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Is it Time for Deficit Hawks to Walk Away from the Bargaining Table?

Charles Blahous | 12/12/2012

I continue to believe that a bipartisan fiscal grand bargain, one that stabilizes the paths of federal spending and debt, is somewhere between desirable and necessary. Until there is a fundamental change in the White House’s substantive positioning, however, the best tactical option for deficit hawks may be to walk away from the bargaining table.

Throughout the past few years I have been a consistent advocate of bipartisan engagement and compromise on fiscal issues. I signed the Committee for a Responsible Federal Budget’s letter urging comprehensive, bipartisan deficit reduction legislation. I wrote repeatedly in support of the Simpson-Bowles Social Security reform proposal although it deviated significantly from my own preferences by including substantial tax increases. I have consistently made the case to like-minded policy makers that compromise is preferable to allowing current unsustainable trends to continue.

There are certain substantive realities, however, that limit our scope of useful action. As I detailed in my last piece, the structural fiscal problem is one of spending growing faster than the underlying economy can sustain. That trend is driven by growth in four programs alone – Social Security, Medicare, Medicaid and the so-called “Obamacare” entitlement. Without fundamental reforms that qualitatively re-direct the spending paths of these four programs, tax increases can only kick the can down the road, at best buying some additional time while the real problem grows more difficult to solve.

Chart: Federal Expenditures are Growing Faster than the Economy

Those of us who interact directly and indirectly with the White House are familiar with their standard tactics in fiscal negotiations. Behind the scenes staff assure fiscal watchdog groups and economic policy reporters that they really do want to address the drivers of deficits, but just couldn’t until Republicans gave up their allegedly doctrinaire opposition to tax increases. Publicly, however, the White House has consistently taken positions against correcting the entitlement spending path.

We now have a substantial body of data with respect to Obama Administration fiscal policy. At no time in the past four years has the President offered or even supported a plan that would meaningfully address the long-term entitlement spending growth problem. This position has held throughout widely varying political circumstances. It was maintained in 2009-2010 when Democrats commanded majorities in each chamber of Congress and the White House could have addressed the fiscal problem entirely on its own terms. It was maintained after the Simpson-Bowles commission offered a compromise bipartisan fiscal plan. It was maintained in 2011 when the White House withdrew a pending budget deal with Speaker Boehner. And it is maintained now, even after the White House has prevailed in securing a critical agreement from Republicans to raise taxes by at least $800 billion.

Instead of now pivoting to the most important and hardest part of fiscal consolidation – i.e., entitlement reform – the White House has instead sought to increase pressure for further tax increases, offering only token changes to spending and employing widely-acknowledged budget gimmicks. This policy if followed would leave the fiscal problem unrepaired.

At this point there are only two possible explanations for the White House positioning:

  1. The President does not actually support fiscal reforms that would put federal spending on a sustainable path.
  2. The President is willing to accept such reforms, but wants others to accept political responsibility for their enactment. One example would involve the White House reaping the political benefit of some parts of a deal (i.e., raising taxes on the “rich”) while requiring others to take the political hit for the tough parts (i.e., constraining spending growth in Social Security, Medicare, Medicaid and Obamacare).

Regardless of which explanation above is true, no meaningful fiscal reform can occur until there is a qualitative shift in the President’s position. If the President opposes such spending reforms, he can veto any such package that Congress passes. It is implausible that Republicans could persuade Congressional Democrats to join in crafting legitimate entitlement reforms as long as the President appears to be against them. Without the President pivoting to push actively for such reforms, they simply cannot happen.

The President also has the constitutional power to force tax increases because under current law taxes will rise across the board if no action is taken. Thus in the absence of a fundamental position shift by the President, fiscal reform advocates face a choice between two undesirable policy outcomes:

  1. Substantial tax increases in the absence of spending reforms;
  2. Substantial tax increases accompanied by token spending reforms masquerading as a so-called “balanced” agreement, consisting largely of budget gimmicks and a repackaging of previously-enacted law.

Either of these alternatives would embody a terrible policy outcome. But if deficit hawks continue to be presented with these as the only two choices, less damage is probably done by enacting the tax increases in isolation. The worst possible outcome for deficit hawks would be to enact tax increases while leaving the upward path of spending uncorrected at the same time that elected officials are allowed to claim victory for insubstantial fiscal reforms.

As long as spending growth trends remain uncorrected, deficit hawks must ensure this is understood forthrightly by both press and public. This might best be accomplished by giving the President the substantial tax increases he has sought while fiscal hawks walk away from the negotiating table, promising to return only if and when the White House is willing to seriously confront the spending growth issue.

I am under no illusion that walking away would produce anything other than a substantive defeat for fiscal conservatives. Enacting substantial tax increases in the absence of spending reforms would be an undisputed victory for advocates of bigger government. If and when a genuine fiscal negotiation occurs, the government would have grown still larger, government-expansion advocates could argue for still more tax increases and might well get them.

Unless the President’s substantive position changes, however, much of this policy damage is inevitable. Congress cannot constitutionally (excepting the implausible circumstance in which the parties unite to override a presidential veto) force the President to accept meaningful spending reform. As long as he remains unwilling to do so, and also wields the power to force tax increases, the main question before deficit hawks will be whether to permit this outcome to be depicted as serious fiscal reform. The most responsible course is to say no, publicly and clearly.

Enacting the tax increases in isolation could have an additional upside. To date the White House has ducked most fiscal issues by alleging others’ intransigence about raising tax rates for the rich. The issues of deficit reduction and upper-income tax rates have been successfully conflated, although the former is little dependent on the latter. Moving the tax increase separately might finally eliminate its exploitation as a dodge from real fiscal reform.

Procedurally, how would Congress go about implementing this policy? One option is simply to do nothing. If no action is taken on tax rates before we go over the fiscal cliff, they will rise for everyone. This option has been outlined by my former colleague Tony Fratto. Congress could engage on a separate track to deal with other elements of the fiscal cliff (sequestration, Medicare physician payments, etc.) but leave the bigger fiscal issues unresolved. This would be a bad policy outcome and poses obvious economic and political hazards. It would, however, maximize continuing pressure for both real spending and tax reforms, the former because the spending problem would obviously remain uncorrected and the latter because individuals throughout the income spectrum would retain a continuing stake in tax reform.

Another alternative is simply for the House to move the Democrats’ legislation (S. 3412) raising taxes on upper-income Americans as passed by the Senate in July of this year. This would straightforwardly enact the tax increases Democrats have advocated; Republicans and deficit-hawk Democrats could declare themselves ready to negotiate on the real fiscal problem if and when the White House becomes willing to do so. Constitutionally tax legislation must originate in the House, but the Senate could handle this by substituting the text of S. 3412 for a House-passed tax bill, and returning it to the House to be passed there. This approach would be simple and neat; the Senate would not have to vote on anything new.

Neither of these options would produce good policy. The better outcome by far would be a grand bargain producing sustainable trends in revenues, spending and debt. Meaningful fiscal reform, however, will not be possible unless and until the President pivots from pushing for still more tax increases to publicly breaking with his own party’s progressive wing and advocating for fundamental entitlement reforms. Unless that pivot occurs, enacting the tax increases in isolation without disguising them as meaningful fiscal reform is probably the least damaging policy outcome available to deficit hawks.

 

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.


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