I’ve just spent a snowed-in day plowing through the Congressional Budget Office’s latest ten-year budget and economic outlook. The short-term outlook is grim enough, with an estimated deficit of $1.5 trillion—a new record, and the third consecutive 13-figure result. As for the long-term outlook, it’s not as bad as you’ve read; it’s worse.
Here’s why the headlines understate the gravity of our situation. CBO is required to use current law as the basis for its estimates—to assume, for example, that all the Bush tax cuts will expire at the end of 2012, that Medicare payments to physicians will be cut sharply, and that the alternative minimum tax will be allowed to affect millions more Americans. Using these assumptions, taxes as a share of GDP would by allowed to increase by five percentage points by 2014 and would keep on rising thereafter, we’d have a cumulative deficit of about $7 trillion dollars over the next decade, and debt held by the public would increase from 62 percent to 77 percent of GDP. Using more politically realistic assumptions, the cumulative deficit would be about $12 trillion, and debt held by the public would reach 97 percent of GDP, the highest level since 1946 (when it was headed down, not up).
I don’t know many economists, liberal or conservative, who view this prospect with equanimity. The CBO certainly doesn’t; its report states that “Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have ... negative economic consequences for the United States”—among them, reduced investment, output, and incomes; less room for maneuver when the next economic crisis erupts; and worst of all higher probability that investors would eventually lose confidence in our country’s creditworthiness and demand much higher interest rates. While no one can predict when that “tipping point” might occur, the report notes that as the global economic recovery gathers strength, investors will be less inclined to purchase U.S. government debt as a safe haven and will focus instead on its rising risks.
What should we do? Answer: Use the tax compromise struck during the lame-duck session of the 111th Congress as a two-year window to get our house in order. By the time that legislation expires, we should agree on a long-term plan that halts and then reverses our downward fiscal plunge. How should we do it? A number of high-level commissions have come to roughly the same conclusion: We need a grand bargain that deals structurally with both spending and our outdated tax code. Can we do it? Yes, because we’ve done it before—in the 1990s, to be precise, starting with the bipartisan budget deal that may have cost George H. W. Bush a second presidential term, continuing with Bill Clinton’s brave 1993 austerity budget, and concluding with an agreement between the Clinton administration and the Gingrich-led House Republicans.
Let’s look at a snapshot of the eight Clinton years (all numbers expressed as a percentage of GDP).
Total spending 21.4 18.2
Domestic discretionary 3.4 3.0
Deficit 3.9 -2.4 (surplus)
Debt held by the public 49.3 34.7
During the Clinton years, spending of all kinds declined as a share of GDP, deficits turned into surpluses, and debt held by the public barely budged: $3.2 trillion at the beginning, $3.4 at the end. During the Bush years, by contrast, every form of spending increased substantially, surpluses turned into deficits, and debt held by the public almost doubled, from $3.3 to $5.8 trillion.
The experience of the Clinton years contradicts a standard Republican talking point: increased revenues aren’t always spent. The Clinton administration used the proceeds from a higher top marginal tax rate to reduce the deficit. And those rates didn’t exactly suppress economic growth or job generation either.
I wish I could say that today’s elected officials are as serious about our fiscal future as Clinton was. Republicans are proposing damaging cuts in domestic discretionary spending (a small part of the total budget) while ducking far more important drivers of the long-term deficit problem—such as entitlements. Democrats seem to be hoping that they can score tactical political points by hanging back and forcing the Republicans to put specifics on the table. And although the State of the Union address left the door open to a serious discussion, not even the president’s supporters are claiming that it etched a profile in fiscal courage. (As intended, his investment message had far more resonance.) Senator Kent Conrad, the Democratic chair of the Senate Budget Committee, is publicly lamenting the president’s unwillingness to join in a budget summit with the bipartisan congressional leadership.
Memo to Republicans: You’re rightly critical of George W. Bush’s fiscal performance. But there is no evidence—none—that you can get the deficit and debt under control with your preferred combination of spending cuts and tax cuts. Have you noticed that Paul Ryan’s famous Roadmap allows the national debt to reach 100 percent of GDP? Do you care about facts?
Memo to Democrats: Denouncing the proposal offered by the president’s commission as a “cat food” budget for the elderly is a political talking-point, not a serious argument. Is Dick Durbin no longer liberal enough for you? Have you forgotten that fiscal restraint and full employment were partners, not adversaries, little more than a decade ago?
Memo to Obama: During your 2008 campaign, you said that the president has to be able to walk and chew gum at the same time. You were absolutely right. You can talk, as you should, about vital public investments and take the lead, as you must, to head off a fiscal train wreck.
During the next two years, we have to do what Clinton did, and more. We have to restrain discretionary spending (defense as well as domestic) and boost revenues. And because what was only a cloud on the horizon in the 1990s—the retirement of the baby boom generation—is now a swelling reality, we have to do what Clinton didn’t: Namely, find a way to reduce the anticipated increases in entitlement spending without imposing hardship on the lower-income elderly who depend on these programs for a decent and dignified old age.