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The New Year Presents a Rare Opportunity for Responsible Governance
A willingness to address runaway federal spending would be a welcome signal of a return to serious economic policy development
By Charles Blahous
The only thing people love more than watching a good horse race is talking about a good horse race. This is why the November elections generated so many postmortem analyses of the split decision conferred by American voters. Seemingly every pundit aspires to explain what happened and what it portends. A common refrain is that we are probably in for a period of legislative gridlock, given that Republicans narrowly control the House and Democrats narrowly control the Senate. That prediction may well be true, but it need not be. Gridlock is a choice, not an inevitability.
How Bipartisanship Overcomes Gridlock
The expectation that we are in for gridlock will prove true if both parties remain internally unified and externally uncompromising, colliding repeatedly over the next two years like two opposed battering rams. However, recent U.S. history provides many examples of legislative behavior that follows a different model, wherein split control of the federal government induces the parties’ more centrist members to cooperate, while each party’s extreme wing grumbles on the back benches.
It’s no accident that the last time federal lawmakers successfully balanced the federal budget was in the late 1990s, when Republicans controlled Congress and a Democrat (Bill Clinton) sat in the White House; each party’s participation in making hard choices then gave cover to the other. Going back further, the celebrated Social Security solvency rescue of 1983 happened during Republican control of the White House (under Ronald Reagan) combined with Democratic control (under Speaker Tip O’Neill) of the House of Representatives. That Social Security fix was not only enacted, but it persisted afterwards, because both parties were invested in its success and thus didn’t try to undo it. The parties were also forced to work together during the Great Recession of 2007-2009 and the more recent COVID pandemic, both of which hit when control of the executive and legislative branches was split between the parties, forcing far-reaching emergency relief legislation to be bipartisan.
As I have written, the urgent need in our current economic circumstances is almost exactly the opposite of what it was during the Great Recession and the early stages of the pandemic: Namely, we must reduce the pointlessly large deficit spending that is undercutting the Federal Reserve’s efforts to fight price inflation. Bringing the deficit down to sustainable levels requires elected officials to put aside their recent political tactics in the interest of responsible governance.
Responsibility and seriousness are often in the eye of the beholder. Among my personal pet peeves is politicians who pompously hold forth on the need to have an “adult conversation” with the other side about a pressing policy imperative. The phrase “adult conversation” practically bubbles with condescension, the obvious insinuation being that the opposing party’s position isn’t even that of a responsible adult, hence progress can only be made when the other side (certainly not the speaker’s) puts aside childish things and agrees to shoulder its grown-up responsibilities. The phrase is usually code for “I don’t want to compromise with the other side, so I’m going to ridicule it to build public pressure to agree to what I want.”
Nevertheless, external realities often constrain decision space and require a joint attitude of shared responsibility for progress to be made. Sometimes these binding realities conflict with fashionable partisan rhetoric, precluding viable solutions until pervasive political tactics are shelved. The state of the federal budget is one of those realities. Neither major political party enjoys the realities of the budget, and each would find it easier politically not to confront them. But there is simply no way to place the federal budget on a sustainable course without large numbers of elected officials moving away from their recent positioning and taking a more serious approach.
Mandatory Spending Growth Drives Budget Deficits
The fundamental problems plaguing the federal budget have been repeatedly documented by nonpartisan scorekeeping agencies within the government and by academic analyses outside it, among them Brian Riedl’s as well as my own. We have runaway federal deficits for one reason alone: because the largest federal mandatory spending programs—Medicare, Medicaid, so-called Obamacare and Social Security—all, under current law, automatically grow faster than our economic output. The fiscal problem simply cannot be fixed until legislators pass reforms to slow down that mandatory spending growth.
This overriding budgetary reality is detailed in so many places that there seems little need to do so yet again. But despite widespread understanding of the problem among budget experts, Americans can repeatedly consult popular news sources without forming any concept of the actual situation. To illustrate this budgetary problem, the first graph below presents current and projected federal spending and tax revenues as a percentage of GDP, illustrating how deficits are driven by untenable spending growth even as current and projected tax collections exceed historic norms. Our fiscal problem is not a tax policy problem; it’s a spending problem. That’s not a statement of ideological preference but an inescapable mathematical fact.
The spending growth problem is in turn entirely caused by the spending growth in a few large entitlement programs. Chief among them is Medicare.
Other drivers of unsustainable spending growth include Medicaid and the Affordable Care Act (ACA), which the Congressional Budget Office combines into a single category in its long-term projections.
The other program whose costs persistently grow faster than our economic resources is Social Security.
These programs alone are why the federal budget situation keeps growing worse and worse, year after year, election cycle after election cycle. If lawmakers hadn’t structured the automatic growth of these programs to exceed Americans’ ability to finance them, then, all other things being equal, federal debt would currently be on a manageable trajectory. Framed another way, the federal government can’t stabilize the federal budget until it fixes this mandatory spending growth problem.
Further, certain of these programs—specifically, Social Security and Medicare Hospital Insurance—are designed as contributory insurance programs, funded primarily by participating workers’ payroll taxes. Accordingly, they can only remain solvent if their cost growth doesn’t exceed the growth in what workers can finance. Thus, even if there weren’t a need for a larger budget policy correction, Social Security and Medicare’s cost growth would still need to slow down for these programs’ own sakes.
Disclaimer: This problem with spending growth in mandatory entitlement programs exists separate and apart from ongoing debate over raising the federal debt limit. Nothing in this piece should be taken to suggest that Congress should use the necessity of raising the debt limit to force changes to federal fiscal policy. The debt limit will need to be raised irrespective of the outcome of any fiscal reform discussions.
How Politics Prevents Policy Solutions
If budget experts widely acknowledge the overriding fiscal realities—and they do—why don’t lawmakers fix them? The reason is simple: politics. Federal health programs and Social Security provide benefits to tens of millions of Americans of every income level. Politicians try to stay on the good side of voters who draw from these programs, as well as Americans who care about those beneficiaries (which includes pretty much all of us). Accordingly, politicians often attempt to curry favor by promising to “protect” or even increase the total benefits of these programs, sometimes while attacking more responsible public servants who recognize that their cost growth already exceeds sustainable rates and needs to slow.
Political incentives lead to not only ducking hard choices about mandatory spending programs, but exaggerating the extent to which modifying other policies, such as tax rates and defense spending, can address the situation. When elected officials aim to redirect voters’ attention during budget discussions to largely extraneous factors such as tax rates for billionaires, they are engaged in political self-protection rather than problem-solving. As long as the government’s spending grows faster than our national economic output, changing such tax rates can’t do much to ameliorate the problem.
I believe most elected officials want to serve the American public’s interests as they perceive them to be. Yet there is an unavoidable cynicism at the heart of the politics that have long surrounded programs like Social Security and Medicare, for it clearly would not serve the interests of these programs’ beneficiaries to do what certain politicians suggest—that is, for the programs’ cost growth to even further outstrip taxpayers’ ability to finance them. Benefits don’t necessarily need to be cut from current levels, but certainly the programs’ current growth rates must be slowed rather than increased. Reasonable people can disagree about how much of workers’ earnings these programs should absorb within a stabilized system. But no matter where any elected official comes down on that value judgment, it is irresponsible for elected officials to leave these vital programs’ costs perpetually growing at an unsustainable rate.
Taking Responsible Action
None of this, of course, means that raising taxes (or restraining other spending such as annual appropriations) cannot be part of bipartisan legislation to strengthen federal finances. Indeed, for policy as well as political reasons, it is probably impracticable at this point to attempt to sustain Social Security and Medicare without any revenue increases at all. Tax increases, however, cannot by themselves solve the problem of program cost growth outstripping the growth of American workers’ economic output. Policymakers can choose between higher tax revenues and slower cost growth only once cost growth has already been slowed so as not to exceed the rate of economic growth.
Perhaps the most frustrating aspect of all this to a student of policy is that some of these programs would actually treat participants far better if they were less expensive. Social Security, for example, would be a far more effective program if certain of its regressive income transfers were scaled back, which would improve intergenerational equity, program solvency and the returns on Americans’ work, all while reducing costs borne by workers. A wonderful opportunity exists to make these programs not only less expensive but better. This requires, however, that politicians resist the impulse to describe every deceleration of cost growth as an unacceptable “cut” in benefits.
Unfortunately, we are not yet seeing evidence of a conversion to policy seriousness in this area. Bipartisanship is more likely to make these problems worse than solve them. For example, instead of explaining the solvency crises threatening Social Security and Medicare, and offering critical cover for bipartisan efforts to slow the growth of these programs, President Biden’s current rhetoric insinuates that the only threat posed to them is the mean-spirited people across the aisle who want to gut them.
Such positioning by the sitting president is an abdication of responsibility; it renders it politically unrealistic for anyone in the opposing party to lead by proposing reforms, which in turn fuels bipartisan irresponsibility. It is fundamentally unserious to claim to support a sustainable budget policy while at the same time deploying the rhetorical power of the presidency against the necessary slowing of spending growth in Social Security and Medicare. Unless and until leaders of both parties agree to forgo such opportunistic attacks, they cannot achieve lasting fiscal policy corrections.
How We Got Here and How To Change Course
The current widespread denial of overarching budgetary realities is a relatively recent phenomenon. Throughout the late 20th century and even into the beginning of the Obama administration, elected officials routinely acknowledged that mandatory spending was driving the fiscal imbalance. Republicans and Democrats might disagree on the optimal balance of taxes and spending, and on the best way to slow spending, but they agreed on the need. Throughout the 1990s Democrats and Republicans co-authored multiple proposals to slow cost growth in Medicare and Social Security. Even the ACA was initially promoted on the promise that it would slow the growth of federal health spending. As Speaker Nancy Pelosi argued then, “Health care reform is entitlement reform. Our budget cannot take this upward spiral of cost.” How times have changed.
What happened to this consensus understanding of fiscal reality? A full analysis of how the federal government drifted further away from responsible fiscal policy over the last decade is beyond the scope of this article. However, four behavioral pivots seem worthy of especial note.
First, the Obama administration pivoted on healthcare policy. It initially presented healthcare reform as “entitlement reform” that would slow the growth of federal health spending. But the administration adopted a legislative strategy of enacting the ACA on a party-line vote, holding as many Democrats behind it as possible. To win the support of congressional progressives, it ultimately arrived at a package that actually increased federal health spending, already the fastest-growing area of the federal budget. This necessitated a rhetorical pivot away from the goal of fiscal consolidation to expanding health insurance coverage. Coverage expansion has remained the primary rhetorical focus ever since, even though no elected official has any idea how to finance the federal government’s current health spending commitments, let alone expanded ones.
Second, both parties have moved leftward in their economic policy platforms. Progressives seeking to expand government steadily grew stronger in the Democratic Party, while the Republicans turned to Donald Trump as their standard-bearer, a politician with no interest in traditionally conservative positions such as limiting federal spending or deficits.
Third, the media landscape has fragmented to reflect political tribes rather than delivering a common storehouse of information. While American journalists have been left-leaning for a long time, it was once expected that they would cover pressing fiscal policy challenges even if the politicians they supported would prefer to ignore them. But in the current era of media fragmentation, network commentators seek to accentuate the issues their political allies want to emphasize, and to downplay the issues those allies wish to evade.
Interestingly, this dynamic results in media outlets on both sides ignoring the drivers of the escalating budgetary mess. MSNBC and CNN lead their viewers to believe there’s no budget problem that can’t be solved by taxing billionaires more, while Fox News tries to discourage conservative politicians from being associated with a politically disastrous agenda of cutting Social Security and Medicare. News media will still cover symptoms of the problem such as large deficits and persistent inflation, aggressively or grudgingly depending on the outlet, but both right- and left-leaning sources discourage their political allies from confronting the substantive drivers of these problems.
A fourth factor is that we live in an age where people can increasingly access information that supports what they prefer to believe, while avoiding information that makes them uncomfortable. The most uncomfortable information for viewers is not necessarily news about tragedies such as war crimes abroad or shootings at home, which allow us to feel compassion or anger without necessarily revisiting our own opinions. Rather, it’s information that forces us to reassess our own beliefs, so there isn’t much of a market on social media for the uncomfortable reality that spending growth in popular federal mandatory spending programs must be slowed.
In the final analysis, it takes leadership by elected officials to tackle and resolve critical challenges to the general welfare. The next two years of power-sharing provide opportunities for leaders of both parties to cooperate for the public good. If key leaders on both sides begin to explain the necessity of constraining mandatory spending growth to fight the debt explosion and all its inflationary effects, that would be an important signal of serious intent. However, if we continue to hear nothing but pledges to spend more money on federal entitlement programs, combined with attacks on those accused of fiendishly plotting to gut them, U.S. economic policy will remain a long way from returning to seriousness.