Magazine | December 31, 2011, Issue

How Speaker Newt Balanced the Budget

And why President Newt would not

In the United States, our political discourse is extraordinarily democratic, and therefore extraordinarily stupid, and the immortality of certain myths — the Social Security “trust fund,” the impact of foreign-aid spending on the federal budget — makes it nearly impossible to discuss the fundamental facts of American government. Here are two phrases that should be struck from our political lexicon, their use designated an occasion for corporal punishment: “Reagan deficits” and “Clinton surpluses.” Presidents do not write the national budget, balanced or otherwise, nor do they create deficits or surpluses. Congress does that, by passing tax bills and appropriations bills. There were no Reagan deficits, nor were there Clinton surpluses: There were Tip O’Neill deficits and Newt Gingrich surpluses.

The governors in the Republican presidential field all can boast of having worked with legislatures to achieve balanced budgets. Rick Perry and Jon Huntsman can boast of having done so in situations that replicate in miniature the national fiscal picture — locked-in spending outpacing tax revenues reduced by recession and subsequent slow growth — but with an important difference: Unlike the federal government, states and cities do not really have much choice but to balance their budgets. It is a lucky thing that this is so, and one that bears further consideration: Most of our states and cities operate under legal prohibitions against operating deficits, but the federal example suggests that restraints on borrowing are easily set aside, and many of our states and cities have excellent credit ratings that would enable them to borrow at attractive rates. The real constraint here seems to be an informal norm against states’ and cities’ borrowing to finance regular operating deficits, even though they do borrow large sums for capital projects.

No such norm prevails at the federal level, where balanced budgets or surpluses require a combination of sober fiscal realism and delicate bipartisan diplomacy. Newt Gingrich has many fine qualities, but he is not the most obvious man for the job when the job calls for realism and delicate bipartisan diplomacy, virtues with which the former Speaker is associated by no sentient political being. But the facts are not to be denied: Under a fiscal course set by Newt Gingrich and his Republican congressional allies, the United States reported a budget surplus of $69.3 billion in 1998 and of $125.6 billion in 1999. Gingrich resigned from the House that year, but it was the continuation of Gingrich’s policies that produced the subsequent surpluses of $236.2 billion in 2000 and $128.2 billion in 2001. But this is not a conservative success story, conventionally understood: Gingrich balanced the budget in no small part by knuckling under to Democratic demands, including relatively high taxes, and by helping to entrench the myth that our entitlement liabilities are only a kind of fiscal hypothesis, something that can be made to vanish into the fiduciary ether with a flourish of the magical wand of government accounting practices. While Speaker Gingrich does deserve some credit for the millennial budget surpluses, President Gingrich would be crucified for attempting to revisit the policies that produced them — and conservatives would drive in the nails.

The foremost contributor to the Gingrich surpluses was taxes, and the main contributor on that front was the payroll tax, receipts from which far exceeded payouts to Social Security and Medicare. Because such excess payroll-tax receipts are by law automatically spent on federal securities, they camouflage the true extent of federal indebtedness. Thus the fiscal paradox of the Gingrich surpluses: Even though the federal government reported hundreds of billions of dollars in budget surpluses, the total national debt continued to climb, by $113 billion in the surplus year of 1998, by $130 billion in 1999, by $18 billion in 2000, and by $133 billion in 2001. What happened was in fact a redistribution of federal liabilities from publicly held debt to intragovernmental debt in the form of securities held by the so-called trust funds that support the major entitlements according to the epic fiction that is the federal ledger. The debt held by the public in the form of Treasury bonds and notes went down, but intragovernmental debt went up by an amount that exceeded that reduction. This of course makes those Gingrich surpluses look less attractive in retrospect. More important, it points to the major fiscal challenge in the coming years, when the entitlement programs will be the major driver of federal deficits. Social Security already is in a permanent deficit, and, with some $100 trillion in unfunded liabilities, Social Security and Medicare will prove impossible to sustain, especially with an aging population. If deficit hawks can take heart from anything, it is that the major Republican presidential contenders have credible plans for reforming Social Security and that most of them — the notable exception is Gingrich — have credible plans for reforming Medicare.

#page#But the Gingrich surpluses were not accounting gimmickry only. There were real reforms, too — reforms that were enacted by and large over Republican objections, Gingrich’s in particular. Again, a very large role was played by taxes, specifically by the tax increases in the 1990 budget deal between Pres. George H. W. Bush and congressional Democrats, and the tax increase in the 1993 budget. The former so enraged Gingrich, who was at the time the minority whip, that he hung up on chief of staff John Sununu when Sununu called with the news. The latter helped to bring Republicans to the majority — every Republican had voted against it — and Gingrich to the speakership.

It also increased federal revenue substantially by steeply increasing the top tax rate (from 31 percent to 39.6 percent), inflicting new taxes on the middle class (raising the gasoline tax, for instance), raising the corporate-income tax, lifting the income cap on Medicare taxes, and increasing taxes on Social Security benefits, among other things. Conservatives, in thrall to something called Hauser’s Law — which is a law of economics in the same sense that Lady Gaga is a lady — argue that federal revenues always stay roughly the same regardless of tax rates, but this is demonstrably untrue. Federal tax receipts neared 21 percent of GDP in 2000, about one-sixth higher than their post-war average of 17.7 percent. The difference between 18 percent and 20 percent may not seem like very much, but when you are talking about a share of an economy equal to a quarter of the world’s economic output, the numbers are very large indeed. In fact, with the exception of World War II, there was not a year in American history in which federal spending broke 21 percent until 1975, when there began a long run of very high spending that ended with the Gingrich ascendancy in 1994. When Republicans won their landslide in 1994, federal spending was 21 percent of GDP; by 2000, it was down to 18.2 percent — a real reduction in federal spending relative to the size of the economy, if not in absolute terms. You may not remember 1994–2000 as a time of savage austerity measures: We had welfare reform, a reduction in military spending, and generally sensible restraint that endured until the peculiar economic ideas of Pres. George W. Bush and Rep. Tom DeLay went into effect, with the goal of reducing the putative budget surplus — to “return the surplus to the American people,” as DeLay put it — as though such surpluses were a permanent victory, and as though the real debt were not mounting in spite of them. If tax receipts today were comparable to the millennial levels, then the 2013 deficit would run about $418 billion; if we are collecting taxes at the current level, that deficit will be $1.4 trillion.

Conservatives are justified in balking at the idea that one in five dollars should be consumed by the parasitic class in Washington. But the lowest level of federal spending that Republicans have brought us in recent decades was 18.2 percent in 2001. Until such a time as there is evidence to the contrary, it probably is safe to think of 18.2 percent as a practical floor on federal spending, regardless of which party is in power. Perhaps some future Republican majority will do a better job of containing costs, but there is scant reason to think that likely: The most effective statutory constraint on federal spending, the so-called Pay-As-You-Go (PAYGO) rules, were undermined by Republicans, who chafed under the rules’ constraints when they desired to cut taxes without cutting spending.

This is a case, then, of picking our poison. Tax increases are undesirable for any number of reasons, some of them moral — if you go to bed with the devil, expect to wake up with a burning sensation — and some economic: Higher taxes may retard growth and certainly will cause massive amounts of capital to be reallocated from productive purposes to unproductive ones. Tax increases are a drag on growth, but so are endless substantial deficits. The best method of balancing the budget would be spending cuts, but there is no constituency in Congress, or in the country, for cuts of the requisite depth — and, in any case, those cuts would have real economic effects, too, though effects that probably would be less undesirable in the long run than entrenching the federal state at its current bloated level. The 2013 deficit will probably run right around $1 trillion; if Republicans are not prepared to cut $1 trillion in spending, then they should make their peace with tax increases — or make their peace with endless deficits, until such a time as the weight of them produces an avalanche that will destroy the economy of this country and seriously disrupt that of the rest of the world. Those are the choices.

#page#Incidentally, except where noted, none of the deficit numbers above includes the mounting liabilities for Social Security and Medicare, which are the most significant fiscal threats as we move forward. Put simply, no balanced-budget program that fails to incorporate robust entitlement reform will prevent the eventual insolvency of the United States. But no entitlement-reform deal that neglects the rest of the deficit will prevent that outcome, either. The trick is to do both, and Newt Gingrich’s experience suggests that higher taxes — and let’s not use the euphemism “revenues” — probably will need to be a part of that picture.

Like higher taxes, bipartisanship is not a good on its own; given the perverse character of the contemporary Democratic party, it would be better to describe bipartisanship as a necessary evil. Faced with the master politician Bill Clinton, Gingrich had little choice but to cut relatively liberal deals, and contemporary Republicans will have little choice about doing so, either, regardless of what happens in 2012: A long-term solution, one that will stick, will require buy-in from both parties, and to proceed as though this were not the case is deeply unconservative, to the extent that wishful thinking is unconservative. The essential thing for Republicans to do is to identify and encourage the best deficit-reduction impulses that the Democrats harbor. (This may require the use of an advanced microscope.) The PAYGO rules, for example, were hated by congressional Republicans, because Democrats used them against unfunded, irresponsible tax cuts of the sort in which congressional Republicans specialize, and PAYGO finally was abandoned in 2002. Subsequently, the deficit more than doubled, from 1.5 percent of GDP in 2002 to 3.2 percent in 2008, then leaping to 10 percent of GDP in 2009. PAYGO was not perfect, but it is preferable to trillion-dollar deficits. Bipartisan compromise is not perfect, either, but it beats default and national impoverishment.

We are well past the point at which it is sufficient to achieve moral victories, ideological victories, or mere political victories. Political victories are a necessary but not a sufficient condition for achieving the business at hand, which is, to put it baldly, a matter of national survival. That fact already is beginning to sink in among Republican budget hawks: “Broad-based tax reform” is a Republican euphemism for tax increases, though it is not only a euphemism: It is important that our tax code be reformed along the most growth-oriented lines, those that minimize the distortion of economic decision-making, rather than along the class-warfare lines preferred by Pres. Barack Obama and his congressional allies. Phasing out the deductions for mortgage interest, state and local taxes, charitable giving, and the like would go a long way toward closing future deficits while removing destructive distortions from the tax code. It is even more critical that we enact similar reforms in the handout-ridden corporate tax code. A general policy of flattening and simplifying the tax regime — a model that has partisans in both parties — is greatly preferable to further politicizing the code with more brackets and more exemptions that encourage rent-seeking on a massive scale.

If Republicans find themselves in control of both chambers of Congress and the White House after 2012 — which seems to me the most likely outcome at this point — they will need to act quickly and decisively to pass a legislative program that reforms the major entitlements and brings spending and taxing into some kind of sensible alignment. But in order to balance the budget, a President Gingrich would almost certainly be obliged to accept policies that Speaker Gingrich opposed, and that most Republicans will continue to oppose — until, once again, they have no choice.

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