over from the Clinton administration: the hope that economic growth will sort out the nation’s fiscal mess and somehow result in a balanced budget.

These days, the budgetary sniping seems to largely boil down to a single number: the percentage of the economy that should be devoted to government spending.

Republicans have become increasingly explicit on that score. Presidential hopeful Mitt Romney calls for capping federal spending at 20 percent of the gross domestic product by 2016; Ryan has proposed capping spending at 20 percent of GDP by 2015 and 15 percent by 2050. (The last time the federal government spent less than 18 percent of GDP was almost a half-century ago, in fiscal 1966, right before the government created Medicare.)

Obama didn’t talk in those terms this week—which, in itself, says volumes. Federal spending currently accounts for almost 25 percent of GDP, and Obama’s budget would do little to change that. Instead, the president’s narrative for the fiscal 2013 budget is one of economic optimism and growth fueled by increased revenues from taxes on the wealthy and stimulus-like measures such as infrastructure spending to nudge the slow-to-recover economy. Obama’s vision might as well have been an outtake from Clint Eastwood’s Super Bowl commercial.

“The idea that you’d cap spending at some point of the GDP precludes the flexibility in advanced economies in a global era.” —Jared Bernstein, former economic adviser to President Obama

The president reportedly took a stab at entitlement reform last year in talks with House Republican leaders over finding a way to forge a grand bargain out of the debt-ceiling imbroglio. But his new budget doesn’t move in that direction. The White House has expressed an interest in talking further with the GOP, but if any negotiations are going to bear fruit, something has got to give. Democrats want to raise taxes but haven’t been as ruthless as the GOP about cutting spending. Republicans want to take a hatchet to government but haven’t figured out a way to boost revenues to cover the nation’s long-term commitments.

“We’ve been having a party with tax cuts and higher Medicare drug costs. We’re not in the slightest bit prepared” to deal seriously with the towering deficit, said Paul Posner, director of George Mason University’s public-administration program, who managed the Government Accountability Office’s budget and public-finance work.

THE SHAPE OF THINGS TO COME?

It’s not enough to say that Republicans and Democrats disagree on issues of spending, taxes, and government assistance. It’s more appropriate to say that the two parties view the world entirely differently. If Democrats are the Impressionist painters (warm and bright, but fuzzy), Republicans are the modern abstract artists (sharp colors, contrasts, and big bold lines).

Ryan, the architect of the GOP’s grand plan, knows that it would be a radical step. “A bold reform agenda is our moral obligation. We have an obligation to provide the American people with a clear path that gets our country back on track,” he told a receptive audience last week at the Conservative Political Action Conference in Washington.

Under Ryan’s spending cap, the government of the future would look radically different—and much smaller. Gone would be any assumption that all taxpayers have the right to collect Medicare or Social Security. He proposes to raise the Medicare eligibility age from 65 to 67 by 2033 as a way to cut costs. Deficit-
reduction commissions such as Simpson-Bowles and Domenici-Rivlin have called for tweaking Social Security benefits for the wealthy, while still protecting the poor.

The safety net—Medicaid, food stamps, and unemployment insurance—could vary widely by state if the federal government decided to fund those programs with block grants, a proposal that Romney has put forward on the campaign trail. This mechanism hands the states a lump sum of money and gives them discretion over the spending and structure of various programs. But, more important, block-granting severely curbs federal spending by shifting the definition of these programs from open to anyone who meets the criteria to serving only as many people as a state’s budget allows.

Under the House Republicans’ strict spending cap, Washington would have to either drastically scale back the entitlements or decimate the pot of discretionary spending that pays for everything else: that is, transportation, education, housing, homeland security, and veterans’ affairs—the list goes on.

Infographic

No matter that the size of government would shrink just as the older population is swelling. Currently, according to the Congressional Budget Office, entitlement programs consume 10.4 percent of GDP. By 2022, spending for those programs will represent 12.8 percent of GDP. “We all know that aging societies spend more on public services. That will be the case with the entire Western world over the next several years,” Posner says. “How do you finance that and keep it from undermining the health of the government? That’s the question nobody is talking about right now.”

One key part of the Republicans’ budget math is the absence of revenue in the equation. GOP presidential candidates Romney, Newt Gingrich, and Ron Paul would make the Bush-era tax cuts permanent. Last fall, the Joint Committee on Deficit Reduction failed, in part, because Republicans would not agree to tax hikes of any kind.

The Republican Party insists, instead, that any new federal revenue will come from trickle-down economics—the Reaganesque idea that tax cuts spur growth and, in turn, lift up the economy (and somehow pay down the deficit). It’s an economic principle that is so well worn that’s it’s fraying a bit. The last decade’s tax cuts on individual income and investments coincided with one of the worst periods of job losses since the Great Depression.

Finally, a spending cap of 20 percent of GDP or lower would limit the government’s ability to grow or expand during tough times to assist greater numbers of Americans in need. In the wake of the Great Recession, pervasive unemployment ballooned the number of Americans on food stamps. In 2010, according to the Agriculture Department, 40.3 million people in 18.6 million low-income households collected food stamps. In 2007, before the housing market crashed, the number of recipients was 26.3 million. A spending cap would mean that the government might not have such flexibility when and if the economy tanks again. Neither could it, for example, help a region shattered by a natural disaster, such as the Gulf Coast after Hurricane Katrina.

IF WISHES WERE HORSES

Unlike the Republicans, Obama’s vision of federal spending seems a little less profound, except that he clearly believes that investment in technology and infrastructure is crucial to economic growth.

Sure, his budget is a political document during a significant year, but the president’s plan does offer insight into the policy stances of his potential second term. “The idea that you’d cap spending at some point of the GDP precludes the flexibility in advanced economies in a global era. Who’s to say when the next recession is out there?” says Jared Bernstein, a former top economic adviser to Obama, who is now a senior fellow at the Center on Budget and Policy Priorities.

The Democratic world of spending rests on a Keynesian-infused ideal. The president and congressional Democrats want to keep spending relative to the strength and health of the economy rather than locking into a certain number that would leave Washington unable to respond to economic crises or natural disasters. They also strongly believe that as the economy rebounds, people will lean less on the federal government for assistance and spending will drop naturally.

“I think this budget is a strong expression of the president’s priorities,” says Alice Rivlin, founding director of the Congressional Budget Office and one of the leaders of the deficit-reduction task force known simply as Domenici-Rivlin. Obama’s budget makes the case for federal intervention in job creation, for example, with stimulus-like measures such as the $350 billion for infrastructure projects or domestic manufacturing. He also includes spending to hire teachers and to hand out tax breaks for families with college tuition bills.

If the president’s views on federal spending do not easily boil down to a specific percentage of GDP, they do revolve around a prominent idea: dealing with the impending fiscal calamity by raising revenues. The president wants to let the Bush-era tax cuts expire for households that earn more than $250,000 a year and for single taxpayers who earn more than $200,000. He would limit the tax breaks that the wealthy can collect by reducing the value of itemized deductions to a maximum of 28 percent.

And, in a move that’s a direct shot at Romney, Obama would eliminate the so-called carried-interest provision that allows investment and hedge-fund managers to get a preferential tax rate of 15 percent by allowing them to take advantage of the low rate on capital gains. This rate allowed Romney to collect $7.4 million in carried interest in 2010, according to the candidate’s tax returns.

Let’s not forget the well-branded “Buffett Rule,” which would require any household making more than $1 million a year to pay at least 30 percent of its income in taxes. Taken together, the administration says, these tax changes would boost federal revenues by $1.5 trillion.

More than anything, Obama’s spending targets are closely tied to his tax ideas and in line with his campaign themes of boosting the middle class and ensuring economic fairness—the White House’s polished and gussied-up version of the Occupy movement’s “99 percent” rallying cry.

The president isn’t looking to cap federal spending. Instead, he’s counting on an overhaul of the tax code to pay the government’s future bills. But legislators on the Hill have shown little stomach for that massive undertaking this year, unless it involves lowering corporate tax rates.

Here’s the irony in the whole thing. Although Republicans and Democrats have wildly different visions for the future of the country, the end results of their machinations could look the same: a government unable to perform many of the basic functions that Americans currently expect from it. The Democrats’ trajectory could result in a swollen, lethargic entitlement state where little money is left for other priorities; the Republicans’ path could dismantle the safety net and leave an eviscerated government that is a only slim shadow of its former self.

The clock is ticking. By 2060, according to the White House’s budget predictions from last year, federal spending will creep up to 29.9 percent of GDP. By 2085, it is estimated to be 33.5 percent. How does that compare to the amount of money the government expects to collect in 2085? Receipts are estimated to be just 21.2 percent of GDP. Hardly a balanced mix of revenue and spending.

The last time that the ratio was this far out of whack was during the latter part of World War II; the federal government spent 43.6 percent of GDP in 1944 while collecting just 20.9 percent of GDP in taxes.

Of course, a third option remains in the scorched-earth battle over spending: compromise. Make all sides feel the pain. Raise revenues. Cut spending. Overhaul entitlements. For Republicans, that would mean shelving their dream of a government downsized. For Democrats, it would mean alienating key constituencies and perhaps imperiling some they have sworn to protect. For all of Washington, it would mean laying aside philosophies and dealing with a hardheaded, unavoidable reality.

Maybe that will happen someday. But not today. 

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