Making Deficits Great Again

After 2010, when Republicans gained control of the House of Representatives and later the Senate, the U.S. essentially pursued a policy of fiscal austerity.  President Obama sought to roll back the Bush-era tax cuts for wealthy households and was partially successful during the “fiscal cliff” standoff at the end of 2012. Meanwhile, the Republican Congress steadfastly refused to allow Obama to stimulate the economy with federal spending.  As a result, total federal budget outlays (including Social Security) grew at only a 1.9% annual rate from 2010 to 2016, far slower than the 6.5% annual rate of increase during the Bush years.

That American-style austerity was an under-appreciated contributor to the slow recovery from the Great Recession. However, the budget deficits of the U.S. government fell in both absolute dollars and as a percentage of GDP during most of Obama’s tenure, in 2014 and 2015 even reaching a level that produced stability in the ratio of overall debt to GDP. There was some slippage in the deficit at the end of Obama’s tenure, primarily because of a lapse in the economic growth rate in 2016. Responsible fiscal management would have suggested an attempt by Obama’s successor to get the deficit back to parity with the rate of economic growth, which would have required shaving it by about one-third, or by $250 billion.

Of course, after the Republicans held on to both houses of Congress in 2016 and unexpectedly found themselves with a Republican President to work with, there was no reasonable prospect that stabilization of the debt-to-GDP ratio would be made a policy priority. It is undeniable that cutting taxes, regardless of the fiscal implications, is the core policy goal of the modern Republican Party. Two intertwined factors are behind that inversion of Republican political philosophy. First is the widespread acceptance among conservatives of the “starve the beast” strategy for reducing the size of government.  The second was the creation of a much more cohesive, purposeful and sophisticated political apparatus by conservative mega-donors to the Republican Party, who out of ideological conviction and personal self-interest orchestrate anti-tax pressure and insist that their  elected dependents deliver. The two previous times Republicans took over the White House (Reagan and George W. Bush) they immediately enacted huge tax cuts and the deficits swelled. There was never any chance that, in the unlikely event Trump was actually elected, this time would be any different.

So the tax reductions Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan engineered in December were entirely out of the Republican playbook and should have been fully priced in to any economist’s or investor’s forecasts.  If there was anything surprising about the tax changes, it was the gratuitous and vindictive targeting of voters in high-cost, coastal Democratic strongholds (by imposing new limits on the mortgage tax deduction and the state and local tax deduction), an unprecedented use of the federal tax code to punish political opponents.

The McConnell-Ryan tax cuts will raise the cumulative federal deficit by $1.268 trillion over 10 years, according to Tax Policy Center estimates.  That represents a 14.8% increase over the CBO’s June 2017 baseline estimates. 

Then in early February things took an unexpected turn. Instead of pressing for more spending stringency, a smiley McConnell suddenly agreed to a two-year budget deal with Democratic Senate leader Chuck Schumer that called for large increases in both defense and non-defense discretionary spending. The deal, subsequently approved by Congress and signed by the President, is expected to add another $419 billion to the cumulative deficits through 2027.

Although Senate and House Democrats took a large gamble by decoupling the budget votes from the DACA issue, it is easy to see why many approved the deal — it protects core domestic social programs past the 2018 elections, when the Democrats have realistic hopes of regaining control of at least one house of Congress. (Democrats in the Senate split 37-12 on the budget bill, in the House 73-119.)

More surprising was that McConnell agreed so readily to the big boost in spending. Other conservatives criticized the deal. Rand Paul single-handedly delayed the Senate vote on the budget bill, charging that Republican “hypocrisy is astounding.” The House Freedom Caucus opposed the deal and all of its members voted against it. The Club for Growth urged all members of Congress to vote no, and the Koch Brothers’ organ, Americans for Prosperity, voiced its “strong opposition.”

Yet, conservative opposition to the budget deal was strangely muted. The opposition of the most influential right-wing organizations seemed more pro-forma than passionate. In The American Spectator, Bruce Weichert lectured Republicans that a choice eventually has to be made between tax cuts and “cradle-to-grave entitlements.” In The National Review, Brian Riedel concluded that Republicans regularly bluff on spending reform, and that Trump’s election exposed that voters do not prioritize spending restraint. In a comment to the Times he was even more explicit: “Republicans will tell you that runaway spending hurts the economy, but the party isn’t even talking about Social Security and Medicare reform anymore.  And that to me is the sea change. There is no constituency for it, and Republicans have essentially given up.” Ross Douthat characterized the Republican approach to cutting government spending as “doomed cavalry charges against popular programs followed by a shrugging acceptance of more spending for the welfare state status quo.”

Should we believe those conservative pundits that the budget deal reflects a “sea change” in Republican objectives? I think that would be an extremely naïve and dangerous conclusion to draw. Conservative opponents of Social Security and Medicare are far too savvy to contemplate a doomed cavalry charge against those bastions of social welfare; their technique is one of patient asymmetric warfare and subversion.  As Eric Laursen and Nancy MacLean have detailed, conservative think tanks and political action organizations have mapped out a careful long-term strategy aimed at undermining and delegitimizing those programs while driving wedges between current and future beneficiaries.

Only a little over a year ago McConnell said that the “unsustainable growth rates” of the so-called entitlements programs are the “single biggest threat to our future,” and that “until you get that fixed, you can’t fix the debt problem.” He has not changed his stripes, and Ryan has been chomping at the bit to eviscerate those programs. However, with an unpopular president, Republican legislators announcing their retirements at an unprecedented rate, Republican candidates lagging their opponents in fundraising,  and a string of Democratic victories in state and special elections, McConnell has become increasingly concerned that Republicans could lose control of Congress in the 2018 mid-term elections.  He recently told The New York Times that “the odds are that we will lose seats in the House and the Senate,” indicating that given Republicans’ slim 51-49 majority in the Senate, he sees losing his job as Senate Majority leader as a real possibility. It is also quite probable that he anticipates a series of bombshell revelations from the Mueller investigation that will force Republican incumbents to strap on their seatbelts and hold tight for their political lives. It is no wonder he’s said that he does not see “entitlement reform” being on the Senate’s agenda in 2018.

Thus, looked at from McConnell’s viewpoint the budget deal makes a lot of sense. If he had pressed curtailments to the major entitlement programs now it would only add to Democratic fervor going into the 2018 elections and increase the risk that Republicans lose one or both houses of Congress. That would only set back, rather than advance, the long-term goal of trimming Social Security and Medicare. Better, from McConnell’s viewpoint, to skate into the 2018 elections with a strong deficit-powered economy and hope to hold onto Republican majorities. In the meantime, he can let fiscally-conscientious Democrats, The New York Times, and good-government groups fret about the deficit, better preparing the ground for future entitlement reform. It takes patience to starve a beast.

There is also relatively little short-term economic risk in the strategy. Interest rates and inflation are still quite low, and the tax cuts and spending hikes should provide a nice Keynesian boost to the economy going into the elections. (Paul Krugman offers a nice calculation of the probable stimulatory effects.)  For Republicans, maybe deficits aren’t so bad after all.