After the Lost Budget Opportunities of 2011: What Next?

As 2011 ended we should have been celebrating a bipartisan deal to restore the federal government to fiscal sanity. The deal should have included sufficient reductions in spending growth and increases in revenues over the next decade to keep the national debt from rising fasting than the economy can grow. It should have encompassed full-year extension of the payroll tax holiday and unemployment compensation, and possibly other job creation measures. Instead, we are bemoaning the lost opportunities of extreme partisan pig-headedness and hoping that 2012 will bring politicians to their senses before a debt crisis overtakes us.

As 2011 began, President Obama missed a huge opportunity to seize the budgetary high ground. In his 2010 State of the Union address, he had charged the bipartisan Simpson-Bowles Commission with recommending a long-run budget fix after the congressional elections. I served on that Commission, as well as co-chairing with Pete Domenici the Bipartisan Policy Center’s Debt Reduction Task Force, also created to propose a fiscally responsible budget plan after the election.

Both groups worked diligently and reported on schedule. While their detailed recommendations differed, the arithmetic of the budget drove them both to similar proposals: (1) Slowing the future growth of Medicare and Medicaid, while putting Social Security on a sound basis; (2) capping discretionary spending; and (3) broadening the bases of the individual and corporate income taxes to raise more revenue with lower rates. The exhilarating experience of reaching bipartisan compromise on such big issues made many of us optimistic that the political system could reach similar agreement.

Moreover, the congressional elections, which shifted House control to Republicans, brought to Washington new fiscal conservatives determined to reduce borrowing. The new members were passionately anti-tax, but veterans of the Clinton-Gingrich era hoped that divided government might lead to responsible budget compromises. The bitter polarization of the late 1990s had produced a budget surplus, albeit in far more favorable economic circumstances.

President Obama should have embraced the main proposals of Simpson-Bowles (and Domenici-Rivlin) his 2011 State of the Union Address and promised to work with the Congress to restrain future debt and create jobs at the same time. Instead, he made the tactical error of focusing solely on job creation, which made his jobs bill a partisan Democratic proposal instead of an element in a bipartisan plan for growth and deficit reduction. On the Republican side, hopes for fiscal responsibility were shattered by the reckless intransigence of the Tea Party members who were willing to risk closing the government and defaulting on the nation’s debt in their zeal to shrink the public sector. Months of partisan brinkmanship culminated in the embarrassing near- debacle of the debt ceiling fight in late summer.

Getting past that painful episode, however, revived hopes for bipartisan agreement. The Budget Control Act (BCA) raised the debt ceiling; capped domestic and defense appropriations for ten years, as both bipartisan commissions had recommended; and created a Joint Select Committee (JSC) with extraordinary powers. It could propose tax or spending changes which could pass by simple majority without amendment or filibuster. The JSC was charged with recommending at least $1.2 trillion in deficit reduction over ten years to avoid an automatic across-the-board spending cut (or sequester) beginning in 2013, but could have done much more.

Optimists urged the JSC to shoot for a grand bargain involving entitlement and tax reform that would cut $4-5 trillion from projected deficits over ten years, enough to stabilize the ratio of debt to economic activity. Simpson, Bowles, Domenici, and I joined a vigorous effort, including bipartisan groups of senators and representatives, businesses and think tanks, to give the JSC political cover for using their extraordinary powers to get the job done. But the JSC dissolved in partisan rancor without producing even enough debt reduction to avoid sequester. Its demise also sank hopes for easy agreement to extend the payroll tax holiday, unemployment benefits and other measures vital to keeping the recovery on track.

So we enter 2012 with federal debt projections still rising unsustainably; Europe’s crisis providing daily reminders of the dangers of postponing tough budget decisions; and election fever undermining bipartisan cooperation. Hopes for fiscal sanity in 2012 are focused on a lame-duck congressional session convened to avoid a mindless sequester and automatic expiration of the Bush tax cuts. Returning to Clinton era tax rates in 2013 would cut projected debt substantially, but leave entitlement programs untouched and endanger recovery. This prospect might bring both parties back to the bargaining table, but it is hard to believe that a lame duck session could achieve the multi-trillion dollar grand bargain that eluded the JSC.

Whatever happens in the 2012 election, big decisions on taxes and entitlements will still require bipartisan compromise. A reelected President Obama or a new president, working with a new Congress may be able to forge a solution early in 2013, but time is running out. A punishing market reaction to American political dysfunction could turn the missed opportunities of 2011 into prolonged economic failure.