Politics & Policy

A Grand and Scary Compromise

Combining tax increases with benefit cuts would be a political kamikaze -- and an economic disaster.

Federal spending has been stable at around 20 percent of GDP for over fifty years, ever since it settled down into a long-term trend after World War II.  But long-term Congressional Budget Office projections now show federal spending exploding to around 38 percent of GDP by 2050, or even higher. The driving cause behind this is the entitlement-program threesome of Social Security, Medicare, and Medicaid.

If anything even close to such spending occurs, small-government conservatives will have been disastrously routed. Adding in state and local spending, total government spending in 2050 would be close to 50 percent of GDP. The robust capitalism that has historically provided the world-leading prosperity Americans are used to will have been replaced by Swedish socialism. We will have held the socialists at bay for the last fifty years, only to see them march over us right when we thought we were achieving permanent victory.

 

Members of the old-line Washington establishment have made clear how they want to address this fiscal cataclysm. They are calling for a grand compromise deal between Republicans and Democrats, and conservatives and liberals.

 

That deal would be a major tax increase in return for cuts in entitlement spending.

 

This is what is behind legislation for an Entitlements Commission, which was introduced by Rep. Frank Wolf (R., Va.) on June 7. The bill picks up on President Bush’s proposal in his State of the Union for a bipartisan commission to study ways to address the long-term problems of federal entitlements such as Social Security, Medicaid, and Medicare. The bill explicitly provides that the commission is to consider tax increases as well as other reforms. But to limit criticism from conservatives, the bill says only increased revenue from tax-code changes that increase economic growth could be considered.

 

That double talk will never work, however.  Either tax increases are on the table or they are not. Indeed, in a Washington Post column on May 20, David Broder first reported that the Wolf bill would provide for tax increases and that Clinton Treasury secretary Robert Rubin might agree to serve on the commission as a result. President Bush has personally appealed to Rubin to help lead such a commission. But Rubin has refused to do so unless tax increases are on the table, a position echoed by other Democrats.

 

Rubin and the other Democrats are not going to accept a provision saying that only increased revenue from tax changes producing higher projected economic growth can be considered. So expect any restriction on tax increases to be dropped if the Wolf bill is to go forward.

 

Indeed, late last month, President Bush’s National Economic Council chairman Al Hubbard told the National Journal that President Bush would accept an Entitlements Commission where tax increases are on the table.

 

Moreover, Wolf’s commission is to operate like the Federal Base Closing Commission.  When the Entitlements Commission makes its proposals, including tax increases, the House and Senate would each be required to take an up or down vote on them, without amendments from the floor, which might otherwise pick apart the deal the commission has struck. This provision in the Wolf bill will enable enormous tax increases to be rammed through Congress, just like the Base Closing Commission does with controversial base closings.

 

Wolf cited support from the Concord Coalition, an organization fervently supporting tax increases, and the Heritage Foundation in developing the bill. Heritage, in fact, has been meeting with such liberal groups as the Urban Institute and the Brookings Institution to develop a consensus package of entitlement reforms. On May 24, Cato Institute economist Jagadeesh Gokhale joined this chorus in a column he wrote for Tech Central, calling for a compromise package that includes tax increases. Former Hill staffer Bruce Bartlett is reportedly marketing a tax proposal that would substantially increase revenues based on a new value added tax.

 

The strategy of a grand compromise with the liberals will inevitably lead to a reversal of the Bush tax cuts. But the fundamental folly is more basic than that. If federal spending as a percent of GDP is currently slated to rise from 20 percent to around 38 percent, where is a grand compromise with the liberals going to leave it? Surely not at 20 percent, and probably not even 25 percent. How much in benefits can we expect to cut to bring the current projection down, even without liberal support?

 

The truth is that the backdoor consensus is to settle in with a compromise that leaves federal spending around a disastrous 30 percent of GDP.

 

Fortunately, there is a better way to deal with this crisis — and conservatives have been working on it for a long time. A large personal account option for Social Security, such as the one proposed by Rep. Paul Ryan (R., Wis.) and Sen. John Sununu (R., N.H.), would dramatically reduce federal spending over the long run by eventually shifting the payment of Social Security retirement benefits off the federal budget altogether and into the private sector. Later, these accounts could be expanded to cover survivor and disability benefits, reducing federal spending by another 1.5 percent of GDP.

 

Secondly, the hugely successful reform of the old Aid to Families with Dependent Children (AFDC) program should be expanded to the other welfare programs, especially Medicaid. The federal government would block-grant its share of spending on these programs back to the states, with the states then running their own welfare systems based on work for the able bodied. The AFDC rolls were reduced by over 50 percent nationwide through these reforms, and even more where the work requirement was most strongly enforced.

 

Extending such reforms would enable federal spending on these programs to be held to less than the growth of GDP. That means federal spending would again be reduced by an amount that is more than necessary to stop Medicaid, and the other welfare programs, from increasing spending relative to GDP.

 

Medicare is the most difficult program to reform, but it too can be addressed through personal accounts, health insurance vouchers for low-income seniors, and health savings accounts. Another component of reform would be to adopt a “Taxpayer Bill of Rights” spending limit for federal domestic discretionary spending, holding it to grow at no more than the rate of inflation plus population growth. Pro-growth tax reform would also help as it would increase GDP faster than spending growth, effectively reducing spending relative to GDP.

 

This package of reforms can be expected to eventually reduce federal spending to less than 15 percent of GDP. Moreover, this ideologically sound approach is the far more viable one politically.

 

The grand compromise package of tax increases and benefit cuts is a political kamikaze mission doomed to failure. It is the 1990 budget deal writ large, where the first President Bush broke his read-my-lips-no-new-taxes pledge and told voters to read his hips instead.  Two years later voters booted those hips out of office.

 

– Peter Ferrara is director of entitlement and budget policy at the Institute for Policy Innovation and a senior fellow at the Free Enterprise Fund.

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