"Strategic Deficit" Redux

President Ronald Reagan's budget director David Stockman coined the phrase "strategic deficit" to describe the usefulness of creating long-term budgetary shortfalls to undercut political support for governmental spending. As Stockman privately told Sen. Daniel Patrick Moynihan in 1981, accruing large deficits "gives you an argument for cutting back programs that really weren't desired and giving you an argument against establishing new programs you don't really want." Moreover, strategic deficits can enable opponents of public investments to sound compassionate -- "We can't steal from our children to pay for our short-term desires."

Of course, the enormity of today's deficit is, to a large extent, an outgrowth of the severe economic downturn, which depleted tax revenues while generating higher governmental spending as automatic safety-net stabilizers and the stimulus package kicked in -- responses that significantly softened the economic blow relative to what it otherwise would have been. But a large chunk of today's deficit was handed down from President George W. Bush to tie Democrats in knots. With the Obama administration now deciding to endorse a debt commission and a discretionary spending freeze, it is more than a little demoralizing to see that the president and the Democratic Party still haven't recognized that it's time to stomp on Stockman's trap rather than becoming ensnared in it yet again.

Recall that H. Ross Perot's impressive third-party showing in 1992, built on his criticisms of the mountain of debt accumulated under Reagan and George H.W. Bush, led President Bill Clinton to abandon the economic stimulus and investments tied to his "Putting People First" campaign agenda. Instead, he pushed Congress to enact deficit-reduction legislation, which passed by the narrowest possible margin without a single Republican vote in either the Senate or House of Representatives. The legislation included tax-rate increases on high-income earners, a 1 percentage point increase in the corporate income tax rate, a 4.3 cent per-gallon increase in the gasoline tax, a cut in military outlays, new constraints on Medicare and other entitlement spending, and a freeze on the cost of programs subject to annual appropriations. Republicans uniformly described the legislation as a job killer.

As it turned out, both the unemployment and inflation rates dropped throughout the decade. The economy boomed from 1995 to 2000, producing broadly shared wage increases for the first time in decades. A federal budget deficit of 4.7 percent of gross domestic product in 1992, projected at the time to rise to 5.5 percent of gross domestic product by 2000, transformed into an actual surplus of 2.4 percent of GDP by the end of the decade -- a massive swing of nearly 8 percentage points.

Many factors went into those gains beyond the 1993 legislation, including a soaring dollar, falling oil prices in 1997-1998, a surging stock market (which ultimately became hyperinflated), and the acceleration in long-dormant productivity as advances in information and communications technology diffused through workplaces. It would be hard to imagine what more the Democratic Party could have done, though, to win the public's trust for fiscal responsibility.

But what lasting good came of all that hard-earned deficit reduction, either for American citizens or the Democrats? Newly elected President George W. Bush responded to the economic downturn he confronted upon taking office with large tax cuts, mainly benefiting the wealthiest Americans, eradicating the $4 trillion to $5 trillion in previously projected surpluses after just eight months in office. His reaction to the return of deficits was that it was "incredibly positive news." Why? Because it would put Congress in a "fiscal straitjacket." The conservative columnist Fred Barnes wrote, "The most important fan of a strategic deficit in Bushland: Bush."

Now the economic and political advisers of President Obama, most of whom served in a Clinton administration that understandably came to equate deficit fighting with economic and political success, are changing the subject to budget shortfalls when economic conditions remain far worse than anything encountered during the 1990s. The Congressional Budget Office forecasts that unemployment, now hovering above 10 percent, is likely to remain over 8 percent even two years from now in the absence of significant governmental action to create jobs. But conceding control of debate to the deficit hawks has reduced the political chances for the bold actions needed to improve both the nation's economic prospects and the Democrats' electoral chances.

How might Democrats, at least those who are so inclined, trump Stockman's strategy? President Obama himself, in response to a question from Prospect co-founder Robert Kuttner in December, succinctly and eloquently described the best way to frame the purported choice between job creation and deficit reduction: "If we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes, and businesses that are making profits have taxes, are paying taxes. … That's not always the dialogue that's going on out there in public, and we're going to have to do a better job of educating the public on that."

It's never too late to try. Beyond that, the administration should go back to emphasizing how the still-not-quite-dead health-care legislation would actually reduce long-term deficits, while including initiatives that hold enormous promise for gaining control over the soaring health-care costs that underlie all the scary long-term forecasts. And is it really so politically unthinkable for Democrats to say that they'll start negotiating spending cuts when Republicans express a willingness to curtail at least some of the myriad special tax breaks for wealthy investors and sundry industries? The truth is that federal balance sheets and the complicated numbers that fill them ultimately don't connect to the lives of actual voters. Social Security and Medicare made Democrats popular in ways that lasted because they improved the security of generations of Americans. Improving economic security and opportunity for citizens, which will strengthen the economy and thereby reduce long-term deficits, should be where the administration focuses its laser.

The period of governance that began with Reagan and ended with Bush in 2008 was dominated not only by conservative ideology but also by bipartisan alarmism over long-term federal deficits. It seemed that era would come to an end when Obama and the Democratic Party won decisively. But apparently Democrats still haven't learned even in the midst of an economic crisis that prioritizing federal deficit reduction is a game for suckers. Somewhere David Stockman is having yet another laugh.

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