Morning Jay: How to Understand the Debt Ceiling Battle
6:00 AM, Jul 15, 2011 • By JAY COST
Contemporary journalism is much more episodic than systematic, focusing on one-off events and the colorful personalities involved rather than the long-term trends that brought about the current situation. Beltway reporting on the current debt ceiling battle has been no exception, relentlessly emphasizing the personal dramas rather than the big picture. Combine this “episodic” bias with a healthy dollop of liberalism, and it is darned near impossible to get a sense from the media of what the heck is really going on.
So, let’s sketch that out today: a broad-based look at why this current fight is so messy and what the prospects are for the future politics of deficit reduction.
It wasn’t always like this. Between 1947 and 1967 the federal budget deficit was negligible, equaling only 0.3 percent of GDP. Yet tax rates remained relatively low, having been cut by Kennedy/Johnson, and social welfare spending increased substantially, thanks to the Great Society. America was able to bankroll conservative and liberal policies without running a deficit because of the fantastic growth of the post-war economy, which more than doubled during this period.
The happy times came to an end with LBJ’s “guns and butter” policy of the mid-1960s, followed by the stagflation of the 1970s. The new era would be characterized by "hard choices and scarce resources." Economic constraints kept politicians from cutting taxes and raising benefts. Instead, tough choices had to be made between the two goals, making politics more and more like a zero-sum game. This, in turn, contributed greatly to the increasing partisanship that has come to define Washington politics, including the persistent charge on both sides that the opposition is not acting in good faith.
Jimmy Carter’s bind is particularly helpful in understanding the political contours of the new era. Carter was challenged by traditional liberal clients of the Democratic party on his left, which demanded ever-greater shares of the national wealth. Meanwhile, on his right he faced a tax revolt that caught fire with the passage of Prop 13 in California in 1978. Additionally, Carter was forced to increase military spending to deal with the resurgent Soviet Union, which had invaded Afghanistan. Combine all of this with the need for austerity policies to deal with runaway inflation, and you can appreciate the policy squeeze of the late-1970s: Inflation had to be stopped, but tax hikes were unpopular, benefit cuts were unpopular, and military cuts were a non-starter.
The conservative triumph in the 1980 election led to the drastic tax cuts of 1981, but soon enough the country found itself locked in a political stalemate on the issue of the budget. The recession of the early 1980s gave the liberals the upper hand and forced Reagan to raise taxes in 1982, 1984, and 1986 to deal with the budget deficit, though he managed to keep the core of his reforms in place. Since then, budgetary politics have followed a predictable pattern: Large deficits develop occasionally and create brutal, zero-sum political battles between those who want low taxes and those who want high social welfare benefits.
In all of these instances, there has been no clear political winner because there is no consensus in this country on what to do about deficits. Put another way, it’s a pretty sure bet that you can rally a majority coalition in opposition to any proposal designed to deal seriously with the deficit, regardless whether it emphasizes spending cuts or tax hikes. Thus, Bush suffered for his deficit plan in 1992; Clinton suffered for his in 1994; and the Republican Congress suffered for its in 1996.
High deficits usually follow a recession, and seeing as how our last recession was the worst since the Great Depression, it should come as no surprise that today’s deficit is now substantially worse, and the politics over it are especially vitriolic. As a point of comparison, the deficit as a share of GDP averaged “just” 3.3 percent between 1988 and 1996, the period of our last heated battles over the deficit. Last year, the deficit was 8.9 percent of GDP.
As if all this were not enough, there is the added problem of runaway entitlement spending. Short-term political calculations regularly create incentives for politicians to increase entitlement benefits during good times. And so, nearly every president since FDR has promoted some new, expansive social welfare agenda. That goes for Democrats (Fair Deal, New Frontier, Great Society) and Republicans (Nixon’s Family Assistance Plan and George W. Bush’s prescription drug benefit program). The same calculations – maximize the benefits today while minimizing the costs – have also led politicians to underfund these programs systematically.
The result is a federal welfare state that has grown much faster than the private economy in the last 50 years. The following chart makes that clear by comparing real private sector GDP to real government transfer payments. Both numbers are on a per capita basis and are indexed so that 1960 equals 1.
Thus, our deficit battle today is not simply about getting taxes and discretionary spending to sync up once again. It’s about dealing, for once and all, with the irresponsibility of the last fifty years, when time and again politicians in both parties have piled new obligations on to an unsustainable welfare state, leaving the bills to come due long after they have gone to meet their maker.
Just how bad will this conflict get? It all depends on how well the economy does. If we suddenly generate economic growth like we enjoyed in the 1960s or late 1990s, our deficit problem will ease. If, on the other hand, growth remains stagnant, then the debt ceiling battle will turn out to be merely one in a prolonged series of bloody conflicts over spending and taxation. Given the recent growth forecasts, there are more reasons to be pessimistic than optimistic.
So, what we should see over time is increased partisanship – as the zero-sum policy battles over the deficit reinforce the ideological divide that separates Democrats from Republicans. The GOP has long been the party of the “full dinner pail,” beliving that mass prosperity comes from the promotion of capitalism, meaning a tax structure that facilitates wealth creators. The Democrats have long promoted a redistributionist ideology on behalf of the “humble members of society” -- from Bryan to Wilson, FDR, LBJ, and now Obama. As the deficit forces Washington D.C. either to raise taxes or cut spending, those ideological lines will only grow sharper.
So, unfortunately we all should expect things to get worse before they get better.