Attention George Hager: Are "Dire" And "Embarassing" Even Possible When It Comes To The Deficit?
Over at Capital Exchange, the blog part of The Fiscal Times, long-time budget reporter and watcher George Hager (and good friend) says that my judgment about the dismal prospects for the presidential deficit commission should not be taken as gospel because events could make success possible.
George says two things are needed for deficit reduction to be come a reality: the deficit has to be seen as both "embarrassing" and "dire." Only then, he says will the other conditions -- a president willing to give up on a key pledge and an opposition party willing to compromise -- be possible.
Let's put aside 2009 and 2010. Capital Gains and Games readers know that, given the state of the economy, I consider the large deficits of these years to have been the absolute correct fiscal policies. Far from embarrassments, as I've called them before, these deficits were triumphs that should be celebrated.
What should have been embarrassing were the federal deficits in the earlier part of the decade when the economy was growing on its own and red ink absolutely was the wrong fiscal policy. But rather than be embarrassed into paying off a substantial part of the national debt when it was both appropriate and possible, the Bush administration and Republican-controlled Congress went in the opposite direction in spite of the repeated warnings about the impact of continued deficits that were being issued at the time.
In other words, those deficits weren't at all embarrassing to those supporting the policies that created or increased them. What would have been embarrassing to them was failing to put spending increases and tax cuts in place when they had the power to do so.
Of the three examples George cites as recognition that the situation was dire or embarrassing, only one -- the Social Security deal of 1982 -- qualifies because the program really was on the verge of collapsing. There was no budget-related crisis that was either dire or embarrassing when Gramm-Rudman-Hollings was adopted in 1985. Furthermore, and the response -- a new budget process rather than actual spending cuts and revenue increases -- was cynical rather than sincere. And the process that was put in place was so ineffective that it was revised two years later and then replaced three years after that.
The problem with dire is that it's almost impossible for the current political system to take warnings seriously. Even when they're made on a bipartisan or nonpartisan basis, government and public policy officials have so little credibility and hyperpartisans so quickly dismiss warnings when they appear to be critical of their side that there is no way for lawmakers to pay attention to anything predicted to be dire until after it actually occurs. (if you don't think this is true think about the subprime lending situation.)
So we're in serious trouble if, as George recommends, we have to wait for "dire" and "embarrassing" to occur to deal with the deficit. Predictions about a looming "dire" catastrophe may not be believed and "embracing" may not be possible.
That leaves just one thing: testicular fortitude.
Bookmark/Search this post with
And revolt.
And revolt.
Attention, Stan Collender: Here's your answer, pal!
Stan’s calling me out! Time for budget smackdown! First he’s gonna PAY and then he’s gonna GO.
A little humor for the budget geeks among us.
But seriously, yes – “dire” and “embarrassing” are possible when it comes to the deficit. Rare, but possible. My blog post at The Fiscal Times attempted to tease out the common elements that led to the few successful deficit-reduction deals in the last 30 years, and suggest that if those same elements come together over the next year, we might get a repeat.
But Stan (who tutored me when I knew nothing about the budget, so should take responsibility for any errors I make now) asks some good questions, so let me answer:
Yes, it should have been embarrassing for a GOP president and a GOP Congress who both claimed to be fiscal conservatives to turn the surplus they inherited into a deficit and then let it rise uninterrupted for the next seven years. (The 2001 recession was an excuse for one or two deficits, but seven? Not counting the 2009 deficit because it was triggered by the onset of the current recession in December 2007.)
OK, but look at the numbers. From 2001 to 2008, the average Bush-era deficit was a mild 2% of GDP. Think we’ll ever see that again? As for the debt, it bottomed out at 32.5% of GDP in 2001 and rose to 40.2% by 2008, all below the postwar average of 45.2%. Now, was that dire? Um, not really. On the wrong track, sure. Unnecessary, irresponsible and wrong, of course. The golden rule of budgeting is that you run surpluses (or close to it) in good times, so you can afford to run deficits in bad times.
True, the wheels started to come off in Bush’s last budget year, and you could certainly blame Bush’s (and Clinton’s) lax financial regulatory policies for the collapse. In 2009 did the deficit hit 9.9% of GDP, after Presidents Bush and Obama borrowed huge amounts for TARP and stimulus money. It finally hit 53% in 2009.
Now, though, things are getting seriously out of control. There may be good reasons for this – I certainly agree with Stan that the 2009 and 2010 deficit spending is necessary to ward off a financial collapse. But publicly held debt is expected to hit 60% of GDP this year for the first time since 1952, on its way to 90% 10 years from now. That’s dire. Somewhere along that steepening curve, China and the rest of our creditors are going to look at America and see Greece. And stop lending to us, or at least rise rates to painful levels. That would be embarrassing and worse for politicians who let it happen.
Now, Stan gets one of my arguments wrong. I didn’t use the 1985 passage of the Gramm-Rudman rules as one of my examples … but as long as Stan brings it up, it’s worth remembering that that seemingly nutty automatic mechanism was created and passed in a time of absolute budget desperation. And embarrassment. GOP Sens. Bob Dole and Pete Domenici (the Senate was in Republican hands) had worked with Reagan OMB Director David Stockman to put together and pass a remarkably courageous, $300 billion package of deficit cuts, only to see it collapse and die on the Senate floor. By year’s end, Republicans had considered 35 (!) separate budget plans, and all had failed. They were desperate to do something, so they settled for the promise of future deficit reduction with an automatic mechanism that threatened automatic cuts if deficit targets were missed.
But for the next five years, Congress and Presidents Reagan and Bush conspired to ignore or flim-flam the Gramm-Rudman targets. When they got to 1990, an election year, and deficit forecasts were suddenly rising sharply, they knew the game was over. It was a little dire and a lot embarrassing to have failed so miserably and so publicly to do what they had promised. Hence, the 1990 budget summit, and the resulting deal.
Similar forces are at work again now. The situation is growing dire, and the endless stalemate and bickering – don’t raise taxes, don’t cut Social Security – has become childish and, well, embarrassing. I disagree with Stan that we’ll have to wait a long time for the stars to begin to align. They already have.
JOBS
Bill Clinton proved that the key to balancing the budget was to get unemployment down to 4%. Once people have jobs, government collects more revenue and pays out less in benefits.
A policy that takes aim at job creation and reducing unemployment will do far more to bring the deficit under control than any amount of spending cuts that leaves unemployment festering at too high levels for years.
Two ways of creating more revenue are collecting higher tax rates or collecting the same tax rate from more workers. Obama and Congress need to do more to create jobs.