Is The Economy Actually Better Than We All Think?

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Dan Gross:

1. Recent History: In the past 20 years, there have been two deficit-reduction deals. But Congressional Republicans weren’t a significant party to either one of them. In 1990, Republican president George H.W. Bush and the Democratic Congress agreed to higher taxes and spending cuts — a deal that was largely denounced by the then-minority Republicans in Congress. In 1993, Democratic Congress and President Clinton passed another package of spending cuts and tax increases over the united opposition of then-minority Congressional Republicans.

2. Hawks Fly the Coop: Several self-professed deficit hawks on both sides of the aisle have left. Republican Senators Judd Gregg of New Hampshire and George Voinovich of Ohio, and Democrat Evan Bayh of Indiana, who each stepped down before the election, generally talked a good game about deficit reduction while approving plans to increase the deficit. The departure of Senate centrists decreases the potential for deal-making. In the House, conservative Blue Dog Democrats — who would frequently buck their own party on spending issues — suffered sharp losses. The remaining Democrats in Washington are more liberal — and hence more opposed to cuts in entitlement spending.

3. Revenge of the Establishment: In 1994, Republican revolutionaries, led by Newt Gingrich, grabbed the reins of power. This year, plenty of winning Tea Party candidates, including Rand Paul of Kentucky, have proposed ambitious spending cuts. But the Tea Party has helped restore establishment Republicans to positions of power. Mitch McConnell, Senate Minority Leader, and John Boehner, the next Speaker of the House, are veterans of last decade’s Republican majority that created the Medicare prescription drug benefit with no payment mechanism, funded wars on an emergency basis, and sharply increased discretionary spending.

4. Deficits Don’t Matter, Reprise: Whether it’s Dick Cheney saying deficits don’t matter, or Democrats urging more stimulus, politicians on both sides of the aisle have made it clear that they don’t care much about deficits. The consensus against deficit reduction may have just become more hardened. Today’s Republican orthodoxy on budget matters can be expressed as follows: Don’t touch defense, Social Security or Medicare. Revenue lost via tax cuts doesn’t need to be offset with spending cuts. Tax cuts pay for themselves.

5. The Fragile Economy: The tax cuts enacted in 2001 and 2003 are slated to expire in less than two months. Given the economy’s unsatisfactory growth rate, there’s not much appetite — on either side — for letting them expire. Republicans, and many Democrats, want to extend all the tax cuts, without offsetting reductions. President Obama and most Democrats want to extend them for all but families earning $250,000 (and individuals earning $200,000), without offsetting reductions. The negotiation positions, then, are a choice between adding about $3.2 trillion to the national debt over 10 years or adding $4 trillion. Splitting the difference would mean about $3.6 trillion in new debt over the next decade. (David Leonhardt in the New York Times this morning outlines several possible compromises.)

6. Elusive Cuts: Not surprisingly, the overwhelming majority of candidates — on both sides — refuse to specify significant cuts they’d like to make. Republicans have been talking up the possibility that they’ll call for $100 billion in discretionary spending cuts. But $100 billion is a drop in the bucket, and the overwhelming majority of government spending remains enormously popular. Programs like food stamps, the National Institute of Health and national parks have lobbies and supporters dedicated to their preservation. And advocating for harsh cuts in popular programs will give embattled Democrats something to defend.

7. Outsourcing Doesn’t Always Work: Much of Washington seems to believe that tough choices on deficits can be outsourced to the bipartisan Deficit Commission, which is scheduled to submit its findings in December. Reports suggest the Commission might propose raising more revenue by reducing tax expenditures — i.e., by repealing popular tax breaks. Given the state of the housing market, and the influence of the lending, banking, and real estate lobbies, do you think it’s likely Congress will vote to eliminate or reduce the home mortgage deduction?

There are no quick, easy fixes for large-scale deficit reduction. Continuing economic growth and the payback of bailout money have the capacity to reduce the deficit by small margins. But those gains can be easily overwhelmed by policy choices. And in the absence of a crisis or extreme brinksmanship — the threat of defaulting on the debt, a spike in interest rates, a government shutdown — it’s difficult to see how the realignment of power in Washington will lead to a significant deficit-reduction deal in the coming months.