Magazine | November 29, 2010, Issue

Toward the Precipice

A divided government faces a budget crisis

Come January, America will have a Democratic president and a Republican Speaker of the House of Representatives, a rare configuration in the 150-plus years that there has been a Republican party. There were Republican House majorities during Democratic administrations for two years after the 1894, 1918, and 1946 midterm elections, and for six years after the 1994 midterms.

In 2011, only the memory of the acrimonious cohabitation after 1994 will matter. The Republican speaker who took the gavel after that election had famously disparaged a leading senator from his own party as the “tax collector for the welfare state.” Republicans swept to power in 1994 clearly dedicated to the mission Ronald Reagan proclaimed 13 years earlier, to “curb the size and influence of the federal establishment.” Moreover, the Democratic president startled the nation, especially politicians in his own party, by declaring in the 1996 State of the Union address that “the era of big government is over.”

Knowing this much, it would have been plausible for the welfare state to do something in the 1990s it had never done since the New Deal: shrink. While that expectation may not have been far-fetched, it did turn out to be wrong. Adjusted for inflation, per capita federal outlays on the five big categories that dominate the Office of Management and Budget’s “human resources” programs — Social Security; all other income support programs; Medicare; all other health programs; and all education, job-training, and social-service programs — were 7 percent higher in 2001, the last fiscal year shaped by the Clinton administration, than they had been in 1995, the final one before the GOP Congress.

It wasn’t just the political circumstances of the 1990s that seemed to favor the reduction of the welfare state. The economic circumstances were favorable, too. The boom, before it turned into the bust, drove incomes up and unemployment down, causing spending on “automatic stabilizers” like unemployment compensation and food stamps to fall. Demography should have helped as well, since the people signing up in the 1990s for the two biggest welfare-state programs, Social Security and Medicare, were the ones born during the Depression — and baby bust — of the 1930s. As life expectancy increased, the proportion of the American population aged 65 or over grew from 8.1 percent in 1950 to 12.6 percent in 1990. Even though life expectancy continued to increase after 1990, the proportion of Americans at least 65 years old declined slightly, to 12.4 percent in 2000.

It turned out that the welfare state expanded in the 1990s less because it needed to than because it could. Relative to gross domestic product, total federal outlays actually decreased during the decade, from 21.9 percent in 1990 to 18.2 percent in 2000. Adjusted for inflation, however, per capita GDP was 22.8 percent higher in 2000 than it had been in 1990. The federal government was spending a somewhat smaller slice of a significantly larger pie.

Furthermore, the federal government was laying claim to a lesser portion of the national income mostly because of defense-spending cuts after the end of the Cold War, not because of welfare-state reductions. The Reagan rearmament program peaked in the late 1980s. In 1986 the federal government spent 6.2 percent of GDP on national defense. That proportion began to decline during “glasnost,” even while Reagan was still in office and the Berlin Wall was still intact. It fell to 5.2 percent of GDP in 1990 and 3.0 percent in 2000. Leaving GDP percentages aside, inflation-adjusted defense spending peaked in 1989, the last fiscal year of the Reagan administration, and declined by 28 percent over the following decade.

#page#By contrast, federal outlays on the five human-resources categories named above were 10.3 percent of GDP in 1990 and 10.9 percent in 2000, and averaged 11.6 percent of GDP from 1991 through 2000. Even with the conservatives’ biggest domestic-policy triumph of that decade, the replacement of Aid to Families with Dependent Children by the non-entitlement Temporary Assistance for Needy Families program, overall welfare-state spending was larger at the end of the 1990s, both in absolute terms and relative to the size of the economy, than it had been at the beginning.

Federal spending on everything else, from farm subsidies to the National Zoo — that is, everything but national defense and human resources — amounted to relatively little. It averaged about one-fourth of federal outlays in the 1990s, or roughly 5 percent of GDP. In 2009, it accounted for 22.6 percent of all federal outlays, and 5.6 percent of GDP.

The pattern, as I have argued in my recent book Never Enough, is indeed that when the welfare state doesn’t grow because it must, it grows because it can. Throughout the world, left-of-center politicians and intellectuals react to economic downturns by insisting on more government spending to assist the afflicted. When the economy is strong, on the other hand, their dramatically different position is to insist on more government spending to address “unmet social needs.” One needn’t be a cynic to suspect that these leftists have been less than zealous in their efforts to determine the size of a welfare state that’s exactly the size it needs to be, and doesn’t need any expansion.

President Obama and Speaker Boehner will face a set of circumstances that are far more daunting than the ones that confronted President Clinton and Speaker Gingrich. It’s hard to imagine the economy regaining its balance, much less displaying the vigor of the 1990s, before the nation endures several more years of deleveraging. Making impossible a breather from rising entitlement costs like the one the nation enjoyed that decade, the oldest of the 77 million baby boomers started enrolling in Social Security in 2008 and will become eligible for Medicare in 2011. Americans born between 1946 and 1964 will continue swelling the ranks of those programs’ beneficiaries for the next 20 years. Finally, it’s highly doubtful that the world will be, anytime soon, the safe neighborhood some supposed it was between 1989 and 2001. Adjusted for inflation, defense spending was 20 percent higher in 2009 than in 1989. Given the world’s dangers, the architects of a military draw-down like the one in the 1990s would be guilty of gross negligence.

The felicitous coincidence of a surging economy, a respite from growing entitlement payments, and declining military outlays created budget surpluses in the late 1990s that took the nation and its leaders by surprise. One result of the surpluses, recounted by the historian Steven Gillon in his 2008 book The Pact, was that Bill Clinton and Newt Gingrich began laying the groundwork in 1997 for sweeping reforms to Social Security and Medicare. The talks, held in secret to avoid outraging each one’s partisans, progressed far enough to produce a framework before the Monica Lewinsky story broke in January 1998, ending the negotiations before the participants had fashioned a true deal.

Even so, the framework is noteworthy. Gillon reports that President Clinton was prepared to antagonize his liberal base by accepting entitlement-policy changes strikingly similar to the ones advocated today in Rep. Paul Ryan’s “Roadmap.” Social Security’s retirement age would have been raised, and its cost-of-living adjustment lowered; workers would have been given the option to direct some of their payroll taxes into private retirement accounts. Medicare would have been modified into, or at least in the direction of, a defined-contribution program that helped people purchase public or private health insurance. Speaker Gingrich was prepared to antagonize his conservative base by agreeing to postpone consideration of any tax cuts that returned budget surpluses to the people until after the entitlement reforms had been enacted.

#page#It was never certain, or even probable, that these ambitions could have been achieved on Capitol Hill by what Gillon called a “60-percent coalition made up of moderates in both parties.” It’s significant that Erskine Bowles, President Clinton’s chief of staff in 1997 and a key facilitator of the clandestine entitlement-reform talks, is now the co-chairman, with former Republican senator Alan Simpson, of the National Commission on Fiscal Responsibility and Reform. (Most press accounts refer to it, more simply, as the Bowles-Simpson Commission.) In the event, also by no means certain, that the Commission can round up 14 votes from its 18 members for a series of recommendations on tax and spending policy, it will issue its report in December.

The happy circumstances — economic, demographic, and geopolitical — that yielded budget surpluses and high-level talks about entitlement reform 13 years ago have all deteriorated, forming today’s perfect storm for fiscal-policy makers. The prospect of surpluses then meant that the quid pro quo for cutting entitlement spending would have been postponing and limiting tax cuts. That package would have been hard to sell, politically. The prospect in 2010 of federal deficits that average $1 trillion a year for the next decade, and raise the federal debt to a level nearly equal to the gross domestic product by 2020, means that the concessions needed to make a deal are going to involve spending cuts and tax increases.

That combination of measures, with something to infuriate everyone, is going to be even harder to assemble and sell. The chances of finding enough votes to assemble a 60 or even a 51 percent coalition are surely lower in 2010 than they were in 1997. Following leaks that the Bowles-Simpson commission to reduce the federal debt has been considering a mix of entitlement reductions and tax increases, liberal bloggers denounced the “cat-food commission” and the “Social Security death panel.” Many conservatives, by the same token, have stated that proposals for any tax increases are non-starters.

Adversaries are supposed to make concessions during negotiations, rather than before and outside them. Maybe these unalterable positions are the kind of non-negotiable demands that savvy politicians make in the understanding that they’ll wind up getting altered as talks get serious. Between the rise of the Netroots and the Tea Party since Bill Clinton and Newt Gingrich held their wary discussions, however, it’s clear that the determination not to yield has grown considerably stronger on both sides.

As a conservative, I’m completely sympathetic to the idea that America’s fiscal challenges should be resolved through spending cuts rather than tax increases. Bending the growth curve of federal outlays until they meet tax revenues that remain constant as a percentage of GDP is, for example, the essence of the Ryan Roadmap. But the numbers have to work. In America’s grave fiscal circumstances, a zero-tolerance policy on tax increases is governmentally tenable only if the dollars are there, if the politically feasible spending cuts are of sufficient size to steer the nation away from insolvency without higher taxes. This means it’s politically tenable only if the votes are there, in Congress and the country, for budget cuts of that magnitude.

Right now, the votes are not there. According to a New York Times poll from earlier this year, three-quarters of Americans believe “the benefits from government programs such as Social Security and Medicare are worth the costs of those programs.” Three-fifths of the people who express support for the Tea Party movement share that belief.

#page#Neither are the votes there for the large and widely applied tax increases that would be necessary to balance the budget without any spending cuts. Liberals and conservatives are both hoping that intransigence will be rewarded in the end. Liberals believe that when voters reckon with the spending cuts necessary to make the conservative fiscal approach work, they will accede to a policy based overwhelmingly on higher taxes. Conservatives believe that when voters realize the magnitude of the tax increases necessary for the liberal approach to work, they will swing decisively to the position that spending cuts are the lesser evil.

In the event neither side gets its way decisively, the resolution will be a combination of spending cuts and tax increases, either in the near future as a matter of choice, or later on in a desperate attempt to cope with a dire necessity like the one that befell Greece this year. Conservatives, dedicated to the success of the American experiment in self-government, have every reason to prevent the nation from descending into insolvency or mutating into a European social democracy. That obligation is not sufficiently discharged by insisting, against the weight of evidence from the past three decades, that tax cuts will pay for themselves, either by igniting economic growth or by forcing spending cuts.

The demands of conservative statesmanship in this situation call for making good governance possible by practicing smart politics assiduously. Every solid argument against more spending and more borrowing should be brought to bear, so that higher taxes or dangerous debts do not become the default option.

Here’s one argument: Conservatives would do well, by their cause and their country, to emphasize that the fact that a historical pattern is predominant — modern economies grow steadily, and their welfare states grow even faster — doesn’t make it right or wise. As a nation grows richer, it should at some point begin to devote a decreasing rather than increasing portion of its GDP to welfare-state spending.

America is rich enough to have spent more inflation-adjusted dollars on national defense in 2009 than we did in 1968 with 500,000 troops in Vietnam, even though we are devoting half as much of our GDP to national defense now as we were then. Had our defense policy been driven by the relentless quest to address and if necessary discover “unmet military needs,” we would still be spending roughly the same percentage of GDP on national defense that we did at the height of the wars in Vietnam (9.4 percent) and Korea (14.2 percent). We would, in other words, be spending hundreds of billions of dollars pointlessly.

Military spending has been constrained because it corresponds to objective conditions in the world beyond our shores. The objective conditions, domestically, are that long-term economic growth enhances the ability of more people to spend more of their lives providing for more of their own health care, education, and welfare through their own resources and precautions. Such prosperity should allow a welfare state to shrink relative to the size of the economy, even while growing in absolute terms, if needed, to assist the truly needy. By applying the same logic to welfare spending that we do to military spending, in other words, we can avoid the taxes and the borrowing that would change America irrevocably, and for the worse.

– Mr. Voegeli, a contributing editor of The Claremont Review of Books, is the author ofNever Enough: America’s Limitless Welfare State and a visiting scholar at Claremont McKenna College’s Salvatori Center.

William Voegeli — Mr. Voegeli is a senior editor of the Claremont Review of Books and a contributor to the American Project at the Pepperdine School of Public Policy.

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