There Is No Quick Fix for the Deficit
As the congressional supercommittee is finding out, the road to fiscal stability is long and winding
President George H.W. Bush and congressional leaders at a 1990 summit on the budget. Credit: Barry Thumma/AP
The lesson of the congressional supercommittee's agonies should be that deficit reduction is a journey, not a destination.
Absent an unexpected, last-minute breakthrough, the 12-member panel won't produce a sweeping "grand bargain." Although the committee was still negotiating as this column went to press, most in Washington are expecting either only an incremental package or a partisan stalemate that triggers $1.2 trillion in automatic cuts. Neither outcome would be pretty. But, depending on the details, both could move Washington a step closer to fiscal stability--and that may be the most realistic way to address the federal government's long-term fiscal dilemma.
A stalemate would send an ominous message about Congress's inability to surmount partisan differences. But, unless Congress changes the rules, even deadlock would activate those $1.2 trillion in cuts, hardly an inconsiderable sum. And an incremental plan, even if it defers some decisions to next year, could constitute worthwhile progress, so long as it doesn't rely heavily on accounting gimmicks. "Go big or go home" should not apply to deficit reduction.
Gene Sperling, who directs the National Economic Council for President Obama (and held the same job under Bill Clinton), has argued that "a big deal is optimal," but that people should not dismiss a smaller package including serious proposals. "While we should aim for a bold grand bargain, we shouldn't think it is all or nothing," Sperling says. He's right. Last summer's agreement to raise the debt ceiling, ugly as it was, did commit Congress to $917 billion in deficit reduction over the next decade. So long as Congress upholds that agreement, the super-committee process guarantees those $1.2 trillion in further savings. (If the panel's recommendations don't reach that level, Congress is mandated to impose automatic cuts sufficient to do so.) And the high-profile debate that produced these deficit-closing commitments "has increased the chances" that the public will demand further progress after 2012, no matter which party controls Washington, predicts Steve Bell, a former Republican staff director of the Senate Budget Committee. An incremental plan would have the bittersweet virtue of dispelling the illusion that fiscal balance can be restored in one dramatic agreement. In fact, given the demographic pressures of an aging society, stabilizing Washington's finances while reinvigorating the economy will demand years of attention. "I believe this is a 20-year project," says Bell, who now directs the Bipartisan Policy Center's economic-policy project.
Like Bell, Peter Orszag, Obama's first director of the Office of Management and Budget, would prefer an ambitious deal that tackles entitlements and revenues. But he agrees it is misguided to hope that any one agreement will solve the problem. "Fiscal adjustment is more like a diet and not like an exam--you're never fully done," says Orszag, now vice chairman of global banking at Citigroup. "But the dieting regime is likely to get much more challenging over the next 20 years than it was over the previous 20."
The most encouraging model for the challenge ahead is the path that Washington took toward replacing chronic federal deficits with surpluses through the late 1990s. Those gains, which closed the deficit chasm opened by Ronald Reagan's 1981 tax cuts, weren't achieved in one big leap. Instead they derived from three agreements, each forged under a different political alignment: the 1990 deal to cut spending and raise taxes reached by Republican George H.W. Bush with a Democratic Congress; the 1993 agreement that Democrat Clinton squeezed through a Democratic Congress to raise taxes and cut spending again; and the 1997 agreement between Clinton and a Republican Congress that restrained spending and cut some taxes but reconfirmed the 1990 and 1993 tax-rate increases. It took both parties and several tries to achieve balance.
For an incremental super-committee plan to mark progress, three conditions seem essential. One is that Congress does not block the automatic spending cuts if the committee falls short of its $1.2 trillion mandate. The second is that any agreement doesn't make permanent the tax cuts passed under George W. Bush. Given that federal revenue, as a share of the overall economy, is now at its lowest level since 1950, those rates are incompatible with lasting fiscal balance. Locking in the tax cuts would also cripple future negotiations, because the only way to ever get enough Democrats to accept the necessary constraints on entitlements is to persuade enough Republicans to accept the necessary increases in revenue, and vice versa. "There is virtually nothing the supercommittee could plausibly do that could offset the harm from making the tax cuts permanent," Orszag says.
Sperling offers a third condition: that any deal provides a down payment on confronting each party's sacred cows: taxes and entitlements. Restoring fiscal balance ultimately will demand bigger tax increases and entitlement constraints than the supercommittee likely will propose. But cementing the precedent that any agreement must include both will provide Congress a stronger foundation when it inevitably scales this hill again in 2013 and beyond.