Post fiscal cliff: The fix is in

January 2nd, 2013



We’ve been trying to deal with the national debt in this country for 30 years now. The fiscal cliff is just the latest failed gimmick. We’ve had more failed gimmicks than professional wrestling.

Failed? Yes, because the whole idea of the fiscal cliff was to force the federal government to put in place a long-term reduction of the national debt. And look what happened. Instead of reducing the national debt, the deal passed by Congress late Tuesday night will add $4 trillion to the deficit over the next 10 years, according to the nonpartisan Congressional Budget Office.

In the 1980s, we tried the Gramm-Rudman-Hollings law. If the federal budget missed its deficit-reduction targets, the law triggered across-the-board spending cuts (“sequesters”). Guess what? It never happened. Congress exempted 70 percent of the budget from sequestration.

A number of candidates have tried to run for president on a platform of deficit-reduction. They all failed. Starting with Vice President Walter Mondale in 1984: “Ronald Reagan will raise your taxes. So will I. He won’t tell you. I just did.” Goodbye, Walter.

Senator Paul Tsongas promised tough medicine in 1992. He declared that he was “not running to be Santa Claus.” His opponent in the Democratic primaries, Bill Clinton, proved that Santa Claus is a popular fellow.

Ross Perot ran on the deficit issue in 1992 and got 19 percent of the vote. Clinton believed Perot had created a constituency for deficit reduction. So as president, Clinton raised taxes in 1993. And the Democratic Congress got wiped out in 1994.

Congress nearly passed a balanced budget amendment to the Constitution in 1995. If nothing else works, let’s declare the deficit unconstitutional! The result would have gotten federal judges involved in the budget process for the first time.

We’ve had three blue-ribbon commissions charged with figuring out how to reduce the deficit. All three recommended a menu of spending cuts and tax hikes. The National Economic Commission delivered its report in 1988. It promptly got shoved aside when a new president got elected on a pledge of “Read my lips: no new taxes!” The Kerrey-Danforth Commission gave its recommendations in 1994. They promptly got shoved aside when a Republican Congress got elected for the first time in 40 years.

Congress set up the Simpson-Bowles Commission during the 2011 debt ceiling crisis. This panel recommended, you guessed it, a hefty menu of spending cuts and tax increases. (End the mortgage interest deduction!) But the report didn’t even get enough support from the commission members to force Congress to vote on it. Instead, we got . . . the fiscal cliff! Automatic spending cuts and tax hikes that would go into effect this year if Congress still had not passed a debt-reduction plan.

“We gotta figure out,” Senator Carl Levin (D-Mich.) warned after the debt ceiling debate, “how to avoid the train wreck we put in there to avoid the first train wreck.”

That’s what Congress just did. It didn’t pass a solution. It passed a fix.

Why do we keep doing this? Because the American public is not panicked over the debt. Voters know it’s a problem. But it’s not an impending crisis. Voters are not saying to officeholders, “Do something about the debt! Anything! Raise taxes! Cut entitlement spending! Do whatever it takes to get this problem solved. Or else we’ll throw you out of office!”

What officeholders hear from voters instead is: “Don’t you dare raise my taxes. Or cut Medicare, or Social Security. If you do, we’ll throw you out of office!”

The national debt is an establishment issue. Elites on Wall Street and in Washington worry about it. A lot. They demand austerity. They want to tell the people, “Do without! Pay up!”

That’s never going to work in a populist political culture like ours. It was easier to impose austerity measures in European countries that have elitist political cultures. And look at what happened. Economic disaster. Political meltdown. Governments falling left and right.

The United States narrowly averted its own austerity crisis this week. If we had stayed over the fiscal cliff for more than one day, the country could have gone into another recession. That would have made the debt crisis worse, with fewer employed workers paying taxes and more demand for unemployment insurance and food stamps.

The fiscal cliff was an artificial crisis created by Congress to force itself to reduce the debt. In other words, a gimmick. It did accomplish something. It forced Congress to raise tax rates for the first time in nearly 20 years.

It worked because President Barack Obama clearly had public opinion on his side. Obama had run for re-election on a promise to raise taxes on the wealthy — and every poll showed strong public support for doing just that.

The vast majority of American voters consider themselves middle class. What they mean by that is simple: “Neither rich nor poor.” So the public thinks it’s O.K. to raise taxes on the rich. It means, “not me.”

Every gimmick is an attempt to turn the national debt into a crisis. But the voters know the crisis isn’t real. Congress created it, and Congress can get around it with a fix. So if we can’t raise taxes or cut spending enough to get the deficit under control, what can we do?

The answer is simple, and painless. The deficit did disappear for four years (1997-2000). The economic boom — or bubble — of the late 1990s caused tax revenues to pour into the Treasury so fast that the country ended up with unexpected surpluses. And a debate over what to do with them. In the 2000 campaign, Al Gore wanted to put the money into a “lockbox.” George W. Bush promised to give it back to the people — and he did.

How did we end up with a surplus? One word: growth.

President Ronald Reagan knew that way back in 1985, when he said in his State of the Union speech, “The best way to reduce deficits is through economic growth.” It worked for Reagan in his second term. It worked for Clinton in his second term.

Obama is counting on growth to work for him in his second term, too. Because growth is not a gimmick.

This post was originally published by Thomson Reuters.