How to Avoid a Fiscal Train Wreck
Congress may be at loggerheads, but recent proposals from conservatives and liberals contain a surprising number of common ideas, from slowing the payouts of Social Security and Medicare to cutting military spending and overhauling the tax code. Tax increases? Yes, but in very different ways. Read More (for subscribers only) >>
Outside the hearing room, the usual battles were raging. Over in the House, Speaker Nancy Pelosi maneuvered ruthlessly through her final days in power, holding an abrupt vote to extend middle-class tax cuts while letting taxes for the rich rise. (“Chicanery!” declared GOP Minority Whip Eric Cantor.) In the Senate, Minority Leader Mitch McConnell vowed to filibuster everything that didn’t have to do with tax cuts. (“Obstruct and delay!” the Democrats shouted.)
But elsewhere on Capitol Hill, inside the Hart Senate Office Building, a kind of Camelot moment was occurring. A group of prominent Democratic and Republican legislative leaders were behaving like actual “adults,” as they kept noting with self-approbation. Suddenly, everything seemed possible: Democrats were talking about cuts in Social Security and Medicare, and small-government Republicans were considering new ways to raise tax revenue—a discussion that in Washington these days is about as close as one gets to Arthurian chivalry.
“I’ve been here for 29 years. We’ve never had this conversation,” remarked Sen. Dick Durbin of Illinois, No. 2 in the Democratic leadership, as the presidential deficit-and-debt commission presented a bold plan on Wednesday. Even the commission’s chairmen were surprised by the debate they stirred. “There’s no turning back now. The era of debt denial and its consequences are over,” boasted Erskine Bowles, the normally restrained former White House chief of staff for President Clinton who led the commission along with crusty Republican Alan Simpson. “Together, I think we have started an adult conversation.”
That is true—sort of. The commission’s proposals did manage to move the national “debate” away from the fantasy nostrums of the recent election campaign—the idea that eliminating earmarks or cutting waste, fraud, and abuse could take care of the deficit—to a reluctant reckoning with reality. Which is that cutting the deficit and debt will require both revenue increases and serious curtailment in the biggest entitlement programs, particularly Medicare. In the end, even three conservative Republican senators on the commission who originally voted against its creation—Judd Gregg of New Hampshire, Tom Coburn of Oklahoma, and Mike Crapo of Idaho—all said they supported the final product.
But all that bonhomie is a long way from saying that this divided government might be ready to take on the hardest problems—fixing the economy and restraining runaway spending and entitlements. The real question is whether the “adult conversation” will ever translate into actual votes or even make it onto the legislative agenda. No matter how much people agree that it’s time for a national adulthood, the critical mass for transformative change—something that would require broad consensus in both parties—is almost certainly not there.
“I think it’s a long shot,” says G. William Hoagland, who was a top aide to then-Senate Majority Leader Bill Frist. Hoagland is one of several who say that a much larger crisis will probably be required, that the fear factor isn’t yet great enough to offset the combined “screams and hollers” of the vested interests in Medicare, Social Security, and tax exemptions—those lobbyists whom Simpson called practitioners of the “dark arts.”
And, predictably, the yelps began almost immediately: On the right, Grover Norquist, founder of Americans for Tax Reform, called the plan “snake oil” and dismissed it as “no more than an excuse to raise taxes.” Economist Antony Davies of George Mason University described the spending cuts as mere “window dressing.” Meanwhile, Tamara Draut of Demos, a liberal think tank, called the commission members “out of touch” and contended that their plan “ignores the need for immediate public investments to spur job creation, relies too heavily on discretionary spending cuts, and slashes Social Security at a time when fewer Americans can count on a secure retirement.”
Skeptics say that only another market meltdown, triggered this time by a collapse of confidence in the dollar, would be powerful enough to overcome years of political inertia. “Once we hit the [$14.3 trillion] debt limit next spring, if we’re in a standoff situation here and the international markets are nervous about default, that’s the kind of defining event that might force action,” Hoagland says. Bob Bixby of the Concord Coalition agrees. “It would take something bigger, like a major plunge in the dollar or the stock market, or a decision by China not to buy U.S. bonds—something that was tangibly connected to the debt. We haven’t had that yet,” Bixby says.
It’s already clear that even though Republican leaders want to shrink the deficit, they don’t want to give President Obama a major victory in the next two years. Presumptive Speaker John Boehner has not replicated outgoing Speaker Pelosi’s commitment to hold a House vote on the deficit-commission proposal, even if it got the requisite 14 votes from its own members. Obama has all but conceded—unilaterally, it seems—that he’ll extend the Bush tax cuts for a certain period. “A lot of Republicans, including the leaders, will say, ‘This is great. We can let this [deficit cutting] go and still put all of our eggs in one important basket, which is defeating Barack Obama, and then we can deal with the issue under a Republican president,” says Norman Ornstein of the American Enterprise Institute. “Why make some of these tough decisions now, when we’re going to have even more advantage?”
In any case, the presidential deficit panel wound up its work at a propitious moment. Formed just before Greece tumbled into its fiscal crisis at the beginning of the year, the commission finished its work just as Ireland, Portugal, Italy, and Spain were going down. And its report arrived at a time when the United States has amassed a higher debt-to-GDP ratio than some of those troubled countries; when federal spending as a percentage of gross domestic product is the highest it’s been since World War II; and when revenue is the lowest since 1950. “Members from both parties spent six months together staring at some hard, cold facts and a frightening outlook,” the panel’s executive director, Bruce Reed, told National Journal. “It had a sobering effect that made it very difficult to view the problem through an ideological lens.”
The cochairmen were also lucky in that they disgorged their proposal in a peculiar political environment—the high tide of the tea party backlash against government spending—when Washington power elites were casting around desperately for ways to appease the new ideological force in town.
The report, in a scant 65 pages, puts the knife to one sacred cow after another, resembling in budget terms nothing so much as a production line at a slaughterhouse. Its highlights: eventual caps on both revenue and spending at 21 percent of GDP; the elimination of all tax breaks, amounting to about $1 trillion a year—in return, offering lower rates and the abolition of the alternative minimum tax; and various controversial formulas to slow the growth of Medicare spending, the biggest single driver of future deficits, to “GDP growth plus 1 percent.” Together, the cuts purportedly would carve out nearly $4 trillion by 2020, cut the deficit in half by 2015, and reduce the national debt by about half of what it would have grown to otherwise, with a target of a much healthier 40 percent of debt-to-GDP ratio (well below most of Europe and Japan) by 2035.
In the end, the plan won more support than anyone thought it would even a few weeks ago. Many surprise supporters—among them Democrat Kent Conrad, the outgoing chairman of the Senate Budget Committee—cited Europe. “If we fail to act now, our country could find itself in a circumstance in which we have to take draconian action at the worst possible time, in the midst of a crisis,” Conrad said.
The spirit of Simpson-Bowles has also shaken out several alternate plans on the Hill. But, realistically, only two centrist proposals have any chance of becoming legislation. One is Simpson-Bowles and the other is a plan from a Bipartisan Policy Center panel cochaired by longtime budget mavens Pete Domenici and Alice Rivlin. Their scheme divides spending cuts and revenue increases more evenly (about 50-50, compared with the Simpson-Bowles approach that gets about 65 percent of savings from spending cuts). Domenici-Rivlin also calls for even bolder health care changes ($600 billion in savings over the next 10 years, compared with $482 billion proposed by Simpson-Bowles, according to a study by the Center on Budget and Policy Priorities).
The danger, and perhaps the greatest likelihood, is that Congress will cherry-pick individual ideas rather than embrace the holistic suite of policies that are collectively needed to deal with the deficit and debt. The zero-tax-break approach wins plaudits, but once it becomes legislation, lobbyists will work to restore, one by one, all of their favorite deductions. That is approximately what happened with parts of the 1986 Tax Reform Act, and it’s an even greater probability now, given Boehner’s penchant for farming out initiatives to committee heads rather than orchestrating bills from his own office.
Still, there is clearly a new willingness to find common ground. The clever core of the Simpson-Bowles proposal is that it conjoins tax reform and budget issues, so that the new Republican forces in Congress don’t have to look like they’re raising taxes so much as refining the system. Even a reluctant Paul Ryan of Wisconsin, the incoming chairman of the House Budget Committee (who opposes Simpson-Bowles because he says it doesn’t do enough to fix health care) had good things to say about it. “The concept that tax reform ought to be merged with budget reform is something that’s incredibly important,” he exclaimed at the hearing. Separately, Republican Ryan and Democrat Rivlin agreed on a more dramatic—and controversial—plan to reform Medicare, shifting defined benefits to defined contributions.
Both Obama administration officials and Republican leaders like Ryan—whose own tax-cut-heavy plan has won just 16 GOP cosponsors—say they want to adopt key elements of the Simpson-Bowles plan next year. “I do expect it to serve as a catalyst for what is expected to be robust debate in the next Congress,” Jim Manley, chief spokesman for Majority Leader Sen. Harry Reid, told National Journal. Simpson says: “We all know the math.… No more fun and games, smoke and mirrors, trickery, alchemy.… These are not normal times for normal nonsolutions.”
Amid all the political jockeying, the public may be moving toward that conclusion, too. According to a USA Today/Gallup poll conducted in mid-November, 39 percent of Americans cite deficit-and-debt reduction as the best approach for dealing with the economy, compared with 31 percent who favor raising taxes on the wealthy, 25 percent who want tax cuts, and only 5 percent who advocate new stimulus spending. Other surveys have shown, however, that Americans are leery of the pain inherent in slashing their favorite programs. And they may not understand the risk that hasty and dramatic spending cuts pose to a still-weak economy.
The challenge for serious-minded reformers is to use the new conversation about debt to galvanize action. Most incentives still favor inaction. Despite all the scary talk about Europe, the truth is that the crisis across the pond may only precipitate another round of American complacency in the short term. “The European situation cuts two ways,” says Joseph Minarik, a former chief economist in the Office of Management and Budget. “On one hand, you see what can happen. On the other hand, to the extent that [the euro] is crippled and people are willing to buy our paper for the simple reason that the alternative paper looks even worse, we are being given an expedited route to build up our debt.” At some point, Minarik and others say, the explosion will come, especially when three-month Treasury bill rates return to their precrisis levels of 4 percent, rather than the record lows 0.1 percent or so.
All of which means that the real impulse to act may come only when we are in the middle of the very crisis that our policymakers are trying to avoid.
This article appears in the December 4, 2010 edition of National Journal Magazine.