A Review of the U.S. Fiscal Debate

By Gordon D. Giffin

In the weeks leading up to the traditional August Congressional recess, the drama that played out in Washington over whether and how to raise the statutory federal debt ceiling at times reached crisis (if not comedic) proportions. At the eleventh hour cooler heads prevailed, averting a short-run catastrophe – yet the road ahead is fraught with uncertainty.

At its core this debate is not about economic policy but about competing visions of the role, scope and validity of government. The dominant faction in the Republican Party takes a libertarian-like view: the less federal government the better. This philosophy is predicated on a belief that the private sector, left to its own devices, will provide for society’s needs. Rather than approaching that goal agency by agency or program by program, their strategy is to deprive the entire government of funding, sparing only defense; the proposition is that a resource-starved government shrinks. The traditions of the Democratic Party, on the other hand, are rooted in the belief that even in an efficiently operating economy some members of society, principally the poor and elderly, are at risk of being left behind. The Democratic view also holds that there are some functions only government can provide; these include education, environmental protection, and healthcare for the poor, in addition to defense.  During stressed economic times this instinct leads to a desire for increased government assistance, even though that course exacerbates deficits and debt.

The statutory debt ceiling has been raised scores of times throughout recent U.S. history with the support of Presidents and Congresses of both parties, with no national angst and little public attention. Typically, a few members of the House and Senate would take the opportunity to score political points by accusing their opponents of a lack of commitment to fiscal restraint. In the end, the party of the President would provide the majority of the votes to get it done; it always seemed to be a necessary technical step that was detached from the underlying substantive fiscal debates.

In the Fall of 2010, two things happened that set the stage for this summer’s game of chicken. First, the Republican Party gained control of the House of Representatives through the election of roughly 70 new members, for whom shrinking the size of government eclipses all other priorities. This meant that, as of January 2011, the President’s party could not, by itself, pass legislation in the House to raise the debt ceiling. Second, the President made an ill-fated decision to postpone raising the debt ceiling until the Republican majority in the House took office. The ceiling could have been raised by a lame-duck Democrat-dominated Congress in November or December of 2010, but instead the President chose to force the Republicans to own some of the political consequences of the increased debt. That proved to be a mistake.

In the Spring of this year the Administration was proceeding on the erroneous assumption that the debt ceiling would be raised with the support of most Democrats and a few moderate Republicans.  This approach was surprising in light of the fact that Democrats had suffered at the polls in 2010 due in part to concerns about deficits and debt.  In the House, the newly elected conservative Republicans identified this as an opportunity to force the Administration to impose severe cuts in domestic spending as a pre-requisite to raising the ceiling. The President’s opponents, in other words, were threatening to precipitate a default unless the Administration acceded to their demand to meaningfully reduce social programs.

While reducing federal spending during an economic slowdown was not the President’s preference, he recognized the political realities and undertook a series of negotiations with the Republican Speaker of the House, John Boehner, aimed at achieving a compromise plan to reduce the deficit over time through a combination of spending cuts and revenue increases. (President Clinton’s 1993 budget plan, which passed with no Republican votes, took a similar approach by cutting spending and increasing the top marginal income tax rate by three per cent, to 39 per cent. The result was a budget surplus in 2000.) For a while these negotiations appeared to be making progress, with the President agreeing in principle to cut social programs (the Democrats’ sacred cow) and Boehner showing a willingness to accept some measure of revenue increases (a Republican litmus test). The plan they were discussing would have yielded $4.2 trillion in savings over 10 years.

While Democrats in both the House and Senate were reluctant to accept cuts to Medicare and Social Security, on balance they were prepared to do so provided the plan included increased revenue and would lead to a long-term resolution of the budget dispute.  They did not want to confront the need to raise the debt ceiling again prior to the 2012 elections.  When Boehner took the outline of this plan to his caucus the newly elected conservatives refused to support any revenue increases and made it clear they would hold Boehner accountable if he advanced such a plan. Boehner subsequently withdrew from the compromise talks with the President. From that point on, the acrimony increased and the discourse deteriorated.

While the world watched the developing soap opera, Washington looked more like a banana republic than the leading nation of the free world. In the final analysis the crisis was averted by a short-term budget deal involving spending cuts of roughly $1 trillion, but no increased revenue.  The two sides also agreed to create a special Congressional committee, or “Super Committee”, composed of six House members and six Senators, with equal numbers from each party. The committee is mandated to define a plan that reduces the deficit and debt by an additional $1.5 trillion. Unless a majority of the committee agrees on such a plan by U.S. Thanksgiving, and that plan is enacted by Congress, pre-determined spending cuts of $1.2 trillion will kick in, equally divided between national security and non-national security functions (but excluding Social Security, Medicaid and Medicare benefit levels).  The President’s concept was that the threat of automatic and substantial cuts in defense spending would put extreme pressure on Republican members of the Super Committee to agree to a debt-reduction plan that includes new revenue. Added revenue, Democrats believe, will moderate the degree of necessary cuts to social programs and will assist in deficit reduction.

The Super Committee will begin its work in early September. Its membership is such that there is some basis for optimism that a majority could agree on a plan that would harmonize the opposing views. The central question is whether some number of the Republicans, in the face of possible massive cuts to national security spending, will agree to “tax reform” initiatives (as distinguished from tax increases) that would contribute increased revenue to the equation. Given that any increase in revenue is inconsistent with the conservatives’ bedrock principle of starving the government, the inclusion of such measures in a committee recommendation will not be easy.  Any increased revenues would likely come from eliminating “corporate loopholes” and tax preferences in the federal tax code. On the other side, the Democrats will have to be willing as a quid pro quo to reduce the costs of Medicare and Social Security, perhaps by raising the age of eligibility or employing some form of means testing. Major constituencies of the Democratic Party oppose such action. All of this must occur as the country enters the 2012 election cycle, in which all of the seats in the House, one-third of the seats in the Senate and the Presidency are up for grabs.

The debt ceiling drama has damaged the credibility of all federal elected officials, of both parties. The President has been widely criticized for failing to lead, while Republicans stand accused of intransigence and of being hidebound to ideology. The level of public dissatisfaction with Washington is extremely if not historically high.

To complicate matters further, the process of selecting a Republican candidate for President is gearing up.  The debate among currently declared candidates is creating an atmosphere of focus on conservative principles in which it is even more difficult for Republicans in Congress to compromise on revenue increases.  The challenge for the President, meanwhile, is to explain to the country how his plan and vision will permit the United States to emerge from uncertain economic times.  There are many variables and unknowns but public dissatisfaction with both political parties could lead to a situation in which a respected independent candidate (New York City Mayor Michael Bloomberg?) emerges and makes the case that only an unaffiliated President can make Washington work – unlikely but not impossible.

As the President and the Congress return to Washington and the Super Committee begins its work, the press will once again focus on the ebb and flow of the budget debate.  The attention of the American public, however, will likely have shifted from the drama of July to more personal concerns such as jobs, consumer debt and education.  As a result, the President, beginning with an address to Congress on September 8, will place his emphasis on job creation and making government work to address real concerns rather than abstract issues.  At least until we approach Thanksgiving, the broader deficit and debt debate will be temporarily on the back burner.

The “Super Committee”

The Joint Select Committee on Deficit Reduction, or “Super Committee,” established by the Budget Control Act (BCA) is charged with finding an additional $1.5 billion in deficit reduction beyond the $841 billion in savings achieved as part of the deal to raise the debt ceiling. The “Super Committee” can cut spending – including Social Security and Medicare – raise  revenue, or propose a combination of both. (While the budget exercise does not have any direct implications for Canada-U.S. issues, funding for various initiatives that do impact the efficiency of how the two countries work together could suffer as a consequence of the process.)

If the Super Committee does not produce a report, or if the report does not become law, the BCA requires an automatic, across-the-board spending reduction (“sequestration”) of $1.2 trillion, with $109.3 billion in cuts per year beginning in 2013 and continuing through to 2021. Half the burden would fall on the Defense Department and the other half on the rest of the budget. These cuts would affect both mandatory and discretionary spending with proportionate cuts to both. However, Social Security, Medicaid would be protected, while Medicare providers would see, at most, a two per cent reduction in payments.

Should Congress approve a Super Committee plan containing less than $1.2 trillion in deficit reduction, the sequestration procedure would still be triggered, and the total amount of across-the-board spending cuts would equal $1.2 trillion minus the amount of the approved deficit-reduction package.

Ambassador Gordon D. Giffin is Chair of the Public Policy and International department of McKenna Long & Aldridge LLP, and a Special Adviser to the Canadian Council of Chief Executives. From August 1997 to April 2001 he served as the 19th U.S. Ambassador to Canada.