For fiscal hawks of all political stripes, the last two years have been awfully frustrating. Budget politics has been front and center almost constantly, yet we have made almost no progress toward reducing our deficits and debt.
Ever since Republicans won control of the House of Representatives in the 2010 elections, they have sought to resist and reverse the flood of spending that had characterized President Obama’s first two years in office and to lay out an ambitious long-term path toward solvency. And because entitlement spending is at the heart of the trouble, they have even defied decades of conventional political wisdom by embracing structural reforms of Medicare and Medicaid. Democrats, meanwhile, have been arguing for higher taxes, at least for the wealthy, to help narrow the budget gap.
The divided Congress, and especially the willfully negligent Senate (which has not passed a budget since 2009), has meant that the resulting fiscal debate has not occurred through the normal legislative process but rather through a series of dramatic showdowns forced by a variety of predetermined deadlines. The failure to enact regular budgets has created the need for temporary continuing resolutions, forcing some spending conversations under the threat of a government shutdown. The near-breaching of the statutory debt ceiling in 2011 required congressional action to enable further borrowing, which Republicans turned into an occasion for budget negotiations. The congressional “supercommittee” created in those negotiations to reduce the deficit kept the fiscal debate alive through 2011 but then failed to reach agreement and raised the specter of automatic cuts in domestic and defense spending. And that specter, combined with the simultaneous expiration of the Bush tax rates, then made for the most dramatic showdown yet—the “fiscal cliff” that threatened to raise everyone’s taxes, and which Congress averted with a New Year’s deal to raise income tax rates only on the wealthy (and payroll tax rates on all workers) and to put off the automatic spending cuts until March, when they would coincide with yet another debt-ceiling debate.
Each of these showdowns has involved frenzied last-minute negotiations to avert some supposed catastrophe, each has seemed to be on the verge of failure until just before the deadline, and each has then concluded with an agreement to somehow reduce the deficit. But each of those agreements has been disappointing in roughly the same way: After beginning with talk of a “grand bargain” to simultaneously and substantially reduce spending and increase revenue in ways that would significantly improve the long-term budget picture, it has ended with some very small agreement to move the needle very slightly in the short term.
According to the Congressional Budget Office, the debt-ceiling agreement in 2011 reduced total projected federal spending over the subsequent decade from $43.6 trillion to $42.6 trillion (or 2.3 percent) and the fiscal cliff agreement this month increased total projected federal revenue over the decade from $36.5 trillion to $37.1 trillion (or 1.6 percent). Every little bit counts, to be sure, but this is a very little bit. CBO’s longer-term projections, which see deficits and debt exploding over the coming few decades, have basically not been changed by these agreements, above all because our entitlement system has been left nearly untouched by two years of budget politics.
This dearth of meaningful progress frustrates the champions of a grand bargain because the outlines of such a bargain seem so obvious. The Democrats want to raise revenue and the Republicans want to reform entitlements. Those goals would seem to be easily reconciled—so why not strike a deal that does a lot of both at once? There is nothing about higher taxes that should stand in the way of entitlement reforms, and vice versa. Why can’t each party get what it wants in return for the other getting the same? Isn’t that what deal-making is all about?
The failure to strike this perfectly evident bargain has left many commentators and budget wonks despairing of our political system. Surely nothing but sheer irrationality—whether it is to be found in the design of our constitutional mechanisms or in the individuals elected to populate them—could explain the self-destructive unwillingness to meet in the middle and avert a disastrous debt crisis.
But this disparaging view is unfair to both parties. In fact, there is a deeper disagreement at the heart of our fiscal debate. It is true that Republicans want lower spending (especially on entitlements) while Democrats want higher taxes (especially on wealthy people). But why is this what each party wants? In each case, the reason has to do with a vision of government, and of American life. The partisans standing in the way of a grand bargain are, at least implicitly, better attuned to the implications of the coming fiscal crunch than the centrist critics who just want to split the difference.
Our fiscal dilemma is, to oversimplify a little, an entitlement-spending problem. The network of programs and benefits created by the Great Society, but above all (by far) the Medicare and Medicaid programs, are growing much more quickly than the economy and federal revenue, and so are becoming unsustainable. They have already sent our debt up to levels seen only in the immediate wake of World War II, and in the coming years will send it far higher than it has ever reached in our history—limiting the potential prosperity of the next generation and running the risk of a sudden and disastrous crisis.
Staying on this course is not an option, and two sorts of approaches away from it have emerged in our politics. One would preserve the structure of our entitlement programs more or less as it is and continually expand the government’s scope and revenue base to sustain them, and the other would preserve the government’s role and size more or less as it is (relative to the economy) but reform our entitlement programs to conform to those dimensions.
It is crucial to see that both of these approaches are basically defensive in nature: The left is trying to avoid a fundamental transformation of the structure of our entitlement programs, since liberals believe the structure of those programs is key to their legitimacy and purpose, and so key to sustaining a just society. The right is trying to avoid a fundamental transformation of the relationship of government and society in American life, since conservatives believe the structure of that relationship is essential to American freedom and prosperity. The left would rather see American life altered (with a significantly larger government, a smaller and less active civil society, and a more consolidated but less dynamic economy) than see our welfare-state institutions reformed. The right would rather see our entitlement system altered (with lumbering universal entitlement programs turned into means-tested and market-based safety-net systems for the elderly and the poor) than see the character of our society transformed.
Of course, neither side simply dismisses the other’s concerns. Conservatives think their reformed government would raise more revenue than today’s because it would enable the economy to grow more robustly. Liberals think their reinforced welfare state would cost less than today’s projections suggest because it would be better consolidated and so more effectively managed. But in these ways, too, their basic aims and their basic ideas about American society, government, and economics are at odds.
Thus, Democrats want more revenue so that the entitlement system doesn’t have to be reformed, while Republicans want to reform the entitlement system so that the government doesn’t have to take up more of the economy. This means that doing a good deal of each at the same time would not give both parties what they want—it would give both parties what they are trying to avoid.
A grand bargain with far higher taxes in return for a thoroughly transformed entitlement system would give each party the means it is after but at the cost of the end it is after. That would be a foolish bargain for both of them. They would rather do nothing, and so in fact they have done nearly nothing—reaching agreements to put off deadlines and avert self-inflicted pain but otherwise not changing the basic fiscal circumstances much. These tiny steps are worth taking, but they do not address the underlying problem. Since our deficits and debt grow larger in the meantime, there will always need to be another deadline set, and another crisis scheduled, but it is hard to see why those should turn out much differently, at least as long as either party has the electoral power to stop the other.
At some point, in other words, the fiscal question dividing the parties will be decided by voters. It will likely not happen in some dramatic fashion with one decisive election fought over the future of America, but in the normal and gradual course of our politics. It may even happen by accident—after an election fought mostly on other issues that gives one party or another enough control of the elected branches to advance its fiscal reforms. Until then, both parties will likely continue their defensive efforts, and seek whatever modest incremental steps are possible in an era of divided government.
For Republicans, the challenge in the next four years (at least) will be to distinguish such constructive steps toward entitlement reform from blunt and counterproductive cuts that only weaken their hand in the long run. The right has actually been remarkably forthright about its policy goals—laying out, in the budget resolutions passed by the House of Representatives in 2011 and 2012, a set of ambitious reforms that point to a vision of government beyond the liberal welfare state. Although liberals have sought to depict it as radical, that vision entails a federal government of roughly its postwar size and functions, an economy growing at roughly its postwar pace, and an energetic and flourishing civil society. That is the America we have known, but keeping it will require bold reforms of government programs that capitalize on the efficiency of the market economy.
That vision, however, has taken the form of a post-Obama agenda for congressional Republicans. Many of them took the results of the 2010 congressional elections to suggest that the public had recoiled from the president’s ambitions, and so that his time in office was nearing an end. They spent the last two years getting ready for what would follow. But the president was reelected, and essentially none of the ambitious proposals of the Ryan budget can be adopted as they stand while Obama is in office. This has left Republicans in recent months in the peculiar position of being unable to list their demands in budget talks. Even as they are attacked for threatening entitlement benefits, they cannot name the incremental entitlement reforms they would like.
Their task now is to use the broader vision laid out in the Ryan budget as a standard by which to distinguish good from bad incremental steps, and so to propose discrete, politically plausible reforms that not only reduce spending but lay the groundwork for the sorts of larger reforms they believe are needed in the long run. Many potential spending cuts—including many entitlement cuts, like the provider cuts in Medicare favored by some Democrats—would not meet this test, and should not be pursued. Those that do meet it would need to involve changes in the character of the entitlement system—making it more means-tested, more consumer-oriented, and more market-based. Some would do so modestly enough to be acceptable to some Democrats, and so to play a role in the coming fiscal struggles. Republicans have not yet developed their menu of such steps. This needs to be done swiftly, and its results must be presented to the public in the context of preserving the key functions of the entitlement programs while preserving American prosperity and freedom.
The Democrats’ challenge is more serious, and has been made more stark in the wake of the fiscal cliff deal. They are truly in a reactionary mode, defending the existing entitlement system in essentially every detail and seeking ways to fund it. But the trajectory of our fiscal troubles suggests this may simply not be achievable. Over the last 40 years, federal spending (excluding interest payments) has averaged roughly 18.8 percent of GDP. The CBO projects that, on our current path, it will average roughly 24.2 percent over the next 40 years. The enormous increase in revenue required to support such an expansion is orders of magnitude greater than anything the Democrats have ever suggested to the public. Having just obtained, with great effort and controversy, the tax increase on the wealthy that has been nearly the entirety of their fiscal agenda for years, can they really go back and tell voters that they actually need to increase revenue by about 15 times as much merely to close the coming decade’s deficit and that keeping our debt in check after that will require taxes to grow more and more every year?
Unable even to hint to voters what their vision of American government would require, the Democrats are unlikely to achieve it. And they cannot view incremental steps as building toward an opportunity to enact major future reforms, since their tax agenda likely cannot be made palatable in anything but tiny portions. They can never offer their fiscal vision in a liberal equivalent of a Ryan budget proposal. All they can expect are little increments that add up to little, which will make it difficult not only to add onto the edifice of the liberal welfare state but even to sustain it.
The left has not even begun to contend with this problem intellectually, let alone politically. And the right has barely launched the effort to translate its agenda into bite-sized pieces suitable for budget talks in the Obama years. Both have much work to do, but neither is likely to see a genuinely grand bargain as a plausible way to advance its priorities at this point.
That is not a failure of nerve, or a mark of the dysfunction of our political system. It is yet another odious consequence of the ill-conceived structure of the liberal welfare state, and of the fiscal calamity with which it now presents us—and it is a fact of our politics that will shape the remainder of President Obama’s years in office. Those years may well see legislative achievements on an assortment of issues, from immigration to patent law to education. But on the critical fiscal problems confronting the country, they are likely to see mostly dramatic, deadline-driven showdowns that result in much consternation but very little progress.
Yuval Levin is a contributing editor to The Weekly Standard, Hertog fellow at the Ethics and Public Policy Center, and editor of National Affairs.