Attention: Deficit Disorder

Andrew E. Busch

June 1, 2005

The federal deficit is likely to grow in importance as an issue in the near future, and it is unclear what, if anything, the Bush administration intends to do about it.

On the one hand, it is clear that obsession with the deficit at the expense of other economic questions is both bad economics and bad politics. Many of the widely assumed dangers of the deficit have long been overblown. In the 1980s, many voices warned that deficits would lead to hyper-inflation, much higher interest rates, and a total loss of American competitiveness abroad, none of which happened. Indeed, nothing can be more clear than the counterproductive character of imposing huge tax increases or draconian spending cuts during an economic slowdown, which was the Hoover policy of 1932. No one can tell the economic catastrophe that might have resulted had George W. Bush pushed for a big tax increase rather than more tax cuts in the aftermath of 9/11. Likewise, politically, Republicans spent many years in the wilderness wailing about deficits while Democrats cashed in on the electoral benefits of the programs that spawned the deficits.

Having said all of that, one need not be obsessed with deficits to understand that there are good reasons not to simply ignore the prospects of large federal deficits stretching into the indefinite future. To the extent that large deficits are the result of increased domestic spending, they represent an accommodation of that spending that cannot be healthy in the long term for a free market economy. The steadily growing cost of servicing the national debt is money drained from the private economy to no good purpose. There are both economic and political repercussions—none of them good—to allowing citizens to enjoy a much larger government than they are willing to pay for. Strategically, no one can look favorably upon a situation in which a large amount of American debt is held by China. And Bush’s deficits, coming in a time of unified Republican control of government, legitimize the idea of permanent deficit spending in a way Reagan’s never did, due to Bush’s apparent lack of concern with the issue and the fact that he cannot blame a liberal Congress. For years, Republicans who were too timid to argue against spending on principled grounds of limited government were able to justify frugality on the basis of the budget. If that prop is kicked away—and both Bush and congressional Republicans seem determined to kick it away—there will be little left as a rationale for Republican resistance to new programs.

To think about the potential impact of the deficit on the Republican majority, it might help to remember the “Perot voter”—a creature who has not been heard from in several years, but is still out there. Largely middle class, self-styled independent “centrists,” and nationalists, the Perot voters were anti-deficit, anti-free trade, and anti-“insider.” In the early Clinton years, Democrats made a feint for these voters, but labored under too many disadvantages to consummate the deal. They were too much inside, having controlled the House for four decades, and Bill Clinton’s anomalous free-trade stance also limited Democrats’ ability to appeal to the Perotistas. Today, circumstances are different. Republicans are the insiders, with ethics and powerlust problems of their own, while Democrats are now free to more fully indulge their protectionist impulses. To avoid a trifecta that could move these swing voters against them, Republicans will have to get credible on the deficit soon. At least as important, a large bloc of Republicans is also highly uncomfortable with the developing fiscal record of their party.

So what should President Bush do to deal with a potential economic problem and prevent a clever Democrat from outflanking him to the right on the deficit? Three measures stand out:

  1. By all means, veto the monstrous transportation bill that is now worming its way through Congress. It would be the President’s first veto in four and a half years of office, and it would send a powerful message that the days of uncontrolled spending are over. Unless he is willing to lay down the law soon, even his modest recent efforts at spending control will be ignored by Congress. If he can make a veto stick, his leverage on future budget issues will grow.

    Such a veto would offer two incidental benefits to Bush. First, it would demonstrate him in a posture of firm leadership on a domestic issue that is easy to explain, which would almost surely help his overall standing with the public. Second, a little intramural conflict on an issue like this may help dispel some of the appearance of incestuousness that has crept into the President’s relations with congressional Republicans. It is worth remembering that Franklin Roosevelt actually sought measures by his Democratic Congress to veto precisely to prove his independence (and his control of events).

  2. Push hard for the re-establishment of spending caps and pay-as-you-go rules for new spending. Congress has amply shown that, regardless of party, it cannot be trusted to control its own spending. Ironically, the Republicans’ profligacy confirms the validity of the conservative position: Power corrupts, and government must be limited or it will balloon, no matter who is in charge or what good intentions they might have. New rules should combine features of the Gramm-Rudman-Hollings Acts (GRH) of the late 1980s and the Budget Enforcement Act of 1990. The BEA sensibly set limits on spending levels rather than setting actual deficit targets, the meeting of which lies farther outside the control of Congress due to external economic trends. GRH applied the mechanism of a sequestration, or automatic percentage spending cut if targets were not met. Both were flawed, largely as a result of Democratic control of one or both houses of Congress at the time. Congress imposed, for example, a 50-50 split between defense and domestic spending when GRH sequestrations were required, despite the fact that defense spending only accounted for about one-fourth of federal spending at the time. Republicans today should be able to construct a spending control regime that would more faithfully reflect their principles. Perhaps they could even use a veto of the transportation bill as an excuse to move on this broader question of spending control.

  3. Revisit the Medicare prescription drug benefit, which has turned into a boondoggle even before it has become fully operational. This entitlement program alone will add $700 billion to federal deficits over the next decade. Bush’s critics have long clamored for him to confess a grave error. Perhaps the prescription drug benefit is it. If it cannot be scrapped—and now, before it is entrenched, might be a window of opportunity to do just that, in the same way that the catastrophic health care program was scrapped in its infancy in 1989—it must at least be revised in such a way as to significantly reduce the federal government’s spending liability. In what other relatively painless way could several hundred billion dollars be saved?

Such measures might not restore the surpluses of the late 1990s, but it is far from clear that we should want to. A better goal is to reduce the deficit to more manageable proportions, to hold the high ground politically—and to make sure that these things are done on the spending side of the equation. To that end, these three proposals take important steps in the right direction.

Andrew E. Busch is a Professor of Government at Claremont McKenna College and an Adjunct Fellow of the Ashbrook Center.