Where Deficit Can-Kicking Leads

by Reihan Salam

Are we heading for shock-and-awe-style fiscal retrenchment, or will we muddle-through into the stagnant future? Ross Douthat suggests that the latter scenario is more likely:

Indeed, if I were rank-ordering scenarios for the American future right now, the latter possibility would probably rank highest: Neither a massive crisis nor a sweeping legislative solution, but an ugly equilibrium in which muddling-through politicians win enough small victories and reach enough small deals to gradually stabilize the debt-to-GDP ratio … but at a level that all-but-ensures a generation or more of economic stagnation and lurching, shortsighted, crisis-driven domestic policymaking.

And he links to Arnold Kling’s unnervingly plausible analysis of how a U.S. sovereign debt crisis might come to this, the kernel of which is his emphasis on ease of assembling “blocking coalitions” against tax increases or entitlement cuts:

It strikes me that changes to Social Security and Medicare face generic and ideological opposition.

Generic opposition to change comes from those who want to keep the programs as they are. Retirees and people nearing retirement would tend to fall in this category.

Ideological opposition comes from partisans who are willing to see changes to programs, but who reject certain types of changes. For example, on Social Security, Republicans tend to be ideologically opposed to tax increases while Democrats tend to be ideologically opposed to benefit cuts. On Medicare, Republicans tend to be ideologically opposed to top-down rationing, while Democrats tend to be ideologically opposed to bottom-up choice.

There is a significant probability that by combining ideological opposition and generic opposition, a blocking coalition can readily be formed against any proposed changes to these programs. Thus, even though the need for major reform is evident, it might be that, for every major reform, even once the effort is taken up, its political prospect is only slight.

Kling is skeptical of the viability of a revenue-only solution:

Another alternative that might be considered under threat of default is a tax increase, leaving the entitlement programs more or less as they are. There are two reasons to believe that this also will be politically blocked. First, if entitlement obligations are still projected to grow faster than GDP, then tax increases will not provide a credible long-term solution. Second, if the two political parties are unable to agree on a compromise that combines entitlement cuts with tax increases, it seems even less likely that they would agree on tax increases alone. 

One is reminded of Steve Teles’s “Klugdeocracy” thesis. Revenue increases are possible, but only really opaque revenue increases, like the the restoration of PEP and Pease in the fiscal cliff deal. Suffice it to say, opaque revenue increases tend to be the most economically damaging, in part because they add to the complexity of the tax code.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.