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Deficits matter again.
It wasn’t supposed to be this way. During the campaign, Barack Obama and his advisers thought that concern about deficits was passé. But the financial crisis and the government’s stimulative response have brought back deficit politics and endangered both the timing and the substance of health care reform.
Obama’s campaign team did not see the value in wearing green eye shades. It thought that deficit politics was for suckers and that it shouldn’t be limited to small-bore domestic initiatives. Its political point was that voters would reward the Obama administration for bold programs and not care so much if deficits went up a bit.
This attitude follows a long history of both parties alternately embracing and ignoring balanced budgets and fiscal responsibility. In the era of Democratic dominance from the New Deal to the Great Society, Republicans often couldn’t defeat Democratic initiatives but could claim to manage them in a fiscally responsible way.
Within Republican ranks, there was a criticism of this fiscal conservatism as taking on the role of “tax collector for the welfare state.” And the Reagan years saw the Republican emphasis shift from balanced budgets to lower taxes. And some saw indirect fiscal virtue in cutting taxes and running deficits, believing that deficits would “starve the beast” of government, as there would be no money to propose or expand domestic programs.
After 12 years of Republican presidents, President Bill Clinton aimed to reassure markets that Democrats could manage the economy. And 1992 saw Ross Perot taking nearly 20 percent of the vote, running in the middle of the political spectrum and emphasizing balanced budgets as one of his top priorities. Throw in a growing economy and six years of Clinton and a Republican Congress checking each other, and the result was budget surpluses.
Finally, Bush’s tax cuts, national security spending and congressional spending had some Republicans arguing that the party was abandoning its principles of smaller government.
With this history, it is not hard to imagine why Obama’s economic advisers thought that Obama could afford to run higher deficits, even though many hailed from the deficit-conscious Robert Rubin circle of the Clinton administration. Obama could argue that Clinton had already made the case for economically responsible Democrats and that Bush had made the case for Republican fiscal irresponsibility.
But the financial crisis changed everything. Economists across the political spectrum saw the virtue in running huge temporary deficits in order to avoid the greater evil of deflation. Deficits in the trillions of dollars for a couple of years now seemed almost sensible. The Obama administration used this emergency to its benefit to pass many of its smaller priorities in a large stimulus package.
But this early burst of spending also puts his longer-term priorities on shakier ground.
The administration’s argument about health care has been that it is both an emergency and a necessity for the long-term fiscal health of America. It is an emergency because people are losing jobs and health insurance. But it is also the key to bringing down long-term deficits, as government health spending is projected to grow at tremendous rates.
This twofold argument is the key to why the administration has laid out a very ambitious timetable. The most politically advantageous time for any new administration to pass a big initiative is in the first year, when the president’s popularity is high, Congress is compliant and midterm elections are far away.
But Obama has an additional incentive for speed. This is the year of emergency spending with enormous deficits. The increased spending on health care will be costly, but in the context of large deficits and economic emergency, the additional spending may get buried in the pile of red ink.
If health care slips to Year Two or Three, worries about deficits will have grown. Short-term economic reasons for running big deficits will have given way to a realization that debt is piling up and deficits must come down. Add to this the growing scrutiny–by the Congressional Budget Office, Republicans and others–of Obama’s claim about long-term containment of health costs.
Obama is right that the fall is the most advantageous deadline by which to pass health care. To get there, he will have to compromise to pass something significant–but well short of universal coverage. Otherwise, if the health care debate still rages in 2010, he may face defeat of his health care initiative and head into the midterm elections with Republicans rejuvenated by moderate and independent deficit-conscious voters.
John C. Fortier is a research fellow at AEI.
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