Budget Histrionics — and Reality

by Douglas Holtz-Eakin

The mainstream (liberal) media headlines are red hot in the aftermath of House Speaker John Boehner’s remarks earlier this week. The Washington Post: “Mr. Boehner’s lamentable desire to repeat bad history.” The New York Times: “Republicans Pledge New Standoff on Debt Limit.”


There is no, zero, none, zippo, nada disagreement that the U.S. should not default on its obligations. Any assertion that one side or the other “wants” a standoff is ludicrous. With the exception of the administration, which blithely drove the U.S. into a downgrade, there is no disagreement that elected representatives should be good curators of the credit rating of the federal government.

To meet these dual standards of good governance, it is imperative that the explosive trajectory of federal spending be brought under control. Put differently, a “clean” debt-limit increase is not an option. Simply raising the debt limit will signal to credit markets an acquiescence to fiscal irresponsibility that assures a downgrade.

This is particularly true at the moment. Over the roughly past 20 years of debt limit increases, there have only been 3 “clean” increases. All the others were associated with other legislation, such as the Budget Control Act and the budget agreements in the 90s; were stopgap measures; or were passed using the special legislative rules (the “Gephardt rule”) that the House ended in 2011. Markets were accustomed to getting budget decisions along with debt-limit increases when the debt was not a problem. How will it react to getting no budget progress when debt is?

#more#Of course, some will immediately use this as a call for tax increases on the rich. Unfortunately, as prominent budgeteer William Jefferson Clinton noted this week, repeated promises to tax the rich are not a serious approach to the debt explosion: “This is just me now, I’m not speaking for the White House — I think you could tax me at a 100 percent and you wouldn’t balance the budget.” (Obviously, any statement this arithmetically informed would not emanate from this White House.)

So, in the end, the key to responsible fiscal management is to raise the debt limit and control spending. Which brings us to what Speaker Boehner actually said: “I will again insist on my simple principle of cuts and reforms greater than the debt limit increase” (emphasis added).

The statement merits attention for two reasons. First, it is not an unhinged war cry as portrayed by the hyperventilating headlines. It is an acknowledgment of the reality of the U.S.’s situation. A little reality in Obama’s Washington is welcome.

Second, notice that it talks about “reforms” as well as simple spending cuts. This is crucial. The debt problem is the entitlement-spending problem. The federal social safety net if collapsing under its financial weight. Social Security is running a cash-flow deficit of $45 billion and is kept “solvent” on the books only by promising to slash the benefits of retirees by 25 percent across the board. The gap between Medicare premiums and taxes coming into the Treasury and spending going out is currently nearly $300 billion annually — and there are 10,000 new boomer beneficiaries every day. Medicaid strains the budget of every state, is debt-financed at the federal level, and provides substandard care to its participants. Clearly, reforms are essential and Boehner is opening the door to solving the real problem.

Again, former president Clinton provided a health dose of common sense yesterday in calling on Democrats to be more aggressive in deficit reduction, in general, and Medicare reforms, in particular.

The U.S. has real problems. Speaker Boehner laid out a path to address them in a realistic fashion. Ignore the headlines.