A Crisis Isn’t the Prerequisite to a Budget Deal
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 there’s 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.
[IMGCAP(1)]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 what’s needed when it comes to the budget: There’s 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.
It’s important to note that these aren’t 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.
All of this indicates that the common wisdom is wrong: A crisis may not be the fiscal magical elixir common wisdom says it will be. Even if a crisis occurs, it either may not be attributed to the budget in a way that will change the politics enough to allow spending cuts and revenue increases to be enacted, or the opposite of what’s needed — spending increases and revenue reductions — may be the preferred policy choices at that time.
Relying on a crisis to get the discussion moving again is also a mistake because, contrary to popular opinion, that’s not what will actually change budget politics. It’s the second half of the equation — understanding the pain that a budget-induced crisis will cause — that will increase demand for action.
Recognition of this has been all but missing from the federal budget debate. While there has been a great deal of talk about what will happen to the economy as a whole if the deficit isn’t reduced and the debt isn’t stabilized, most of the charts, graphs and other analyses about what will happen haven’t been translated into what it will mean for individuals. Combine that with the “crying wolf” nature that many perceive about the previous warnings on the deficit, and it’s easy to see why the potential personal pain from not dealing with the budget is downplayed, given short shrift or completely ignored.
That’s what has made the need for lower federal spending and higher taxes the very tough sell that it has become.
When you compare the discussion about the so far very general macro dangers of federal deficits and government borrowing with the specific increase in taxes or spending reduction that are mentioned as possible solutions, it’s almost a political no-brainer.
But that type of specific information simply doesn’t exist. Instead of explaining what personal changes (buying a smaller home, renting instead of buying, not buying a new car as often or at all, having to work longer before retiring, etc.) might be forced on individuals if the deficit isn’t dealt with and debt isn’t reduced, voters are typically only presented with the options that the government should consider. Not only is that type of information not going to move the budget debate needle, it might very well end up resulting in the type of fiscal crisis that otherwise could have been avoided.
Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”