Don't Fear the Fiscal Reapers

For those of us who had a reasonably close view of the early months of the Clinton administration, certain parallels to the current political situation are eerie. One is this: The price of a landmark domestic accomplishment seems to involve turning next to the federal deficit, particularly reducing spending on Medicare, Medicaid, and Social Security -- aka "entitlements." In order to obtain the 50th vote on his 1993 budget reconciliation bill -- which created new programs such as direct student loans, and realigned federal spending and tax policy toward progressive goals -- President Bill Clinton had to promise the quixotic, self-important Democratic senator Bob Kerrey that he would create a commission on entitlement spending.

Today the pressure comes from Blue Dog Democrats in the House, Senate Budget Committee Chair Kent Conrad, and the enormously well-funded advocacy infrastructure constructed to warn about deficits, with the Peter G. Peterson Foundation at its center. They argue the political process itself cannot make the choices needed to deal with long-term budget deficits. Reducing the deficit requires an extra-political structure, such as a bipartisan commission, whose recommendations would be voted up or down in Congress rather than horse-traded away.

The case against today's deficit hawks, and particularly their framing of the problem, is very strong; you've read it at the Prospect before and you'll read it here again. The best economic argument is that to define the problem as entitlements, and to give cuts in entitlement spending priority over reversing the Bush tax cuts, would amount to a massive redistribution of well-being and economic security away from the elderly and vulnerable in favor of the wealthiest Americans. The strongest political argument is that for Obama to create a bipartisan commission at this point is not only anti-democratic, it gives the conservative Republicans a level of power in the process that they have not earned -- either at the ballot box or by good-faith participation in the process of governance. Nor are these the only good arguments against the commission.

There's also a case to be made that a commission focused on long-term deficit reduction might not be the worst thing to happen -- and could do some good. Let me try to marshal the arguments for that position. Before I do, let me be clear -- this has nothing to do with this year's deficit, or next year's. For the short- and medium-term, deficit spending is a positive good, needed to generate economic growth, and as the president told Prospect co-founder Robert Kuttner last week, "The single most important thing we could do right now for deficit reduction is to spark strong economic growth." But in the long term:

The problem is real
Unlike in 1993, when Clinton's budget had actually put the fiscal house back in order, and Kerrey's commission was a vanity project, this time there's no avoiding the long-term fiscal reality. According to the Center for Budget and Policy Priorites, under current spending and tax policies, by 2050, the deficit will reach 20 percent of gross domestic product, and the national debt will be 300 percent of GDP. That won't really happen, because the consequences would be unthinkable, but the sooner we get off that trend line, the less painful the choices will be. (This long-term trend has almost nothing to do with the uncertain costs of the bailouts of the financial system and the auto industry, or the economic stimulus, or the wars -- it's almost all driven by health-care costs and insufficient revenues.)

Talk is cheap
The deficit is always a convenient excuse for Blue Dogs to reject progressive policies -- even policies like health reform that would actually reduce the federal deficit -- while they support fiscally disastrous policies like permanent repeal of the estate tax. And for Republicans, the deficit is a bludgeon, even if in the same sentence they attack health reform's modest reductions in Medicare. A bipartisan commission creates a put-up-or-shut-up moment for political blowhards. That's more or less what happened to Kerrey's commission in 1994: By revealing that no one was really willing to make massive cuts to Social Security or Medicare, it quieted the cheap talk, for a while.

There is something to the political analysis
The Peterson Foundation case for a deficit commission is at heart a claim about politics, not economics, and it generally goes something like this: Democrats can't accept cuts to spending programs like Medicare, Republicans can't accept tax increases, and the only alternative is to get both in a room and have them accept some of each. That might have been an accurate diagnosis years ago but not today. The political problem today is that Republicans aren't willing to talk about tax increases or real spending cuts, and Democrats are willing to make some spending cuts but are still very cautious about tax increases of the level that will be needed. The phony parallelism is wrong, and responsibility for the political problem is not evenly shared, but that doesn't change the fact that a huge, irresolvable political problem exists. Perhaps Sen. Conrad was correct when he told The Wall Street Journal that "some sort of special process" was "inescapable." Such a process would allow the president to empower different Republicans (presumably including some who are not politicians), and, in effect, choose with whom he's willing to negotiate.

It might be the best hope for taxes
One way or another, we have to raise revenues, and this likely involves exceeding the boundaries of Obama's politically careful promise that only households with income above $250,000 would pay higher taxes. Democrats are as much of an obstacle as Republicans to confronting this reality, and as their political worries grow, it becomes almost impossible to see how to get revenue increases, such as a real reinstatement of the estate tax, on the table, without a commission. While the deficit hawks in the past overemphasized entitlements, rejecting tax reform as politically unlikely, more recently they have slowly moved toward an acknowledgement that new revenues are needed, possibly through a new tax such as a progressive consumption tax or the long-overdue financial-transactions tax. Commissions, when they succeed, give politicians cover to do things they know have to be done, and raising taxes is as good an example as there's ever been.

The entitlement problem really is a health-system problem
Peter Orszag, now director of the Office of Management and Budget, imbued the administration with the vital insight that the fiscal problem is not "entitlements" -- a budget category that simply refers to programs that aren't subject to annual appropriations decisions -- or demographic change but per-person health-care costs. Reducing Medicare costs doesn't have to involve, say, raising the age of eligibility but rather, requires system-wide reform that will bring health-care inflation closer to overall inflation. But health reform as it is evolving in Congress will make only a modest step in this direction, and cost-control measures have been the most politically problematic -- the mere hint of them created the basis for the "death panel" fear-mongering of last summer. But with the systems created under health reform in place, a commission might provide political cover not just for taxes but for the big systemic changes that will be necessary to rein in health costs and thus, Medicare and Medicaid.

A bipartisan or nonpartisan commission focused on long-term fiscal reform could do much harm to the American social contract, if it brutally cut entitlements while leaving taxes untouched. But, structured properly, it could also do much good, making possible some overdue decisions, getting cheap talk about the deficit off the table, providing political cover for revenue increases and real health-care cost reductions, and opening up the path to real investment in national priorities. Fortunately, the only people with the power to create such a commission seem to understand the difference.

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