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As the budget and debt ceiling-standoff continues in Washington, many are asking the wrong question: Which party will pay a political price for the government shutdown? Democrats are comparing Republicans to “hostage-takers”; Republicans complain that Democrats refuse to negotiate.
Here’s the right question: Can we afford not to have this fight? With federal expenditures running 30 percent higher than revenues, debt at nearly twice the historical average, and no significant improvement in sight, is it any wonder that a contingent of conservative legislators is willing to ignore political expediency and stand on principle instead?
Over the past 10 years, federal spending has grown twice as fast as GDP. Despite a top marginal tax rate higher than the rate under the Clinton administration, this level of spending has opened up a projected $650 billion-a-year deficit. Without an expected one-time increase in reimbursements from Fannie Mae and Freddie Mac, the deficit would be $100 billion higher, and over $1 trillion at normalized interest rates. For perspective, we only raise $1.3 trillion a year in income taxes. Yes, the deficit is down from $1.4 trillion at depth of the crisis, but on a comparable basis, it’s still six times larger than it was in 2007 before the financial crisis.
Because of the size of this annual deficit, America’s publicly held debt – currently an unprecedented $12 trillion — continues to grow relative to GDP with no end in sight. Interest payments on the debt and entitlement growth will gradually eat the U.S. economy alive. With 2.5 percent-a-year growth, debt will grow relative to GDP if deficits are greater than $300 billion. With the debt already at nearly 75 percent of GDP, nearly twice the 40-year average, it’s clear America needs reduction.
Some point to the Congressional Budget Office’s relatively optimistic economic assumptions as reason not to be concerned with America’s spending levels. But the CBO’s forecast of a bounce back in the economy to the pre-crisis growth trend line ignores evidence that points to mediocre growth from a permanently lower base. The CBO assumes 10 more years of growth without recession, wars, or other contingencies. It assumes sequestration will drive discretionary spending to nearly 40 percent below its 40-year average, and that Congress won’t pass new spending initiatives such as increases in Medicare reimbursements — the so called doctor fix — which it is already drafting.
Despite these realities, the president and his party have refused to discuss fundamental changes to entitlement spending. Instead, they have campaigned relentlessly for more spending. In 2009, for example, Democrats passed Obamacare — another major entitlement program – on a narrow, party-line vote after liberal Massachusetts, of all states, elected a Republican to fill Ted Kennedy’s vacant Senate seat. Today, Democrats refuse to allow discussion of ways to better target sequestration-mandated cuts because they fear that doing so would make the reduced spending levels more palatable and thus permanent.
Fortunately, America’s system of government forces the majority to negotiate with any minority that garners at least a 40-percent share of the representational vote. And in today’s situation, the minority was given additional negotiating leverage because Democratic lawmakers chose to fund popular spending increases with debt rather than unpopular tax increases. Under the circumstances, agreeing to increase the debt limit and pass the continuing funding resolution are the House Republican majority’s only hand to play against the president and Senate Democrats.
The job of every president is to ride herd over Congress. The president must not only use the bully pulpit to pressure the opposition; he or she must push his or her own party to compromise. Successful compromise unites moderates in both parties against the extremes of either party. But because of a lack of leadership by moderates in both parties, the opposite has occurred here.
Pragmatic Republicans are right to be concerned that there is likely little to be gained from a bruising fight that could hurt Republicans more than Democrats. But it is hardly certain that a more pragmatic approach, even if it wins back the Senate, will bring better results, given the president’s veto power. There is little incentive for Democrats to trade significant entitlement reform for tax increases when mandatory spending increases outlays without the need to pass legislation with a majority of Congress. Once the money is spent, the GOP can only borrow to delay tax increases or acquiesce and increase taxes now.
Republicans’ focus on defunding or scaling back Obamacare — an unpopular entitlement program — rather than entitlements generally, namely Social Security and Medicare, has raised questions about their true objective. But critics forget that spending is fungible. For any level of taxation, growth in one program crowds out spending on other programs. Cost reduction is simply a matter of priorities. Republicans value preserving Medicare and avoiding tax increases over expanding Obamacare.
It is true that negotiating with hostage-takers encourages hostage-taking. But given the fact that the debt ceiling and continuing funding resolution legislation are the only mechanisms forcing the parties to compromise over the country’s unsustainable fiscal path, that argument is akin to saying that agreeing to negotiate and compromise will only lead to demands for more compromise. For America’s sake, let us hope so.
Edward Conard, a former managing director at Bain Capital, is a visiting scholar at the American Enterprise Institute and the author of Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong.
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