The Budget Crisis of 2011: The View from 2021

July 22, 2011

Ten years from now when analysts look back on the deficit crisis of 2011, they will cite two major causes of the long standoff that brought the nation to the brink of disaster. President Obama, who appears to be getting the benefit of the doubt from the public now, will be seen as a major cause of the crisis because he waited so long to put a specific plan on the table that included major cuts in entitlements. Even now, less than two weeks from the debt ceiling drop dead date, he still has not made public a specific plan to reduce entitlement spending. In past budget agreements, presidents have always provided leadership that has often been politically difficult given their governing philosophy and base of voters—symbolized by the willingness of Republican Presidents George H.W. Bush and even Reagan to raise taxes, something that has been far less evident during the crisis of 2011.

The second cause analysts will emphasize is the refusal by Republicans to accept a compromise deal. They will cite five reasons why the Republican position defied both reason and history. The first is that although Republicans held that the propensity of Democrats to spend money was the major cause of the nation’s deficits, the record shows that Republicans have also been responsible for major increases in spending. The Medicare Part D benefit and the wars in Afghanistan and Iraq, all major initiatives of the Republican Party, contributed in a major way to increased spending. Arguing that all three initiatives were good policy does not obviate the fact that even a dollar wisely spent increases the deficit if it is not accompanied by a dollar of additional revenue.

The second reason the Republican stance was untenable was that the Bush tax cuts played a major role in growing the nation’s deficit. The Congressional Budget Office estimated that the total cost of the Bush tax cuts over ten years was about $3.7 trillion. Given the record of spending increases and tax cuts initiated by Republicans, it will be impossible for any fair-minded analyst to look back and conclude that the deficit was caused primarily by spending programs initiated by Democrats. Especially now that revenues as a percentage of GDP are the lowest in recent decades, analysts will conclude that the deficit crisis was caused by both excess spending and deficient revenues.

Third, compromise has always been the American way. It is easy to understand the appeal of a political party blaming the other party’s policies and telling the public that their party decided to draw a line in the sand on taxes to “starve the beast.” But especially in light of the bipartisan ownership of the causes of the problem, refusing to accept a solution that includes the policies preferred by the other party is not how a political system based on give and take can operate.

Fourth, analysts are going to look back and conclude that, amazingly enough, Republicans were incapable of recognizing their historic victory in the budget debate. They and the Tea Party have completely changed the conversation in America. After years of labeling spending as the nation’s major budget problem and years of spending denial by Democrats, especially on entitlements, starting with the Bowles-Simpson commission report in the summer of 2010, it became clear that Democrats would accept a deficit-reduction plan that was at least two-thirds spending cuts, much of it in entitlements. As the debt ceiling deadline approached in the summer of 2011, it appeared that the president and Democrats were willing to accept a compromise plan that had an even higher ratio of spending cuts to revenue increases than the Bowles-Simpson report. But despite this surprising capitulation by Democrats on the most fundamental issue separating the parties, Republicans continued to hold to their position that not a penny of tax revenue was permissible.

Finally, there is the matter of risk. Republicans continued to refuse a compromise even when it appeared likely that the financial damage to the nation would exceed the size of the revenue increase that would have brought a deal. In the midst of warnings by financial rating agencies that failure to take a major bite out of the deficit would lead to at least a .5 percent immediate increase in interest rates, the Congressional Budget Office estimated that even this seemingly modest increase would impose about nearly $700 billion in additional interest costs on the federal budget. How can you defend a principled stance that refuses to accept perhaps a $500 billion tax increase when the best evidence indicated that the principled stance would impose greater costs on the federal budget, not to mention its likely impact on the entire economy? This question was even more difficult to answer because the additional revenues could have been structured in a way that would make the tax code fairer and the economy more efficient.

The view from the future should convince Republicans that they had better seize the opportunity to cut a deal. Now. If they don’t, they face the prospect of sharing with President Obama a major part of the blame for inflicting irreparable damage on the nation—and on their own party.