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When the Starved Beast Bites Back

Republicans are trying to create a fiscal crisis they may not survive.

Ever since George W. Bush massively cut taxes back in 2001, squandering much of the $5.6 trillion, ten-year surplus he inherited from Bill Clinton, liberals have assumed that the fiscal game was rigged. Conservatives had been explicit about their starve-the-beast strategy—the practice of creating large deficits through tax cuts in order to force future spending cuts. By playing along, the thinking went, Democrats would only further enable irresponsible behavior—a bit like negotiating with terrorists. Why kill yourself balancing the budget, as Bill Clinton did, if the next Republican is just going to slash taxes again?

The fear of conservative high jinks persists to this day, which is one reason liberals have responded coolly to President Obama’s deficit-cutting commission. In fact, many suspect the right is up to something even more sinister—a “doubling down on starve-the-beast,” as Paul Krugman put it recently. “Depriving the government of revenue, it turns out, wasn’t enough to push politicians into dismantling the welfare state,” Krugman wrote. “So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe.”

Krugman is almost certainly onto something. I suspect, as he does, that Republicans believe precipitating a fiscal crisis will force Democrats to roll back entitlement spending (i.e., Medicare, Medicaid, and Social Security), which would be both politically unpopular and the realization of the right’s dearest policy fantasy. It’s an altogether brilliant, if diabolical, plan. Except for one minor flaw: There’s a good chance it could vaporize the GOP.

The thing to keep in mind about economic crises is that parties who solve them tend to survive and even prosper over the long-term, even if they sometimes suffer short-term pain. Conversely, parties who fail to solve them tend to face political calamity. The case of Democrats and Republicans during the Great Depression is the most familiar example, but hardly the only one. In the last decade-and-a-half, persistent economic crises have sent ruling cliques and parties into the wilderness in Indonesia, Argentina, and Turkey. Even in Japan, which effectively had a one-party monopoly since the 1950s, the recurring economic problems of recent years have given the opposition DPJ a chance to govern. The failure of Democrats in the United States and Labour in Britain to address the economic sclerosis of the 1970s helped lay the groundwork for the conservative ascendance of the 1980s. 

So let’s say Republicans keep forcing the country toward the fiscal crisis some of them are quietly rooting for: They refuse to sign off on any package of tax increases and spending cuts while they’re out of power, and they insist on cutting taxes when they’re in power. At some point, investors in U.S. bonds will presumably decide they’re unlikely to be repaid—that the U.S. is either headed toward default or runaway inflation. At that point, interest rates would spike and we’d be in for a deep recession.

Now, crises being unpredictable phenomena, let’s assume the day of reckoning is just as likely to come during a Democratic administration as a Republican administration. What then? Well, if the bomb goes off under a Democratic president, I suspect the crisis would get solved. The Democratic base doesn’t exactly love the idea of cutting entitlement spending—The New York Times recently reported that the mere whiff of Social Security benefit cuts had spawned organized progressive opposition, including a well-funded group called “Social Security Works.” But the antipathy isn’t strong enough, nor is the left powerful enough, to force Democratic politicians to take the option off the table.

Indeed, many Democratic moderates, like House Majority Leader Steny Hoyer and Senate Budget Committee Chairman Kent Conrad, have openly mused about the possibility of Social Security benefit cuts. (A handful of these Democratic deficit hawks—including Bill Clinton, Bob Rubin, and Peter Orszag—will be gathering at the Peterson Institute in late April to chew over fiscal fixes.) For that matter, the health care bill Congress just passed includes hundreds of billions of dollars in cuts to Medicare. So far as I can tell, no Democrat is at risk of being primaried for supporting it.

Likewise, no one likes to raise taxes, especially no one who depends on moderate voters to get elected. But Democrats have found that raising taxes is hardly political death. Bill Clinton raised taxes as part of his 1993 fiscal package and still cruised to re-election in 1996. Yes, the 1994 midterms weren’t exactly an advertisement for the political benefits of tax increases. (Though that year’s Democratic route is way over-determined, and I suspect the tax-hikes ranked behind half-a-dozen other causes.) But the point is that a Democrat can both raise taxes as president and live to tell about it.

On the other hand, what if a Republican is president when the fiscal crisis strikes? To be blunt, I think the economic situation would be nearly hopeless. Since 1992, when, according to conservative lore, George H.W. Bush’s broken no-new-taxes pledge cost him re-election, basically no national Republican has dared contemplate the possibility of tax increases, much less vote for them. And you can delete the “basically” if you’re talking about the last several years. The party’s anti-tax jihadis are so influential there’s simply no future—or, more precisely, no funding source—for anyone who defies them.

Strait-jacketed by his or her base, a Republican president facing a fiscal crisis would have to rein in the deficit entirely through spending cuts. But that would be even less doable than raising taxes. In 2005, George W. Bush’s presidency effectively ran aground over the cuts he proposed to Social Security. The Gingrich revolution hit a wall a decade earlier over proposed cuts in Medicare. In both cases, the cuts under discussion were far smaller than anything a Republican president would have to embrace if tax increases were a no-go. Long story short: Democrats have enough flexibility with their base, and enough credibility with the political center, to respond to a crisis. The GOP has neither.

And then there’s the really bad news for the GOP: My assumption that a fiscal crisis is just as likely to strike a Democratic as a Republican administration is almost certainly wrong, for some of the same structural reasons I describe above. Because moderates and fiscal hawks enjoy significant influence within the party—particularly at the elite level—most Democratic administrations are going make marginal progress on the deficit. Obama is a case in point. Despite his domestic policy ambitions, the recent health care reform  modestly pares back the deficit in its first decade, and makes potentially significant inroads in its second decade. Bond traders are likely to reward such moves even if they don’t solve the country’s deepest fiscal problems. At the very least, the bond markets aren’t likely to melt down over them. 

But Republican administrations can’t even make this incremental progress because the pressure on them to cut taxes is too great, and because they have no political cover to cut spending. Worse, the next Republican won’t have the one advantage George W. Bush enjoyed, which was an enormous surplus to play with. Which means a future Republican’s tax cuts will turn a pretty lousy deficit picture into a dire one. And that, in turn, is very likely to trigger a crisis. After all, the history of such episodes is that once you add a spark to the kindling, you’re very quickly engulfed by flames. That’s because of the relentlessly self-fulfilling dynamics at work: a certain fraction of bondholders panics and starts selling, which raises interest rates and lowers bond prices, thereby terrifying a broader group of bondholders, who then join the sell-off … and on and on until you’re Argentina.

Of course, we can’t be sure about the political fallout. Times change—if nothing else, the news cycle moves a lot faster today than it did in 1970, to say nothing about 1930. Maybe the Republicans would recover after a few years out of power. On the other hand, being the party that’s associated forever more with America’s own third-world style debt crisis can’t exactly be good for the brand.

So, yes, like Krugman, I’m concerned that the Republican Party really might cast us into the abyss as part of some spectacularly misguided political strategy. But the one thing I’m emphatically not worried about is that it might somehow help the GOP.

Noam Scheiber is a senior editor of The New Republic.