More than perhaps at any time in recent American history, questions of budgeting and the country’s financial future occupy center stage. We have seen, in recent weeks, a long-delayed deal on the 2011 federal budget that stripped $38 billion out of so-called “nondefense discretionary spending,” which includes most of the domestic programs Republicans love to hate (aid to the poor, environmental protection) and accounts for 12 percent of the roughly $3.5 trillion budget. The government came within one hour of shutting down, and this evidently led to some giddiness in the White House, which produced, on April 9, a perplexing video from President Obama in which he almost seemed to boast about the “largest annual spending cut in our history.”
Then, actually, right in the midst of that drama, came the manifesto—“The Path to Prosperity,” he called it—of Paul Ryan, the Wisconsin Republican who chairs the House Budget Committee. Ryan claimed that he would cut $5.8 trillion in spending over the next decade from current projections by the executive branch’s Office of Management and Budget (OMB). Ryan forced the hand of Obama, who had been exasperatingly silent on the whole budget mess except for his brief video. On April 13 Obama announced his own scheme to wrench $4 trillion in savings out of the budget over twelve years.
The urgency is justified—to an extent. The OMB estimates a budget deficit of $1.65 trillion this year, or 10.9 percent of Gross Domestic Product, more than double what it was before the Great Recession starting in 2007. The country’s debt is now $14.3 trillion, and will go up soon. Publicly held debt is at 72 percent of GDP, having averaged about 40 percent during the previous ten years. And spending on entitlements, particularly Medicare, will rise dramatically as Baby Boomers retire. While the alarms raised in Washington by people who thunder that entitlements especially must be examined can be hyperbolic, it is certainly the case that the long-term fiscal picture needs to be addressed.
The question is how. Everyone talks about cutting. Washington is awash in numbers of various kinds, but here are two, both from the Center on Budget and Policy Priorities (CBPP), a liberal policy analysis group whose work is respected across ideological lines, that seem especially relevant. I have not seen them paired together, but when they are, they describe for me better than any other numbers why we’re in the fix we’re in, what needs to be done—and why the budget battles coming this fall and next year will determine not only whether Barack Obama can get himself reelected but whether the American welfare state that was built in the twentieth century will survive.
In 2008, the “Center on Budget,” as Washingtonians call it, released a report finding that keeping George W. Bush’s tax cuts intact through 2018 would cost $4.4 trillion. (Particularly controversial is the Bush tax cut lowering the top marginal rate from 39.6 percent to 35 percent.) Then, in early April, the group estimated that Paul Ryan’s new plan, the one that all but four Republicans in the House of Representatives voted on April 15 to make their party’s official negotiating position, would not really cut the $5.8 trillion that Ryan boasted about. About a trillion of that, CBPP’s Jim Horney explained to The Washington Post‘s E.J. Dionne, comes from savings in Iraq and Afghanistan that are slated to happen anyway, and $500 billion or so come from reduced interest payments and not actual budget cuts. So Ryan’s true cuts, says Horney, amount to $4.3 trillion through 2021.
Put the numbers side by side. The Bush tax cuts, if maintained, will cost $4.4 trillion. Ryan proposes to reduce spending by $4.3 trillion over a similar period. “In a way, all of this debate, all of this ‘bravery,’ is largely about paying for the Bush tax cuts,” says the economist Lawrence Mishel of the liberal Economic Policy Institute.
That overstates matters. Obviously, the United States has hemorrhaged tax revenue because of the recession. And it has spent more because of it, too, on the 2009 stimulus, for example. And the coming mass retirement of Baby Boomers does require some action on entitlement reform. But there is something to Mishel’s claim. The New York Times columnist David Leonhardt wrote in April that if the President and Congress were somehow to let the Bush tax cuts expire for all taxpayers at the end of 2012 (which would happen if they simply did nothing), 75 percent of the deficit problem would be addressed over the next five years.1
Now that’s not likely to happen: as is well known, the President wants to keep the Bush rates for most taxpayers, while raising them for the top 2 percent. But the comparison dramatizes what I believe the fight over the deficit will come down to sooner or later. Democrats and liberals inveigh against Ryan’s cuts to Medicare and Medicaid. They are draconian to be sure—estimated by the Congressional Budget Office to force senior citizens in 2030 to pay an average of 68 percent of their health care costs, as opposed to 25 percent now. Democrats will probably gain substantial political mileage by attacking them—and it helps the Democrats’ case considerably that not a single House Democrat, not the bluest of the remaining Blue Dogs, voted with the GOP on that April 15 budget vote, which would have given the Republicans partisan cover. So Democrats should draw attention to what amounts to an enormous shift of costs onto the elderly and the poor.
But eventually, the conflict will be about taxes. By historical standards, Obama’s insistence, when he presented his deficit reduction plan at George Washington University on April 13, that he will press to reinstate the Clinton-era personal income tax rate of 39.6 percent on households earning above $250,000 (roughly the top 2 percent), is small-scale stuff. But such is the alignment of the parties today—the Democrats occupying a spot once held by moderate Republicans, as the Republicans attempt to build their Galtian-Roarkian Valhalla—that the battle will be immense. The question rarely tested since 1984, when Walter Mondale promised a tax increase in his speech at that year’s Democratic convention and suffered a historic landslide defeat, will be faced squarely: Can the Democrats raise a tax, even on the top 2 percent, and win?
Obama’s April 13 speech was an odd performance in that, in the face of proposing his own brew of very deep cuts, he issued the most full-throated appeals for government and the common good one has heard from an American president in many a year, perhaps going all the way back to Lyndon Johnson:
We believe that in order to preserve our own freedoms and pursue our own happiness, we can’t just think about ourselves. We have to think about the country that made those liberties possible. We have to think about our fellow citizens with whom we share a community….
We recognize that no matter how responsibly we live our lives, hard times or bad luck, a crippling illness or a layoff, may strike any one of us. “There but for the grace of God go I,” we say to ourselves, and so we contribute to programs like Medicare and Social Security, which guarantee us health care and a measure of basic income after a lifetime of hard work; unemployment insurance, which protects us against unexpected job loss; and Medicaid, which provides care for millions of seniors in nursing homes, poor children, and those with disabilities. We are a better country because of these commitments. I’ll go further—we would not be a great country without those commitments.
Remarkable words for a man we’ve come to know as inordinately cautious. So too were his eviscerations of the Ryan plan:
Worst of all, this is a vision that says even though America can’t afford to invest in education or clean energy; even though we can’t afford to care for seniors and poor children, we can somehow afford more than $1 trillion in new tax breaks for the wealthy. Think about it. In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a two-hundred-thousand-dollar tax cut that’s paid for by asking thirty-three seniors to each pay six thousand dollars more in health costs? That’s not right, and it’s not going to happen as long as I’m President.
Obama might have added that the top 1 percent of US households own over 33 percent of privately held wealth. Moreover, many noted ruefully that the stirring words were spoken in support of an administration plan that certainly has conservative elements. It would cut deeply into what Obama called “non-security discretionary spending” (different from “nondefense discretionary spending” in that his formulation includes some categories of national security spending done outside the Department of Defense). Whereas his deficit reduction commission (“Bowles-Simpson”) proposed an equal balance between nonsecurity and security cuts, the President seeks “to cut nonsecurity spending by about twice as much,” according to Ethan Pollack, a staff member for the commission—from roughly $800 billion to $400 billion. Obama’s plan does preserve Medicare and Medicaid as we know them, but he proposes to lower the cap on Medicare’s permitted growth, from GDP plus 1 percent to GDP plus 0.5 percent, which, along with other health care savings like giving Medicare more leverage to negotiate cheaper drug prices, would supposedly come to another roughly half-trillion dollars.
The Republicans could have responded to the President’s speech by criticizing any number of points, and they did in fact reject his desire to preserve Medicare and Medicaid in their current form. But their overwhelming criticism had to do with taxes. Indeed even before Obama spoke, House Speaker John Boehner issued a statement saying in part:
However, if the President begins the discussion by saying we must increase taxes on the American people—as his budget does—my response will be clear: tax increases are unacceptable and are a nonstarter.
House Majority Leader Eric Cantor and Senate Minority Leader Mitch McConnell said much the same.
Hatred of taxes is not merely Republican policy. It is Republican theology. It goes back, in more or less current form, to 1978 and the right-wing populist uprising against property taxes in California led by the industrialist Howard Jarvis—the “Revolt of the Haves,” as the economics journalist Robert Kuttner dubbed it for a book he wrote on that year’s Proposition 13 fight. Then came Ronald Reagan. The great conservative hero did, in fact, raise taxes several times, as liberals love to point out, notably in a 1983 payroll tax increase to rescue Social Security. But Reagan also substantially lowered income tax rates. When he took office, there were fifteen marginal rates, topping out at 70 percent on all income earned above $108,300 (about $255,000 in today’s dollars). By the time he left office, there were just two rates, 15 percent, and 28 percent on all dollars earned above $18,550 (roughly $44,000 today). George H.W. Bush added a top rate of 31 percent in a notorious (to conservatives) deal cut with Democrats at Andrews Air Force Base. Bill Clinton, in his 1993 budget deal that famously passed the House of Representatives by one vote, reestablished five marginal rates, which topped out at the 39.6 percent rate to which Obama wants to see the upper-bracket households return.
1 See David Leonhardt, "Do-Nothing Congress as a Cure," The New York Times, April 13, 2011. ↩
See David Leonhardt, “Do-Nothing Congress as a Cure,” The New York Times, April 13, 2011. ↩