Edit: Oddly enough, I’m not the only person who thinks the debt-ceiling standoff is different, this time around. See this article in Politico.
Recall what happened the last time we had a balanced budget.
One of the reasons I can’t take Republicans seriously on the Federal debt is that I can recall what happened the last time the Federal government ran a surplus. And based on that, the last thing modern Republicans will tolerate is a balanced budget.
Let me just briefly review that.
George H.W. Bush was the last truly fiscally conservative Republican President.
When running for President against Reagan, he had the good sense to characterize Reagan’s “supply side” economics as voodoo economics. In particular, he was a harsh critic of the central tenet of Reaganomics, that you could balance the Federal budget by cutting taxes on the rich. It was that — the magical belief in the Laffer Curve — that truly put the voodoo in voodoo economics.
Then he became Reagan’s Vice President. And ceased all criticism of Reaganomics.
But even though he kept his mouth shut, he didn’t lose his common sense. And so, under his presidency, he set into place the slow and modest change in taxation and spending policy that put the Federal government on a path toward a balanced budget.
He didn’t criticize Reaganomics, but he did what he could to patch up the fiscal damage. He inherited the then-unprecedented peacetime deficits of the Reagan era, and his guidance was responsible for the inflection point in that budget deficit curve. That’s what the arrow is pointing to. That’s when the budget deficit situation began to turn around.
Source: Federal Reserve of St. Louis (FRED) system. Annotations are mine.
I should point out that he achieved that at considerable personal political cost. Remember “read my lips, no new taxes.” When push came to shove, he didn’t let that bit of political theater get in the way of fiscal responsibility. That turnaround in the deficit situation did, in fact, involve tax increases.
Clinton did little more than follow through on the fiscally conservative path laid out in the Bush Sr. administration. And it was that back-to-back pair of fiscally conservative presidents — Bush Sr. and Clinton — and a decent economic climate — that finally pushed the Federal budget back into surplus, at the end of the Clinton administration.
That’s the little mountain top that peeks about the X-axis of the graph above. That’s the last time the Federal government ran a budget surplus.
Because, at that time, Republicans began the drumbeat for eliminating that surplus. The phrase they cooked up was the “harmfully large budget surplus” projected to occur absent their actions. I can recall the always-unintelligible Alan Greenspan, then Fed chair, pushing the line that action must be taken to avoid those harmfully large budget surpluses.
Seriously, I’m not making that up. Republicans were seemingly united in their need to eliminate the harmfully large budget surplus that had been created by the combined actions of Bush, Sr. and Clinton.
And so, with Bush Jr, all it took was a couple of tax cuts, a couple of totally random wars, and a big handout to corporations and the elderly (Medicare Part D, drug coverage), and voila: They succeeded in putting the budget firmly in the red. So that they could all go back to bitching about the budget deficit. Because we all know who’s to blame for budget deficits.
(Most people don’t realize that Part D was mostly a handout to corporations, and only secondarily a handout to the elderly. Most elderly Americans had drug coverage prior to Part D. Much of that was via employer-sponsored coverage secondary to Medicare. And most of the Part D money actually went to employers, who continued that existing drug coverage, that they were already providing to their retirees.)
And now?
All of the above is just a reminder to watch what they do, not what they say.
And so, as House Republicans make all this noise about not raising the debt limit without a deal to balance the budget (in 7 years, or 10 years, or something), I just can’t take it seriously.
Maybe there has been that big a change in the Republican party, since the Bush Jr. presidency. But I doubt it. I think the same forces that wrecked the Bush Sr/Clinton fiscally conservative position are still hard at work. By their actions, they showed that the last thing they would tolerate was a fiscally sound Federal government. I just can’t believe that they’ve now had a profound change of heart.
Still not convinced? Google “starve the beast“. Running big deficits has been a long-standing, explicitly-stated policy goal of the Republican Party. It has been their main strategy for attempting to limit government spending. Cut taxes, run huge deficits, and let that big deficit “starve the beast” of the Federal government.
And repeat.
Unless they’ve somehow repudiated a policy of “starve the beast”, if we ever reach a fiscally sound position in the Federal government, they’ll just do what they did to the Bush Sr./Clinton surplus.
And repeat.
Just FYI, below you see Federal spending as percent of the U.S. GDP. Since the time of President Reagan, that’s been 20%, plus or minus, except in times of catastrophe. A little over 20% for Reagan, a little under 20% for Clinton. But, absent crises, we’re going on half-a-century where that has stood around 20%. There’s a mythology that just won’t die, about ever-growing Federal government and so on. That more-or-less hasn’t been true for half a century. But the folklore lives on.
I believe FY 2023 Federal spending came in around 22% of projected GDP. Or about what it was in Reagan’s time. Just thought I’d get that straight. Some folklore simply will not die.
And then there’s that pesky problem of actually coming up with a plan to balance the budget.
The other reason I can’t take House Republicans seriously is that it takes a lot of thought and effort to come up with anything resembling a plausible plan to balance the budget. Let alone one that has a hope of passing both houses of the Congress and being signed by the President.
My guess is that they’ll never get beyond posturing. By that, I mean putting out hard-and-fast rules that would actually make it impossible to balance the budget. But rules that sound fiscally-conservative-ey.
Let me just briefly explain the magnitude of the problem.
Below is the top-line summary (Table 1-1) from the May 2022 Congressional Budget Office budget baselines, from “The Budget and Economic Outlook: 2022 to 2032″, https://www.cbo.gov/publication/57950
This is where the CBO thinks we’ll be, as of Federal fiscal year 2032. Ten years from now. What I have shown in red is what I’d call the everything-on-the-table solution. Take the projected deficit, and take half the dollars out of reduced (non-interest) spending, and the other half out of increased taxes.
So, one way to eliminate the deficit in ten years is to start now, put everything on the table, and spread the pain equally. Every year, for the next decade, you’d have to raise taxes by about 1.7% per year, and cut all spending by about 1.5 percent per year. And at the end of that time, the budget would be balanced.
Doesn’t sound like fun. But it doesn’t sound flatly impossible, either.
But, suppose that you, yourselves are spectacularly unbalanced. Which I would say is a fair description of House Republicans at this point.
Let’s say that, as a matter of political philosophy, you absolutely refuse to increase taxes from their current levels. But all other spending can be cut. Then the cuts, over ten years, look like this:
So you’d be cutting Social Security and Medicare (the bulk of mandatory spending) by 29%. And you’d be cutting Department of Defense (about half of discretionary spending) by 29%. That, over the course of a decade.
But let’s say that you also consider cutting Social Security and Medicare to be a political third rail. And you won’t cut taxes. In that case, the only way to balance the budget is to eliminate the entire rest of the Federal government. That includes, by the way, the entire Department of Defense.
Conversely, let’s say you refused to change taxes and you refuse to cut the Department of Defense. In that case, you’re going to have to cut all other Federal outlays by more than one-third. That means a one-third reduction in Social Security and Medicare, for (non-) starters.
Here’s my central technical point. It’s (barely) feasible to balance the budget over a ten-year stretch, just as Bush Sr. and Clinton did. Even now, you could close the budget gap over a decade with a combination of modest annual increases in taxes, and modest annual reductions in all spending.
But as soon as you start putting big chunks of revenues or spending off-limits, any fix that satisfies the math looks ridiculous on its face. If you do the math honestly, the proposed changes become so large that I don’t think anyone could seriously believe that you could pass legislation to accomplish them.
Obviously, the next thing to do will be to start fudging the numbers. If and when you see House Republicans start to talk up “dynamic scoring”, then we are returning to the good old days of voodoo economics. And the numbers turn to mush in the process.
But even with that, based on all the hard lines that already appear to have been drawn by various parties, I don’t think the House Republicans are going to put together any practical plan to accomplish a balanced budget in ten years.
It takes a lot of skill, time, and compromise to turn around a big deficit situation. Bush Sr and Clinton had that. I don’t think Speaker McCarthy does.
And yet, House Republicans have repeatedly and unambiguously stated that absent such a plan, they refuse to raise the debt ceiling. A plan that they are almost certainly unable to come up with on their own. And that nobody is going to produce for them.
And that’s why I think, this time, the U.S. actually is going to default on its debt.
Not because it’s smart or rational. Among other things, as I explained in my first post in this series, I think that when Uncle Sugar’s checking account balance is finally zero, and the debt limit becomes binding, we’ll be in an instant, sharp recession.
I truly believe that we’re going to default because many House Republicans just haven’t had a hard look at the numbers. They truly have no idea how hard it will be to produce a plan for a balanced budget. But there will be a huge loss of face if they increase the debt ceiling without it.
So, yeah, this time, I think it’s for real.
