Advancing a Free Society

Why There Is No Bipartisan Budget Deal

Monday, December 19, 2011

This morning e21 published my piece explaining why a bipartisan budget accord has been so elusive.  I believe it to be one of the more important pieces I've written this year.

Excerpts:

The joint deficit-reduction committee’s failure was symptomatic of a larger underlying problem: there are multiple reasons why a bipartisan budget accord is now extraordinarily difficult to attain.  To make progress in 2012 and beyond we must understand the substantive factors inhibiting a budget deal, and develop effective methods for dealing with them:

Factor #1: In the short term, there is no bipartisan consensus that the deficit should be reduced. For the past three years we have run historically high deficits that have both spending and revenue components. But the persistently weak economy has many calling for still more deficit spending as a stimulus measure. Until enough decision-makers perceive a limit to the stimulus efficacy of increasing these record-high deficits, no bipartisan process is likely to produce significant near-term fiscal improvement.

Factor #2: The long-term problem is huge -- so a solution is difficult. This is probably obvious to most readers.

Factor #3: Under current law the long-term problem is entirely attributable to projected spending; it has no revenue component. Over the long-term under current law, both federal revenues and spending would far exceed historical norms (see graph). This increases the difficulty of reaching a long-term budget deal. In this context, the right finds it nonsensical to discuss further tax increases. The left, however, feels as though it is losing a negotiation if discussions focus solely on addressing the spending growth at the root of the problem.

Factor #4: The long-term spending problem is entirely attributable to growth in Social Security, Medicare, Medicaid and other health entitlements. This further adds to the difficulty of a budget deal, as both political parties find it much more difficult to constrain the growth of these politically-sensitive programs than to cut other spending.

Factor #5: The impermanence of federal income tax policy is a huge problem. Under current law all individual income tax rates will rise at the end of 2012, while the AMT will affect more taxpayers every year indefinitely. Neither party wants this to happen. Recognizing this, CBO provides an “alternative fiscal scenario” – effectively a current policy projection. Deficits would become untenable under this scenario far sooner than under current law. This disconnect between current tax law and current tax policy engenders paralysis. Over the long term, conservatives look at the rising current-law tax path and refuse to raise it any higher. Liberals look at the current-policy tax path and argue that revenues need to be raised.

In view of these factors, a few possible solutions suggest themselves:

  1. Bipartisan negotiators should commit up front that any rates resulting from a budget deal will be permanent. Then they can argue over what those rates should be.
  2. Of the negotiating approaches suggested to date on taxes, the Simpson-Bowles commission approach seems the most promising of bearing fruit. Under this approach, the left would win an increase in projected revenues (relative to the current-policy baseline), while the right would win a decrease in tax rates.
  3. The two parties will find it hard to agree on how much to constrain entitlement spending, and should thus try to find creative ways around those disagreements. If half of America wants to spend 15% of GDP on entitlements and is willing to be so taxed, whereas the other wants only to spend 10%, we should revisit the question of whether all the spending growth must occur at the federal level, or whether some of it could occur at the state level -- in states where such cost growth is popularly supported.

A budget deal is unlikely until we find a means of dealing with the specific factors currently rendering it so elusive. And the two biggest structural obstacles we face are the impermanence of current tax rates, and the fact that the budget problem stems entirely from rising federal entitlement spending. A viable budget framework needs to resolve both.

Read Charles Blahous’ full post…

(photo credit: buddawiggi)