The Easy Way Out

By Jonathan Rauch and National Journal

May 9, 1997

Historians will write that in 1997 the Republicans and Democrats girded for budgetary battle, marched afield and sat down together on the grass for a beer.

After seemingly endless negotiations, the two sides agreed on a package to reduce the deficit by about $350 billion over the next five years, fiscal 1998-2002. The result, according to the bipartisan spin, will be a balanced budget in 2002, with enough left over for $85 billion in net tax relief between now and then. "A truly historic event for this Congress and this President," trumpeted the congressional Republican leadership.

Historic the deal may be, but not so much because of what it includes as because of what fell out: just about anything unpleasant for incumbents of either party. From a political point of view, it may indeed be a triumph; certainly, at a minimum, it is clever. From a reformer's point of view, however, it is a washout.

Politically speaking, the deal got Republicans at least part of the way out of the hole they dug for themselves in 1995 and 1996, when their radicalism culminated in government shut-downs, alienated the public and rejuvenated President Clinton. The deal shows the public that Republicans are compromisers rather than scorched-earthers, and lets them claim the first significant tax cut since President Reagan's in 1981.

Democrats did better still. In the 1992 campaign, Clinton promised middle-class tax cuts. He notably failed to deliver--until now. The budget deal made room for his $500-per-child tax credit and his $35 billion tax credit for college tuition, the latter of which economists say will mostly just drive up tuition, but which politicians know will attract politically engaged middle-class voters.

"This ends the critique of the Democrats as tax-and-spend liberals," said economist Robert J. Shapiro of the Progressive Policy Institute, a centrist Democratic think tank. "They've balanced the budget and cut taxes--it denies the Republicans their fundamental issues."

Actually, it's better than that. Democrats get to claim that they deliver not only tax cuts and balanced budgets, but also--eat your hearts out, Republicans--new domestic spending for appealing causes: about $16 billion for health insurance for children, increases in Pell grants for higher education, about $8 billion more for transportation, and so on. If Republicans get to be in favor of eating cake, Democrats get to support having it too.

So everybody's happy, right? Not the reformers. Conservatives wanted a long-term reduction in the size and scope of government. "New Democrats" wanted cuts in corporate subsidies and demolition of stagnant government monopolies, plus major public investments. Above all, pressure is growing to get to work on the great fiscal task of the next 20 years, which is to restructure Medicare (the giant health program for the elderly) to make it affordable when baby boomers start to retire 20 years from now.

What did the reformers get? Nothing.

Granted, to say anything definitive about this deal is harder than usual, because no one, including the negotiators, was actually sure what's in it. The deal was conceived and presented on May 2 as a flurry of "cuts," but actually it had few numbers showing bona fide future spending levels.

As of the middle of the following week, congressional and Office of Management and Budget staff members were still scrambling to make the numbers add up to a balanced budget--which, for some days, they didn't. One experienced budget-watcher said, "This is a truly historic budget deal: It's the first one I've seen without any numbers."

Still, the broad outlines are reasonably clear. Half or more of the deficit reduction comes from cuts in government entitlement programs, mainly Medicare. The Medicare proposals, however, eschew changes that would reform the program's benefit structure, opting instead for further squeezing of payments to health care providers. (The exceptions include an agreement to charge beneficiaries receiving home health care a small premium, which, though modest, asks recipients to give a little. Many recipients will also pay a very small increase in the standard monthly premium.)

Nondefense discretionary spending will be increased above the 1997 level and then will be more or less frozen there for five years. That means that lawmakers and the President can spend more money up front and tighten their belts later on.

Add it up, and you get . . . not much. In 1969, the Johnson Administration put through an anti-deficit plan, including an income-tax surcharge and spending cuts, that reduced the deficit by about 3 per cent of gross domestic product (GDP) in a single year. And the Clinton Administration's own 1993 budget package, though not of that magnitude, brought the deficit down by 2 per cent of GDP in three years.

By contrast, the new budget deal would reduce the deficit by a sum totaling only about 1 per cent of today's GDP over five years. That may or may not be enough to get the budget actually balanced by 2002, but either way, because the deficit has fallen so sharply of its own accord, the amount is small.

"At least a bunch of Republicans and Democrats were able to come to some sort of agreement, but it is marginal," said Rudolph G. Penner, a former Congressional Budget Office (CBO) director who is now managing director of the Barents Group, an economic consulting company. "Compared to some of the major fiscal policy changes of history, or what will be required to adjust for the baby boomers' retirement, it's trivial."

Conservatives may console themselves that they get the first significant tax cut since 1981. But a second look shows that this, too, is minuscule: The tax cut amounts to about 1 per cent of revenues over the five-year period. Not enough, in the opinion of Stephen Moore, a budget analyst with the libertarian Cato Institute, to justify the deal's increases in spending for liberal causes. On the whole, he noted, the deal spends $216 billion more (over five years) than the budget that the Republicans passed in their feistier days in 1995 (and that Clinton vetoed). "I think it's worse than nothing," he says.

Moreover, whereas Clinton pushed for ostentatiously middle-class tax cuts (college tuition aid, tax credit for children), the Republicans demanded reductions in estate and capital gains taxes, which disproportionately benefit the rich. "That strikes me as politically unbelievably foolish," said David Frum, a conservative writer and commentator. "If what they're saying is that, when push comes to shove, the form of tax relief we care most about is estate-tax relief, there is a real danger they're going to find themselves defending simply the class interests of business and the rich."

For fiscal worrywarts, the tax cuts are, if anything, too big--or at least threaten to become so in future years. Clinton did secure a "side letter" from GOP negotiators that pledges, unenforceably, to avoid any tax cut that balloons after 2002.

The much bigger worry, however, is putting Medicare on a secure footing for the long term. In announcing the deal, Senate Majority Leader Trent Lott, R-Miss., declared: "This budget vindicates our long Republican effort to preserve and protect Medicare for current and future generations." Actually, if there is one thing this budget does not do, it's that.

True, the deal will postpone the Medicare trust fund's insolvency another five years or so, to about 2007. Also true, the deal's $115 billion five-year Medicare cut is large in the context of a relatively small budget package. But, says Carol Cox Wait, the president of the Committee for a Responsible Federal Budget, an anti-deficit group: "That's not a tough number--not from any baseline. It doesn't begin to do the things that you need to do to get that program under control."

Pragmatists reply that there's only so much the process can deliver before the voters are ready for change. Just ask the Republicans, who got hammered for trying to reform Medicare in 1995. Besides, the Clinton Administration argues that stabilizing Medicare in the long run needs to be untangled from saving money in the short run.

With the budget deal done, argues OMB director Franklin D. Raines, any broad Medicare reform "won't be related to a tax cut, or funding the Defense Department, or funding highways. So we separate the issues"--and do Medicare later. Maybe. But Medicare reformers wonder whether politicians will really have any appetite to gore this most sacred of cows, now that the public is being told that the budget problem is solved.

So, if you want to know why Sen. Phil Gramm, R-Texas, is having dyspeptic fits, just bear in mind that he is both a government slasher and a Medicare reformer.

"This is not my revolution we're implementing here," he said in an interview. "There's no doubt about the fact that when you look at this agreement, it's probably going to have three lasting effects. No. 1, a guarantee of the continued growth in the structure of government, and social programs in particular. No. 2, a virtual certainty that we will delay meaningful Medicare reform. And No. 3, by creating the impression that the deficit is behind us, we are probably going to open the floodgates to more spending in the future."

Not only does the budget deal do far less than conservative revolutionaries once demanded as their minimum--it does less than Clinton's own, already quite mousy, budget proposal from earlier this year. For that matter, it does less than the deal that Congress and the White House nearly closed a few days before.

Clinton had wanted to cap the growth of Medicaid spending per recipient. The savings weren't large in the near term, but the proposal would have put a potentially important new limit on long-term health spending. Clinton and Congress also edged toward reducing the consumer price index (CPI), which, many economists now believe, drives government benefit checks up faster than the cost of living actually rises. That, too, would have helped reduce long-run costs.

The difficult political decisions were "just about cast, no question about it," recalled Rep. John M. Spratt Jr. of South Carolina, the senior Democrat on the Budget Committee, in an interview.

And then the phone rang. Just as the negotiators were poised to make some politically difficult decisions, the Congressional Budget Office delivered the news that, thanks to robust economic growth, some $225 billion in unanticipated revenue would flow into the Treasury over the next five years.

After an initial period of distress in which GOP and Democratic staffers worried that the unexpected loot might actually upset momentum for a deal, both sides recognized that they had been handed a windfall. They could now punt any tough cuts they were contemplating, and so, without ado, they did.

Out went the Medicaid cap--an "easy decision," said Spratt. "We knew it was politically problematic because 50 governors opposed it, and practically problematic because it locks in disparities from state to state," he said. Out went the CPI adjustment. "Both sides felt that this should be disposed of, because it was to some extent an inchoate idea," Spratt said.

Up went defense spending because, according to Spratt, the top Pentagon brass "were going to mutiny if we didn't." Negotiators put in another $15 billion for welfare reform, added enough for children's health coverage to cancel out any Medicaid savings and threw in another $25 billion for discretionary spending.

"Thursday night [May 1], when they got the $225 billion, they just went on this frenzy of adding money back--and they added back too much," said one Republican congressional aide. The result was that the next day, when the politicians rushed to announce their triumph lest it come unglued over the weekend, the deal actually fell something like $5 billion short of balancing the budget in 2002. Numbers crunchers at both ends of Pennsylvania Avenue were left fishing forlornly for clever ways to squeeze a size-10 budget into a size-9 box.

The story is not over. In Congress, conservatives can be expected to try to toughen the deal, or torpedo it altogether. Indeed, much if not most of the agreement's real meaning will emerge in the details as it makes its way through the legislative process. Still, the signal sent by the new budget deal is unmistakable. The sight of formerly "revolutionary" Republicans signing their names to an agreement that renounces even the most timid of reforms denotes the final humiliation of conservatives' ambitions. For better or worse, centrist, incrementalist Washington has won, leaving no viable reform movement, left or right, alive on the field.

Kirk Victor and Ben Wildavsky contributed to this story.


By Jonathan Rauch and National Journal

May 9, 1997

http://www.govexec.com/federal-news/1997/05/the-easy-way-out/2913/