RALEIGH – After weeks of trading barbs and making headlines, President Barack Obama and congressional leaders seem poised to resolve the nation’s debt-ceiling controversy with some kind of small-scale compromise that kicks the can down the road once again.
So, did you like the play? It was, of course, largely an act for your benefit – and that of your fellow American voters.
President Obama pitched a “grand deal” that he knew Republicans could never accept, because it included significant tax increases. House leaders offered their own package, which would raise the debt ceiling while also cutting future federal budgets by trillions of dollars and putting a balanced-budget requirement in the constitution. Again, they knew that Obama and the Democrats will never agree to it, because it includes significant savings in Medicare and other entitlements but no tax increases.
They were all political actors starring in a political drama. We in the audience were supposed to watch the proceedings with interest, find heroes to laud and villains to loathe, and then offer our reviews of the play during next year’s presidential and congressional elections.
Through it all, there were apparently some observers who thought they were watching a reality show rather than a scripted drama.
For example, some actually believed that the federal government was about to default on federal bonded debts. Investors knew better. There was no great panic, no sudden rise in interest rates. They knew that even after August 2, Washington would receive plenty of federal revenue each month with which to pay the government’s creditors. It was other federal expenditures that would have been cut, not debt service.
Others actually believed that House Speaker John Boehner and other GOP leaders were about to sell fiscal conservatives down the river, or that Obama and Senate leader Harry Reid were about to pressure Democrats into shrinking the size and scope of the federal government.
Wasn’t going to happen. What was at stake during this summer squall of budgetary politics was the narrative. The politicians were trying to find out which argument swing voters found more persuasive: 1) Washington’s main fiscal problem is that the tax burden is too low, or 2) Washington’s main fiscal problem is that the spending burden is too high.
The truth is that Washington’s immediate fiscal problem is the Great Recession. While technically over, it knocked the government’s budget even further out of kilter than it already was. And since 2009, the “recovery” has hardly lived up to the name.
Democrats repeatedly stressed that federal tax revenues as a share of the economy are far below the historical norm of about 18 percent of gross domestic product. They’re right. Republicans repeatedly stressed that federal expenditures are far above the historical norm of about 20 percent of GDP. They’re also right.
The flaw in the Democratic argument is that as the economy (all too slowly) returns to normal levels of production, tax revenues will again rise to the historical norm – without any change in federal tax policy. How do I know that? Because taxes as a share of GDP were at the normal level as recently as 2007. It was recession, not tax cuts, that pulled the revenue side down.
But federal spending will not automatically fall down to a sustainable level as the economy recovers. While some social spending may drop as employment rises, most of the federal government’s fiscal obligations aren’t tethered to the economic cycle. Much of Medicare and Medicaid spending isn’t, for example. According to the Congressional Budget Office, federal spending will reach 26.5 percent of GDP by the end of the decade – and that assumes no new programs or recurrence of the Great Recession.
In the long run, I see no practical alternative to reforming Medicare, Medicaid, and other federal entitlements. They reflect political promises that can’t be fulfilled, even if a future Congress agrees to economically destructive tax hikes.
In the short run, however, nothing much will happen – except that the curtain will fall on this particular play. Then, after a short intermission, the next one will start.
Hood is president of the John Locke Foundation.