The Unavoidable Federal Debt Debate Impasse
Congressional Republicans are seen as the primary obstacles to addressing the nation's burgeoning public debt-now over $16 trillion-but this says more about the deftness of Democratic Party political spin than a real resolution of America's fiscal problems. Republicans have offered a three-month suspension of the debt ceiling, and the White House is likely to go along, but in reality the stand-off will probably continue without a "grand bargain" at least until the mid-term elections in 2014.
The problem is not a lack of political will - it is a lack of public consensus on the solution. And that consensus can only be forged at the ballot box: There is little evidence that the current mix of politicos in the White House and Congress can generate one since both sides, lacking broad public appeal, need to pander to their base to ensure their own political survival.
President Obama doesn't carry quite the political strength many people think he does coming into this debate. While he won last November's election by a majority, he is the only post-World War II president elected to a second term whose share of the vote declined compared to the first election. While Democrats gained in the Senate, this arguably had more to do with bumbling and unseasoned Republican candidates than public support for Obama's domestic agenda. More importantly, Republicans retained a solid majority in the House, the legislative chamber that most closely represents the views of the American public.
The White House's image as the pragmatic, even-handed steward in the debt debate is little more than a clever rhetorical sleight-of-hand that is as disingenuous as it is illusory. Obama made raising taxes on the rich (the top 2%) a signature campaign item, but no one with knowledge of the federal budget expects the revenues generated to cover near-trillion dollar deficits. In fact, the nonpartisan Congressional Budget Office expects deficits to accumulate by more than $1.7 billion over the next four years under the current fiscal cliff deal while the annual deficit is expected to rise from $568 billion in 2015 to $818 billion by 2022.
With its Democratic allies in Congress, the White House has repeatedly argued that the solution to the budget deficit -- and by implication the nation's ballooning debt -- must include a combination of tax increases and spending cuts. Despite the political compromise during the fiscal cliff debate that raised taxes, the White House has bristled at anything that limits its ability to raise taxes further and, in effect, sustain a federal government that now gobbles up 24 percent of the national economy. If anything, the administration has done just the opposite: propping up and encouraging state and local government spending through stimulus programs and signing new entitlements into law. Moreover, President Obama's inauguration speech seems calculated to the hold the line on current spending levels and perhaps even foreshadow an even larger federal government on the domestic front.
Meanwhile, Republicans have used the debate over the debt ceiling to insist that any long-term deal include spending cuts, and, implicitly shrink the size of government.
These political objectives are in conflict but they define the contours of the current debate in Washington. Democrats and progressives want a large federal government to fund fiscally unsustainable social welfare entitlements under the new Obamacare law as well as Social Security and Medicare. They also want a bigger government to provide more federal support to the state and local public sectors. Even with a federal government spending at unprecedented levels outside a war economy, new revenues will be necessary either by growing the economy or by raising taxes. Clearly the White House's strategy is to avoid commitments to spending cuts, gambling the economy will rebound despite a four-year legacy of anemic growth.
Republicans, in contrast, want to return to a smaller (although not dramatically so) federal government, scaling back federal spending to at least to pre-Obama levels (which means a federal government about 20% of GDP compared to the current 24%). That will require substantial spending cuts, including major changes to Social Security and Medicare. Just taking federal spending back to pre-recession levels will require lopping off about $1 trillion dollars.
Despite the bruising Republicans are getting in the press, there is some evidence that they are closer to the American public than Democrats and the White House. Polls show that the general public wants Congress to cut government spending rather than raise taxes. While half the public blames the Republicans for the impasse, according to a New York Times poll this week, 60% believe the debt ceiling should stay where it is and Congress should cut spending.
Until this core conflict over the size of government is resolved, there can be no long-term resolution to our fiscal woes. But there will be huge economic consequence if Democrats persuade Americans that the cure is raising taxes rather than right-sizing government.
Academic research suggests that federal taxes extracting more than 18-20 percent of the national economy reduces growth. The Tax Foundation economist Stephen Entin recently estimated that the tax deal signed to avert the "fiscal cliff" will shave off nearly 1.5% off GDP in 10 years. Closing the gap between current spending and federal revenues will require substantial tax increases to meet current commitments, producing an even greater drag.
But it is unclear whether Republicans will be able to leverage this research into a winning policy strategy. They squandered an opportunity to put the debate front and center during the 2012 presidential election by failing to articulate a tangible goal or benchmark for how small the federal government should be. Even though the federal government grew one-fifth on Obama's watch, Republicans failed to connect the dots and persuade the American public that Obama's second-term agenda would have implications for everyone's wallets -- not just the rich.
Candidate Obama made taxing the rich a signature campaign message. But Republicans failed to show that his redistributionism-making the rich pay their "fair share"- was fundamentally about growing government. They allowed Obama to get away with the fiction that he could provide expanded entitlements and maintain existing ones by small tax increases and squeezing out "waste, fraud and abuse" from the system that would not require a significant increase in government spending -- and therefore the size of government. They allowed him to pretend that this would not add to the deficit and would actually save money in the long run.
Thus, the raucous debate over the fiscal cliff and raising the debt ceiling has yielded little but incremental changes that don't address core fiscal policy conundrums: Raising taxes on the rich, but allowing deficits to increase; suspending the debt ceiling for three more months, and hoping that some political miracle would contain the out-of-control spending. Unfortunately, these political attempts to kick the can down the road on major fiscal policy issues will continue at least until the American public has another chance to choose whether it wants Obama's Big Government or a smaller, more growth-friendly federal government in the 2014 mid-term elections. Let's hope that Republicans do a better job of making their case then than they have done to date.
