In the wake of the fiscal problems in Greece, the common wisdom being repeated with increasing frequency is that the only way a federal budget deal will be reached (indeed, the only way serious talks will even get started) will be if theres a crisis in the U.S. that is incontrovertibly blamed on the deficit and national debt. The assumption is that voters will have to feel the actual pain from a widely acknowledged budget-caused catastrophe before they move away from their existing set-in-stone positions against cutting spending and increasing taxes.
Unfortunately, there are two fatal flaws with this thinking.
First, as the public response over the past two years to the U.S. recession has conclusively demonstrated, an agreement on the cause of a crisis will likely be as hard to reach as an agreement on a solution. This is especially true because the deficit is often blamed for causing problems even when that makes little or no sense and using it has become a political strategy as much or more than a substantive finding. For example, starting the day after the almost 23 percent drop in the Dow Jones industrial average on Oct. 19, 1987, many in Washington, D.C., said it occurred because Wall Street was disappointed that the deficit reduction negotiations happening at that time appeared to be going nowhere. That was almost total nonsense, but the allegation stuck nonetheless.
Second, and as has also been rediscovered over the past two years, the typical federal response to almost every crisis is to do the opposite of whats needed when it comes to the budget: Theres almost always impossible-to-resist political pressure to increase spending and decrease taxes.
For example, a military problem typically results in immediate increases in Pentagon spending, and the Department of Defense budget seldom, if ever, returns to the previous level when it ends. Floods, earthquakes and other natural disasters almost always produce new or extended federal tax breaks and spending increases for the affected individuals, communities, industries and businesses. And an economic downturn seems to demand tax cuts and spending policies that end up increasing the deficit and debt. Typically, the debate is only about what mix of tax and spending changes should be used.
Its important to note that these arent just ad hoc responses to tragedies; permission to incur deficits and debt when crises occur has actually been imbedded in federal budget procedures.
Since the Gramm-Rudman-Hollings Act was adopted in 1985, wars and recessions have always been the two specifically stated exceptions to the budget control rules. Restrictions could also be ignored if Congress and the president agreed that an increase in the deficit and government borrowing was needed because of some other type of emergency. So far this has included everything from droughts, floods and excessive cold or heat, to crop failures and a bridge collapse.