Book review: Reclaiming America’s fiscal freedom

By / 6.2.2014

There’s a lull in Washington’s budget battles, but it won’t last. Inevitably, the fight will flare up again, because the nation’s spending and tax policies are fundamentally at odds with what it will take to restore shared prosperity in America.

For now, though, it’s a relief to be spared another mortifying spectacle of fiscal brinkmanship.  After their 2010 midterm sweep, Republicans were convinced they had won a mandate for drastic cuts in federal spending. Spurning compromise, they shut down the government and repeatedly pushed the country to the brink of default. Such reckless antics shook investor confidence in the U.S. economy, triggered a credit downgrade and made America look like a banana republic.

While tea party zealots were chiefly to blame, Democrats didn’t exactly cover themselves with glory, either. President Obama lost his gamble that Republicans would relent in their opposition to tax hikes rather than let the budget sequester gouge big holes in defense spending. And by rejecting serious entitlement reform, Congressional Democrats allowed domestic spending to bear the brunt of deficit reduction.

After three years of fiscal sturm und drang, what did our leaders accomplish? Short-term deficits have been cut nearly in half, though some of the decline can be credited to economic recovery. The affluent pay a slightly higher tax rate thanks to Obama’s 2013 “fiscal cliff” deal. On the other hand, the Congressional Budget Office says that the spending cuts mandated by the 2011 Budget Control Act have slowed economic growth. Lawmakers left untouched the basic drivers of America’s long-run debt crisis: the unsustainable growth of “mandatory” spending and revenues insufficient to pay the nation’s bills.

Because the “grand bargain” eluded them, lawmakers sooner or later will have to go back to the fiscal drawing board. Only next time, rather than let conservatives frame the debate, Democrats should stop playing defense and make a progressive case for fiscal reform.

That won’t be easy. Many liberals fantasize that we can close our yawning fiscal gap (the national debt is $17 trillion and growing) simply by soaking the rich. From his Olympian perch at The New York Times, Paul Krugman hurls thunderbolts at “austerians” who supposedly want to foist a Victorian frugality on the country at the expense of growth. The charge fits conservatives like Rep. Paul Ryan, who demand even more draconian spending cuts, fiscal drag be dammed. But it’s untrue of progressive fiscal hawks, who are perfectly willing to boost public investment now so long as we also constrain the future growth of health and retirement programs.

Nonetheless, these advocates for fiscal reform need to move beyond abstract warnings about a rising debt-to-GDP ratio and tell a more compelling story about how the fiscal status quo undermines progressive principles and goals. Fortunately, Eugene Steuerle has done just that in a new book, Dead Men Ruling: How to Restore Fiscal Freedom and Rescue our Future. It’s a trenchant analysis of how we came to the current impasse, and an impassioned manifesto for reclaiming America’s “fiscal freedom.”

A Washington tax and budget heavyweight now with the Urban Institute, Steuerle reminds readers that arguments over spending, taxes and debt have powerfully shaped America’s political evolution. Controversy over how to pay the Revolutionary War debt roiled the early republic, prompting the adoption of a new Constitution as well as the compromise that put the nation’s capital in Washington. The need to finance a stronger and more competent national government was the catalyst for key Progressive era reforms, from the income tax to the Federal Reserve. Now, says Steuerle, America has arrived at another fiscal inflection point.

His book highlights three core dilemmas. First, as the title suggests, fiscal decisions made by dead or retired politicians have radically constrained contemporary lawmakers’ freedom of action. Second, the federal budget increasingly supports present consumption (mostly by the old) at the expense of investment in our children and future growth. Third, politicians can’t launch fresh initiatives to tackle contemporary problems without either piling on new debt or reneging on old commitments.

For most of U.S. history, says Steuerle, politicians could spend or cut taxes, confident in the knowledge that economic growth would make budget deficits temporary and create fiscal space for new initiatives. But now the cost of maintaining the government’s cumulative commitments exceeds expected revenues. To illustrate this dynamic, Steuerle and Tim Roeper have constructed a “Fiscal Democracy Index.” It measures the extent to which future revenues have already been claimed by permanent programs (including interest on the national debt). The Index has been declining for decades and fell below zero in 2009, meaning that “every dollar of revenue had been committed before the new Congress walked through the Capitol doors.” Since getting and spending is largely what elected representatives do, slapping fiscal handcuffs on them incapacitates our government’s most democratic branch.

This erosion of U.S. lawmakers’ “fiscal freedom” is a bipartisan achievement. For decades, Democrats have expanded social welfare benefits, especially for Medicare, Medicaid and Social Security. Soon, says Steuerle, elderly couples will qualify for an average of $1 million in old age benefits. But because these programs grow automatically each year, by formula, Congress never deliberates over the wisdom of allocating a growing share of the budget to older Americans and a declining share to everything else.

Since the Reagan years, Republicans have been similarly generous in expanding tax breaks that drain the U.S. Treasury of revenue. So between one party overpromising benefits and the other under-collecting taxes, we’ve created a massive structural debt that will explode over the next two decades as the baby boomers retire.

But progressives face a more pressing moral and economic dilemma. The relentless growth of mandatory spending (much of which goes for health benefits) has squeezed out discretionary spending on investments in our children’s well-being and development, in public goods like roads, science and education, and in national defense. Looking at projected federal spending growth over the next decade, Steuerle estimates that the share going to children will fall from 20 to two percent. Public investments of all kinds will be pinched as well. The federal budget, in other words, will be doing less and less to stimulate economic growth and social mobility. In a striking image, Steuerle argues that the budget has become a blueprint for national decline rather than a plan for building a better future.

Of course, our political leaders have the power to dismantle the fiscal Doomsday Machine their predecessors have bequeathed them. They could slow the growth of health care and retirement benefits by trimming them for the affluent, and raise enough taxes to cover the nation’s expenses without further borrowing. But the loss of fiscal freedom means that anything lawmakers do to rebalance tax and spending will require reneging on promises both parties have made to voters. Republicans will have to abandon their preposterous pledge to never, ever raise taxes, and Democrats will have to stop pretending that entitlements programs are inviolable political commandments engraved in stone.

Yet the parties are trapped in a classic “prisoner’s dilemma.” Polls show that majorities oppose cuts in Social Security and Medicare benefits and general tax hikes. The public doesn’t trust either party to face down its own ideologues and special interests and do what’s right thing for the country. The party that tries to be responsible will likely face both an internal revolt and a voter backlash. “You lead, you lose,” as Steuerle puts it. The only way to avoid political self-immolation is if the two parties hold hands and jump together.

Which brings us back to the elusive grand bargain. Steuerle concludes with a characteristically ingenious proposal for solving the long-term debt crisis. It’s essentially an institutional reform that would take the mandatory programs off auto-pilot and bring them back into a normal budget process. This would allow lawmakers to periodically make policy changes to prevent the big entitlements from going bust, and to make trade-offs between automatic and domestic spending appropriated each year. (Full disclosure: Steuerle and I are part of a fiscal study group that proposed something similar several years back).

It’s a good idea, but by itself insufficient to break the fiscal impasse in Washington. This stalemate reflects political marriages of convenience within both parties between ideologues and powerful pressure groups that benefit from the status quo, even if the country as a whole doesn’t. Anti-government conservatives determined to cut Washington down to size are allied tactically with businesses that want to preserve their tax breaks and eviscerate regulation. Liberals who see an expanding welfare and regulatory state as the antidote to economic inequality align easily with powerful beneficiary groups and public sector unions.

Nonetheless, pressure is mounting for shaking up these convenient arrangements. Polls consistently show that most voters take the pragmatic view that reviving jobs and growth is more important than disabling government in the name of liberty or expanding it in the name of equality. America’s pragmatic center is growing restive, but it may take several more elections to build a critical mass for fundamental fiscal reform in Washington.

What would speed things up, though, is to put restoring the nation’s fiscal health at the center of the 2016 presidential election. Dead Men Ruling offers progressives an alternative to the GOP’s dismal politics of austerity – a positive vision for making fiscal policy once again an enabler of economic growth and opportunity.

This book review is cross-posted from Republic 3.0.