No Deal: Why Last Week Might Have Killed Deficit Reduction for the Year

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Recent votes in the House show how difficult it will be to deal with our long-term deficit problem. Things are unlikely to get better anytime soon.

615 ryan romney budget.jpg

Reuters

There were two important budget votes in the House of Representatives last week. The one that got more attention was the near-party-line vote to pass the budget resolution produced by Representative Paul Ryan and the House Budget Committee. That budget cuts the top tax rate from 35 percent (Bush 2001) to 25 percent, maintains our current record-low tax rates on investment income, converts Medicare into a partial voucher program, makes enormous but unspecified cuts to discretionary spending, slashes Medicaid, and undoes last summer's deal to make automatic cuts in defense spending.

The more interesting vote, however, was the overwhelming bipartisan vote against the Simpson-Bowles deficit reduction plan that has been hailed by so many self-appointed centrists. Simpson-Bowles was the plan created by President Obama's bipartisan deficit commission in December 2010. It also cut tax rates, but spelled out how it would increase revenues by eliminating tax expenditures. It proposed an arbitrary cap on growth in federal health care spending; and it slashed defense and non-defense discretionary spending in equal measure.

I'm no fan of Simpson-Bowles for several reasons, the first being that a long-term debt crisis should not be used as an excuse to cut tax rates. But its crushing defeat should serve as a clear reminder of the political hurdles facing any kind of deficit solution.

Republican opposition to Simpson-Bowles is simple: It raised taxes. Or, to be more precise, it would be scored as a tax increase by Grover Norquist because taxes would rise from the current levels established in 2001 and 2003 (even though taxes would fall from the levels dictated by current law for 2013 and later years). That's also why the so-called grand bargain between President Obama and House Speaker John Boehner was probably doomed all along.

Democratic opposition is only slightly more complicated. Simpson-Bowles made significant cuts to Medicare spending. But the Affordable Care Act also made significant cuts to Medicare. Democrats are not automatically opposed to Medicare cuts, only to cuts that are not accompanied by tax increases on the rich. More to the point, there's no reason to vote for a tax increase if it has no chance of passing.

The simple fact is that there has not been a bipartisan compromise that included higher tax revenues since 1990, and only two bipartisan deficit reduction bills in that period.

In the 1980s, Republicans and Democrats routinely compromised on deficit reduction bills, and all of them included tax increases. That happened in 1982, 1983, 1985, 1986, and 1987. Those bills were passed with the support of moderate Republicans in Congress who cared about fiscal responsibility. And all of those bills were signed by President Reagan, the man routinely hailed as the father of the conservative revolution.

In 1990, President George H. W. Bush broke his "no new taxes" campaign pledge and compromised with Democrats to cut spending and increase taxes--exactly the same thing that Reagan did repeatedly. This time, though, he was undercut by Newt Gingrich and his new conservative opposition movement. This back-bench revolt and the loss of the presidency in 1992 convinced Republicans that the best way to regain power was to take an absolutely inflexible line on taxes--a line that has been enforced ever since by Gingrich, Dick Armey, Tom DeLay, Eric Cantor, and the increasingly well-funded anti-tax pressure groups.

In 1993, Democrats passed a deficit reduction bill, including both tax increases and spending cuts in roughly equal measure, with no Republican votes. (Vice President Al Gore had to cast a tie-breaking vote in the Senate.) In 1997, President Clinton and Gingrich negotiated a deficit reduction bill, but it followed Republican lines: tax cuts and spending cuts. Clinton was willing to go along with the tax cuts because he wanted to make balancing the budget his presidential legacy.

We had major tax cuts in 2001, 2003, 2008, and 2010, each time with at least modest support on both sides of the aisle. Last summer's debt ceiling compromise was the only significant deficit reduction bill in the past fifteen years, and it also followed Republican lines: all spending cuts and no tax increases.

While many observers have focused on the rise of evangelical Protestants and so-called social issues, the Republican Party was really captured by anti-tax zealots. As Speaker of the House in the 1990s, Gingrich changed caucus rules to reward ideological purity and the ability to raise money, which increased the influence of deep-pocketed contributors who care primarily about maximizing their take-home income. (Democrats flattered Gingrich by imitating his rule changes.) The Tea Party has only reinforced the prohibition on Republicans who are willing to even consider tax increases.

Which brings us to today. No plan to reduce the national debt that includes tax increases -- including the one I present with Simon Johnson in our book White House Burning -- can pass so long as the Republicans have 41 votes in the Senate. Democrats have no singular opposing principle to stand on, but will not allow any significant debt reduction package that does not include tax increases. It seems that nothing will change until one party has a complete sweep of Washington. And perhaps not even then: Would Republicans really pass the Ryan budget if they knew it would become law, gutting Medicare and every other government service? Would Democrats really put together a combination of tax increases that would hit their funders and entitlement cuts that would infuriate their base?

We are far from a fiscal crisis today, with 10-year Treasuries at 2.2 percent. But there is no apparent political path that leads to a solution to our long-term deficit problems. Instead, the optimal strategy is to use deficits as a club to beat the other side over the head -- but to avoid doing anything that could significantly reduce deficits. How long can this last?

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James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.
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