The Deficit Dilemma

Here are comments I delivered as part of a really interesting conference about budget deficits and the global economy held yesterday at the Miller Center at UVA.

I’m a faculty member at the College of William and Mary where as you know Mr. Jefferson, the founder of UVA, received his own education.  It is always a pleasure to visit UVA, where he successfully applied so much of what he learned while in Williamsburg.

There are two especially salient features of the current political alignment in contemporary American national government.  First, by all accounts, the U.S. is facing daunting and growing budget deficits over the next few decades.  The federal deficit projected for fiscal year 2010, for example, is $1.4 trillion.  By the end of the next fiscal year, the level of Federal debt held by the public will rise to about 60 percent of GDP.  The longer-term outlook is even bleaker.

According to the Congressional Budget Office, the deficits projected to accumulate over the next decade will add about $9 trillion more to the debt.  By all accounts, the current budgetary trajectory is unsustainable.  And to make matters worse, recent estimates by the Federal Reserve indicate that unemployment levels may remain elevated for at least another five or six years, further complicating efforts to get the deficit under control.

Second, our national politics are increasingly structured by intense partisan polarization.  According to the best measures, twenty years ago there was a substantial overlap between the roll call ideology of Democrats and Republicans in both chambers of Congress.  Dozens of House members had voting records more conservative than the most liberal of the Republicans.  In the current House, in contrast, that overlap between the parties has all but disappeared.   The shrinking ideological middle on Capitol Hill is also apparent in the Senate.  Not surprisingly, the partisan polarization that occurs at the elite level reflects divergent views among ordinary voters, depending on whether they identify more with the Democratic or Republican parties.

Now on to the main questions posed to this panel – What is the feasibility of reforming U.S. fiscal policy and, given the intense party polarization that now characterizes American politics, how might a coalition for reform be built?  Not easily, or any time soon, I fear.

For one, the kinds of broad policy changes that are needed to confront deficits of this magnitude – overhauls of the major entitlement programs, increases in taxes, and so forth – are precisely the types of initiatives that divide the two political parties.  Republicans and some moderate Democrats are steadfastly opposed to tax hikes.  Members of both parties, but especially Democrats, are reluctant to implement the massive cuts in domestic policy programs like Medicare, Medicaid, and Social Security that will be needed to significantly bring down the deficit.  The cleavages that are created by deficit control reinforce partisan polarization, in other words, and bipartisan accords to combat the problem are highly unlikely unless there are substantial changes in the incentives facing elected officials on both ends of Pennsylvania Avenue.

There is some momentum now in the Washington policy community for the creation of a bipartisan commission that would recommend a reform package for reducing the deficit.  This package would be guaranteed an up-or-down vote in both chambers of Congress.  A number of moderate Democrats, including Senate Budget Committee chairman Kent Conrad, North Dakota, have endorsed the commission idea.  The ranking Republican on the Senate Budget Committee, Judd Gregg of New Hampshire, is also a cosponsor.

Indeed, there is some historical evidence in support of such an approach.   In 1981, the Congress created a bipartisan commission chaired by Alan Greenspan to deal with a short-term financial crisis then facing the Social Security program.  The Commission’s recommendations were included in 1983 legislation that most scholars believe helped resolve the problem (for a time).

Along those lines, since 1988 Congress has delegated responsibility for decisions about closing military bases to independent commissions appointed by the President, with the panels’ recommendations being implemented unless the Congress passes a resolution of disapproval.  The “BRAC” process is widely viewed as a policy success precisely because it has helped countervail the parochial incentives of individual members to keep open the military installations located in their own districts.

It is highly unlikely, however, that an analogous approach to reform will be feasible anytime soon for the daunting budgetary challenges confronting the U.S.  Republicans may initially endorse the proposal because the bipartisan makeup of the commission would grant them equal weight, at least during this stage of the process.  But if the commission recommends significant tax increases – not an unlikely outcome given that revenue in comparison to the size of the economy is at historically low levels – GOP members of Congress will almost certainly walk away from the recommendations because tax limitation is so central to their party’s core ideology and message.  Democratic leaders, such as House Speaker Nancy Pelosi, California, oppose the commission idea because they do not want to cede power to Republicans and also doubt that the minority will in the end accept any compromise.

Most important, the reforms required to address the nation’s fiscal challenges would have to be far-reaching and raise fundamental issues about the size of government and its role in the daily lives of Americans.  Such changes would be far more consequential than the 1983 Social Security legislation or the closure of a few hundred military bases.  For the time being, the commission idea seems unworkable.

Also, bipartisan compromise at the elite level may not be essential for comprehensive fiscal reform to pass.  Under unified government, anyway, partisan polarization may not be that much of an impediment.  The 1974 Budget Act “fast tracks” the budget resolution and reconciliation procedures, which enables determined majorities to work their will in the Senate, as well as the House.  If, as is currently the case, a single party controls both chambers of Congress and the White House, that party could conceivably pass significant deficit reduction legislation without much support from across the partisan aisle.

Instead, the evidence indicates that in the 111th Congress we do not have majorities in both chambers and presidential support for the kinds of spending reductions and/or revenue hikes necessary to significantly reform U.S. fiscal policy.  Rhetoric aside, the coalition forming behind health care reform seems more committed to extending coverage than to reducing costs.  The $848 billion compromise package recently introduced by Senate Majority Leader Harry Reid, Nevada, for example, will cut the deficit by about $130 billion over ten years – nontrivial savings, to be sure, but at best only a first step toward meaningful fiscal change.  Significant reform will only be feasible when the priorities and preferences of elected officials are substantially altered, which in turn will require significant changes in the mix of pressures that they are confronting from party activists, advocacy groups, and ordinary voters.

Congressional scholarship and the historical record indicate that such a shift will probably turn on five main conditions.  First, there need to be policy proposals that if enacted would actually address the underlying problem.  Second, the costs of inaction for ordinary Americans must be perceived as short-term, if not immediate.  Third, voters need to be able to link these costs directly to the actions and inactions of their elected representatives.  Fourth, the magnitude of the costs for ordinary Americans must be severe.  And fifth, the costs need to affect a sufficient proportion of the population for voting majorities to form on Capitol Hill in favor of major change.

The first condition is the (relatively) easy one.  Even a cursory review of reports by the Brookings Institution, the Concord Coalition, the Heritage Foundation, and other organizations produces an abundance of initiatives that probably would reduce the deficit if there was sufficient political will to make them law.  Some combination of spending caps, entitlement reform, and revenue increases will do the trick.

Together, the other four conditions are the more vexing problem.  To be sure, Americans are disturbed by the burgeoning budget deficits.  In recent polls, people have responded about two-to one that the government should focus more on reducing the deficit than on boosting the economy (NBC News/WSJ Polls, June-November 2009).   But most Americans do not perceive the costs from the structural fiscal imbalance to be immediate, significant, and directly linked to specific decisions made by policy makers.  Simply put, there is not a pervasive sense of crisis, which likely will be essential to produce the political support necessary for comprehensive reform to take place.

By most accounts, a crisis is in the works.  The gargantuan deficits projected over the next few decades may significantly crowd out private investment, seriously constricting our economic well-being.  An even more significant concern is that these deficits may produce a financial upheaval in which the U.S. would be unable to sell Treasury bonds at viable rates, or that inflation fears might seriously undermine global confidence in the U.S. economy.  But absent some sense among American voters that the budget deficits will produce such dire consequences in the near-term, it will be difficult for coalition leaders to convince the public to support the spending cuts and tax hikes necessary to put our fiscal house in order.

Public education efforts, such as the “Fiscal Wake-Up Tours” currently underway by the Concord Coalition, Brookings, and other organizations, may help sensitize opinion leaders and citizens to the dangers of the exploding federal deficit.  And when a sense of impending crisis does eventually emerge, a bipartisan commission of the sort proposed by Senators Conrad and Gregg might help provide elected officials with the political cover necessary to act.  But meaningful reform will not occur until the perceived costs of inaction are overwhelming to ordinary Americans.  As a country, we are not there yet.