The long view

How did US fiscal policy come to this? Blame Republicans, and the Founding Fathers

December 22, 2012
Obsession
Fiscal Cliff
December 22, 2012

It’s been 45 days since Barack Obama was re-elected president of the United States, and the bulk of that time, he and the lame-duck Congress have been focused on avoiding an automatic austerity package set to take effect Jan. 1. With only 10 days left until taxes go up and spending goes down, likely pushing the US economy into a recession, Republicans and Democrats don’t seem much closer to dodging the axe.

How did it come to this?

We could start the story in 2000, a time of fiscal surplus after budget deals between President Bill Clinton and Republicans in Congress combined with a growing economy and the internet bubble to leave the US in fine economic shape.

When President George W. Bush took office, he lobbied Congress to enact $1.6 trillion in tax cuts that were scheduled to expire in 2011 because legislators correctly feared they were too expensive to maintain. In years to come, those tax cuts weren’t ended to finance two expensive wars, while domestic spending continued to grow, building significant deficits. In 2007, the worst recession in a generation hit. That sapped tax revenues even further and created further demands for public spending. By 2009, a newly-elected President Obama would pass a stimulus package to combat the recession; while it was effective because it increased the deficit, it also contributed to the hodgepodge, temporary nature of the federal budget. His universal health care law, notably, reduced the deficit, but the pressures of an aging population and America’s world-beating health care costs by far the most important driver of US debt.

But we could also start in 1994, when the Republicans took control of the House of Representatives for the first time in 50 years, and began rewriting the chamber’s rules to take power away from the Speaker of the House and committee chairs and instead create an institution where operations were determined by a “majority of the majority,” an approach that continued in subsequent Congresses when the House returned to Democratic control. In the Senate, meanwhile, a procedural tool called the filibuster, which allowed minority parties to block legislation, became far more prevalent than ever before, creating the need for a super majority to pass almost any legislation.

Over this same 20-year period, America’s two major political parties were completing a realignment, away from the regional coalitions they once represented and toward more purely ideological coalitions on the left (Democrats) and the right (Republicans).

All of these trends—more ideological parties, procedural rules that reduce the possibilities of compromise, and a history of lax fiscal policy—collided in Obama’s first term. As American political parties behaved more like those in Europe and other countries boasting parliamentary systems that allow governing parties to enact their agendas, US institutions, with their numerous veto points, became more ineffective.

Though Obama promised a bipartisan manner, and attempted to deliver it—salting his stimulus plan with tax cuts, adopting the Republican health care framework to deliver the admittedly liberal goal of universal health care—his Keynesian approach to economic policy and liberal positions on social issues ignited conservatives’ anger and lead to their 2010 resurgence in Congress. That, in turn, has lead to the last two years of policy stagnation, with neither side able to convince the other to move forward on anything.

Instead, we’ve had two years of running fiscal battles, defined by Republicans’ pledge to never increase tax rates and their desire to cut spending: Over appropriations deadlines, the government nearly shut down in spring 2011. Over America’s borrowing limit, which requires Congress to authorize debt for spending it already appropriated, came the summer 2011 crisis that resulted in US debt being downgraded, which markets cheerfully ignored. At the time, House Speaker John Boehner and Obama nearly agreed on a massive debt reduction deal that balanced spending cuts with revenue increases, but it was scotched at the last moment. The result of that impasse led us to the fiscal cliff, designed to force the parties to work together. How droll.

Can we blame anyone for this rather short-sighted state of affairs? Thomas Mann of the centrist Brookings Institute and Norm Ornstein of the conservative American Enterprise Institute, hoary veterans of Washington, make a convincing case that the Republican party is at fault in their book, “It’s Even Worse Than It Looks.” While neither is hesitant to deride Democrats for their sins, they point to a pattern of ideological rigidness:

Rank-and-file GOP voters endorse the strategy that the party’s elites have adopted, eschewing compromise to solve problems and insisting on principle, even if it leads to gridlock. Democratic voters, by contrast, along with self-identified independents, are more likely to favor deal-making over deadlock.

Democrats are hardly blameless, and they have their own extreme wing and their own predilection for hardball politics. But these tendencies do not routinely veer outside the normal bounds of robust politics. If anything, under the presidencies of Clinton and Obama, the Democrats have become more of a status-quo party. They are centrist protectors of government, reluctantly willing to revamp programs and trim retirement and health benefits to maintain its central commitments in the face of fiscal pressures.

With Obama’s re-election, there was hope that some of this would evaporate; indeed, the next Congress promises more pragmatism among Republicans, with many of the new representatives elected in 2010 kicked to the curb by voters. But that new Congress doesn’t start until Jan. 3, two days after the fiscal cliff.

After the election, Boehner, who has shown an interest bipartisan deal-making in the past, working with the late Democratic Senator Ted Kennedy on a landmark education reform bill during the Bush administration, seemed poised to return to the grand bargaining table he abandoned during the debt limit crisis. The playing field was more favorable for compromise, since the automatic expiration of the Bush tax cuts would make it easier for Republicans to meet Democrats in the middle.

But after coming close to an agreement last week, conservatives in his party complained, and Boehner brought a “Plan B” to the floor, an attempt to establish some baseline willingness to raise tax revenue on the highest 0.1% of American earners. It would have been a demonstration of Republican good faith and increased his leverage in talks with the president, but it failed, leaving Boehner with a tough choice: Risk the ire of the Republicans who made him Speaker by seeking compromise with Obama and his party, or continue his brinksmanship.

The next day, Obama announced a new goal for Congress, which he expects to return after Christmas. He is asking them to exempt the middle incomes from tax increases, suspend the automatic spending cuts, and extend unemployment insurance.

This is something that both parties should be able to support, reminiscent of a deal made in the previous lame duck Congress in 2010, which extended the Bush tax cuts and offered modest stimulus. At the time, the expiration of those policies might have damaged the still-recovering economy. Today, with a stronger economy, Obama will stand by his campaign pledge to raise taxes on the wealthy, but this limited package should appeal to those in both parties who would rather avoid the fiscal cliff and punt on larger decisions about reducing the deficit than risk the consequences of brinksmanship.

When lawmakers return from their holiday weekends, they’ll attempt to take up that package, a last chance for one of the most dysfunctional Congresses in US history to save the country from a mess of its own making. If not, a new Congress will take up the challenge on Jan. 3, heaven help us all.

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