Deficit politics
Michael Barone
newsandopinion.com --
THE most important thing about Senate Majority leader Tom Daschle's January 4 speech on the economy is what isn't there-a call for tax increases. For increasing taxes is the policy prescription that inevitably follows from Daschle's analysis. Daschle calls for "returning to fiscal discipline" and decries budget deficits. But he calls for one-year tax cut and permanent spending increases himself-neither of which, of course, moves the budget toward surplus. There are two ways for doing that: reducing increases in spending (which he doesn't mention and surely doesn't want) or increasing taxes.
Moreover, Daschle implicitly endorses tax increases as a way of cutting deficits when he says: "From 1980 to 1992, our national debt had quadrupled. Some people feared we'd never get out of that fiscal hole. But we did. And we did it the old-fashioned way. In 1993, we made a decision: No more living beyond our means. ... From that point on, we decided, everything we did had to fit into a new framework of fiscal discipline." 1993, of course, was the year when Democratic majorities in both houses of Congress passed, without a single Republican vote, Bill Clinton's tax increase.
This is a partisan Democratic version of history, which leaves out several politically significant things. The argument is: We did the political risky thing, and raised taxes, and the deficits vanished. And in response interest rates fell.
But in fact, there were three things that eliminated the early 1990s deficits, each of approximately similar magnitude. One was the end of the savings-and-loan bailout. The deficit ballooned in the early 1990s as the government paid off depositors in bankrupt savings and loans. But within a few years they were all paid off, and the government actually made some money selling off savings-and-loan assets. All this would have happened whoever was in power. Neither Democrats nor Republicans deserve any credit.
The tax increases of 1993 were the second thing that reduced the deficit. Raising the taxes on high-income earners brought revenues gushing into the Treasury as the stock market boomed and incomes increased. For this the Democrats are entitled to take credit, the more so as the tax increases (together with the Clinton healthcare plan and gun control) cost them control of both houses of Congress in 1994.
The third thing that reduced the deficit, entirely unmentioned by Daschle, was the virtual freeze in federal spending by the Republican Congress in 1995-96. Back in the 1980s, Democratic Senator Ernest Hollings ran for president on the platform of freezing spending for a year, which he said would wipe out the budget deficit.
It would have gone a long way toward doing so; and the Gramm-Rudman-Hollings law, which sought to limit increases in spending, did, in fact, substantially reduce the deficit in the late 1980s. Remember, that when the Republicans came forward with their budget plans in 1995, Bill Clinton and the Democrats refused to call for a balanced budget, ever. Now they claim credit for producing what they said then was impossible. But the Republicans suffered politically from their deficit-cutting success, though not as much as Democrats had in 1994; their standing declined with voters, and they only barely held on to majorities in Congress in 1996, 1998, and 2000.
Daschle's reluctance to call for tax increases is obviously rooted in the knowledge that the things both parties did to effectively reduce deficits did not help them politically and seem to have cost them votes. His strategy evidently is to do to George W. Bush what his predecessor as majority leader, George Mitchell, did to the elder George Bush in 1990-get him to agree to a tax increase.
Mitchell in effect held the defense budget hostage at a time-the end of the Cold War-when political demand for defense spending was disappearing, and when Democrats held solid majorities in both houses of Congress. Bush did not wish to see defense spending cut as it had been in the 1970s, and so he agreed to the tax increase when his OMB Director Richard Darman was able to negotiate "firewalls" between defense and domestic spending. Democrats would agree not to cut defense below certain levels in return for a tax increase.
And why did Democrats want then-and want now-a tax increase? Because, as one Democratic politician said to me when I suggested he might support income tax indexing, which would reduce revenues but avoid raises in effective tax rates: "No. I want the government to have the money." Democrats believe that more government spending can help people in need and will be a good thing for our country. That is what, more than anything else, most of them are in politics for. This is something reasonable people can and do believe; the problem is that most voters don't. So the politicians talk about "fiscal discipline" rather than higher taxes.
As Daschle said in his speech, "The [Bush] tax cut has taken away our flexibility and left us with only two choices-both of them bad. We can shortchange critical needs, such as homeland defense, or we can raid the Social Security surplus-and even run deficits-to pay for these critical needs."
Taken literally, this is disingenuous on at least two counts. Daschle knows that homeland defense is the last thing that will be cut in a fiscal crunch; he is worried about other, less universally popular spending programs, like those in the farm bill he tried to pass in December. As for "raid[ing] the Social Security surplus," Democratic Congresses did that happily for nearly 30 years, passing budgets with deficits or with surpluses less than the amount of FICA revenues. (Similarly, it is a stretch to say, as Daschle did, that what we're seeing is "the most dramatic fiscal deterioration in our nation's history.")
But underneath, Daschle's argument is sincere. The tax cut takes away not "flexibility," it takes away revenues that Democrats would like to spend, in ways they think will be good for the country." His attack on the tax cut is part of a long-term battle over the size of government in years after 2004.
At the moment, it is a battle that he seems unlikely to win. The day after Daschle's speech, George W. Bush went to California and pledged that the 2001 tax cuts would be rescinded "over my dead body." Unlike 1990, Democrats control only one house of Congress, by one vote. In a war atmosphere, they dare not refuse to appropriate as much for defense as the president wants (the senior Bush agreed on "revenue enhancements" in June 1990, two months before Saddam Hussein invaded Kuwait). And the current OMB director, far from cherishing a secret agenda of increasing taxes, is focused on cutting spending and is dead set against tax increases.
In any case, it's not clear that attacks on the federal budget deficit are good politics. Parties that focused on the deficit-Republicans in the 1930s and 1940s, Democrats in the 1980s-did not do well at the polls. The deficit, unlike unemployment or inflation, is an abstraction, something invisible in people's daily lives. Daschle embraces Bill Clinton's and Robert Rubin's theory that cutting deficits sparked economic growth by leading to lower interest rates.
But the theory is dubious. As Alan Reynolds pointed out recently in National Review Online, the real prime interest rate was 6.2 percent in 1985-89, years of high deficits, and 6.7 percent in 1997-2000, years of low deficits or surpluses. Japan currently runs a huge budget deficit, but real interest rates hover near zero. The United States had sustained low-inflation economic growth in the high-deficit 1980s and in the low-deficit or surplus 1990s. Reynolds does not seem too far off when he concludes, "In reality, budget deficits and surpluses have no reliable connection with economic growth, real interest rates, trade balances, inflation, or anything else of practical importance." Deficit-cutting tax increases did not win the presidency for Walter Mondale in 1984 and deficit-cutting tax increases-or complaints about tax cuts but a promise not to roll them back-will not likely win the presidency for Tom Daschle 20 years later.
What they do is give Daschle a peg for criticizing Bush on the economy and putting Democrats in position to capitalize on any discontent voters may have with the economy next November. But they won't help much if the economy improves in 2002-or if voters in 2004 figure out that what Daschle really wants is a tax increase.
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