It was a time of high budget deficits and extensive partisanship. The President and House Speaker came from different parties, and did not see eye-to-eye on fiscal policy. The challenges looked grim and difficult to resolve. Sound familiar?
Although the story is very familiar to a country facing a so-called fiscal cliff at the end of this year when Bush-era tax cuts expire, it could have been 1981 when Ronald Reagan was President and Thomas "Tip" O'Neil was Speaker or 1996 when President Bill Clinton and Speaker Newt Gingrich were locked in a seemingly intractable gridlock. The years and political players have changed, but the personal and institutional dynamic is not new.
The time of 1981 was challenging politically. A new president had just been elected and the nation faced difficult economic circumstances. Both inflation and unemployment were high and political leaders were suspicious of one another. Reagan and O'Neil couldn't have been more different from one another in their personal views, but each gave enough to reach a balanced agreement on tax increases and spending cuts.
In 1996, leaders appeared hopelessly deadlocked. President Clinton had just come off devastating party losses two years earlier and Speaker Gingrich had staked out an ambitious restructuring of government called the "Contract with America." Yet the two men overcame personal and political differences to reduce the deficit and put the country on the path to an extraordinary economic boom.
In looking back on those breakthroughs, there were three reasons why these leaders were able to come together, negotiate in good faith, and reach fiscal agreements. First, the political leaders realized that political rhetoric to the contrary, cutting waste and fraud is not sufficient to address long-term debt and deficit issues. It is a fantasy that we can avoid difficult policy choices simply by getting rid of wasteful spending. It would be nice if this were the case, but the "easy" deficit reduction solutions were implemented years ago and what remains are hard budgetary choices.
In a time of fiscal crisis, it is important for public officials to tell the truth to the American public. The art of leadership is the assumption that ordinary voters can handle the truth and that they understand the importance of shared sacrifice during times of crises. Fiscal Commission Chairman Erskine Bowles told us that, "If there's shared sacrifice from all people and no playing favorites, everyone is more willing to sacrifice and do something real." Former GOP Senator Alan Simpson echoed this thought when he said, "People are so damn sick of BS and mush. They're thirsting for the truth. The truth is called math, maybe the dirtiest four-letter word in the alphabet."
Second, Senator Daniel Patrick Moynihan famously remarked that "everyone is entitled to his own opinion, but not to his own facts." This insight often is lost in D.C. policy discussions as leaders invoke "facts" on a selective or misleading basis. In reality, there are certain fiscal facts that should guide political deliberations.
It is important to note that the federal government "gives up more in deductions (about $1.1 trillion) than it collects ($1 trillion)," according to the Fiscal Commission. This includes deductions for employer-provided health care ($131 billion), retirement savings ($118 billion), home mortgage interest payments ($89 billion), and charitable contributions ($47 billion).
In terms of entitlement programs, demographic changes linked to an aging population and government spending on Medicare and Medicaid drive much of the long-term budget growth. If current growth levels continue without alteration, expenditures on federal health programs will move from 5 to 10 percent of GDP. For the country as a whole, public and private spending on health care has reached nearly 17 percent of GDP.
Defense spending also continues to rise dramatically. The United States currently spends more on defense than the other top nine nations combined. Overall, America has a defense budget of around $700 billion compared to about $500 billion for the next nine countries as a whole.
Finally, one of the most challenging aspects of the contemporary political situation is how bargaining, compromise, and negotiation have become dirty words. In earlier eras over the past few decades, political leaders disagreed about major issues but worked together to solve problems. They did this by bargaining over differences and compromising on stated goals.
There are many reasons why our political system has become polarized and subject to hyper-partisanship. But neither party can solve our fiscal challenges by dogmatically defending its core tenets and refusing to compromise on basic principles. The reason our country has reached the sad state of current affairs is political leaders who refuse to bargain and who campaign against the compromises made by the other party. Understanding this leadership problem is a key ingredient in facing our fiscal policy challenges.