The Return to Fiscal Sanity Began in 2010—Or Did It?

Historians of our era may describe 2010 as the year Americans finally woke up to the fact that their federal budget was on a dangerous course, hurtling toward a debt crisis that threatens American prosperity and international leadership. They may, but we won’t know until we see whether the political system responds with decisive action in 2011.

There is no doubt that 2010 saw an explosion of rhetoric about federal deficit spending and the rapidly escalating debt burden it entails. For most of the year-right up to Election Day–the rhetoric was partisan, polarizing, and unconstructive. Most Republicans and many Democrats denounced huge deficits and fast-rising debt, but each party blamed the country’s predicament on the fiscal irresponsibility of the other, and few candidates offered viable proposals for getting the budget back on a fiscally sustainable track. Republicans vowed to cut “wasteful” domestic spending and implied there was a lot of it, while Democrats urged lower defense spending and higher taxes on the wealthy. But there was little recognition of the magnitude of projected spending growth associated with an aging population and escalating costs of medical care and scant willingness to admit that curtailing future borrowing will require both serious reductions in the built-in growth of popular programs and additional revenue. Moderates who supported more realistic bipartisan solutions tended to lose to more partisan opponents. (Budget Committee Chairman John Spratt will be especially missed.)

But once the election was history, the ultra-partisan rhetoric subsided and public discourse on fiscal matters shifted toward pragmatism. Two bipartisan commissions contributed to the more constructive tone by reporting compromise plans for bring deficits steadily under control and stabilizing the growth of debt. I was privileged to serve on both of them and the experience left me fairly optimistic that our political system can pull itself together and reach a bipartisan compromise in time to avert a debt catastrophe.

The National Commission on Fiscal Responsibility and Reform, ably led by Erskine Bowles and Alan Simpson, included a dozen high-ranking Senators and Representatives from both parties. (Brookings Trustee Ann Fudge and I were among the six public members). The Commission, appointed by President Obama, was charged with crafting a plan, to be released right after the election, for reducing the deficit to manageable proportions by 2015 and controlling future debt. The Commission with the support of a small staff spent months digging into the problem. Despite the fact that most of the members were busy campaigning, they came together in a constructive and collegial spirit to discuss a broad array of spending and tax options, including all the “third rail” political no-no’s that pundits declare untouchable. Until the election was over, no votes were taken. Indeed, nothing was written down for fear some leaked draft document would be misused on the campaign trail.

Shortly after the election the co-chairs produced a bold draft plan for the Commission to discuss. It included all the “third rails”-cuts in domestic and defense appropriations, curbing growth in Medicare, Medicaid, and Social Security benefits, drastic reform of the corporate and individual income taxes to simplify the structure and raise more revenue. Commission members, all of whom disagreed with some elements of the plan, welcomed it as a courageous effort to find middle ground without copping out on the assignment. After vigorous interaction with the co-chairs a somewhat altered plan was adopted by 60 percent of the members. Most of those not voting for it, nonetheless expressed their admiration for the effort and some offered their own alternatives. There were no “deficit deniers.”

The press made much of the Commission’s failure to obtain the 14 out of 18 votes needed to bring the plan to the floor for a vote. But this criterion never had operational significance, since the Commission never imagined that it was writing legislation. It was fanciful to imagine that a Commission could by-pass congressional committees and write the necessarily complex legislation needed to reform the tax code or rewrite the Medicare law or specify defense program reductions. The importance of the Commission was that congressional leaders charged with writing these laws participated actively in the Commission’s deliberations and a new spirit of constructive dialog across party lines emerged in the process. When Senators with views as different as Coburn, Crapo, Durbin, Conrad and Gregg all put their names on a bipartisan compromise, something important has happened, at least in the Senate.

At the same time, I was co-chairing, with former Senator Pete Domenici, a Debt Reduction Task Force sponsored by the Bipartisan Policy Center that reported in late November. We had recruited knowledgeable members with a broad range of views and experience-Republicans, Democrats, and independents, including former governors and mayors, business and labor leaders, tax and budget experts. We had fewer constraints than the National Commission, because none of us were currently running for public office and all of us recognized from the beginning that putting the federal budget back on a sustainable tract would involve both spending cuts revenue increases.

Personally, if had to pick one of the two plans (which I don’t), I would choose Domenici-Rivlin over Simpson-Bowles. The former has a higher ratio of revenue increases to spending cuts, includes a new national consumption tax in addition to aggressive income tax simplification, and proposes a restructuring of Medicare that I believe would help contain costs. It also included a one-year complete payroll tax holiday in 2011-an idea picked up in more limited form in President Obama’s tax compromise-to reinforce the still fragile recovery.

However, the two plans are more similar than different. They both illustrate that it is possible for policy makers with a wide spectrum of views to agree on a plan that nobody thinks is the greatest, but all agree is far less risky than continuing on the current dangerous budget trajectory. They show that any such plan necessarily involves tough, unpopular choices, both on the spending and revenue sides. And they both demonstrate that crafting a plan to constrain future borrowing can, if done right, result in more effective, less wasteful federal spending and a far simpler, more efficient tax system.

Another encouraging sign is that legislators, think tanks, and organizations are rushing to create their own deficit-reduction plans. Instead of denying the problem and bashing other people’s solutions, they are boasting, “Hey look-here’s our deficit reduction plan!”

Will all this talk produce serious action in 2011? Two men hold the key to that question: President Obama and Speaker Boehner. The first move will be up to the President. If his State of the Union and his 2012 Budget shows he is throwing the full weight of his presidency behind working with congress to craft a sustainable multi-year budget plan, there is a chance it will happen. He should make clear right away that he gives high priority to fiscal responsibility and has specifics to back it up. But his budget should not reveal his bottom line. It should be his opening offer in what is sure to be a difficult negotiation.

Speaker Boehner will have to convince his caucus, over the opposition of some of his just-say-no colleagues, that Republican control of the House means taking responsibility for avoiding a debt catastrophe by working to find common ground with the President and the Democrats.

Sometimes divided government produces gridlock and sometimes it results in bipartisan action to solve serious problems. We can only hope that this time the President and the leadership of both parties are sufficiently scared of the consequences of gridlock on the budget that they work together to produce a sustainable multi-year budget plan and avoid a debt crisis and economic catastrophe.