Budget fights are a lose-lose proposition

Steven Pearlstein
Columnist April 12, 2011

Among the benefits of having spent the past several weeks in India: getting away from the tiresome, intellectually vacuous debates over the federal budget here in Washington. It’s now clear that we’re into the political equivalent of trench warfare, and the battle is likely to drag on now for years without any definitive or satisfying resolution.

It all began in December with the bipartisan deal on extending the George W. Bush tax cuts, followed by a series of continuing resolutions setting spending for the fiscal year that is already half over. The latest came Friday night, just minutes before a looming government shutdown. But even before the details of that compromise were released, the the brinkmanship began over the next crisis, a threatened default by the U.S. government sometime in early July. Republicans now threaten that they won’t authorize an increase in the debt ceiling unless it includes promises of even deeper spending cuts next year and beyond.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

However disruptive a government shutdown might have been, it would be a mild tremor compared with the global financial tsunami that would ensue if the world’s biggest and most trusted borrower were unable to repay its debts when they come due. Among the many disastrous consequences would be a big spike in U.S. government borrowing costs, which when you’re carrying $14 trillion in debt has pretty dire implications for the deficit that Republicans say they are trying to reduce. Every one percentage point increase in interest rates would add $140 billion to interest payments every year, more than offsetting the beneficial effect of all those spending cuts that the Republicans have worked so hard to achieve.

Even if we manage to avoid a debt default, however, the budget battle will not be over. At that point, attention would immediately shift to the budget resolution and appropriation process for next year. If history is any guide, the probability of agreement on those before the start of the fiscal year on Oct. 1 is approximately zero, which means there will have to be another round of continuing resolutions to avoid a government shutdown. Inevitably, those skirmishes will spill over into the 2012 election year. The most likely political outcome is that President Obama will be reelected and Republicans will lose a few seats in the House but pick up a few in the Senate, setting the stage for four more years of the same brinkmanship and stalemate.

I honestly don’t know if the American public has the psychological stamina to stick with that process — certainly, I don’t. What I do know is that such a breakdown in the institutional framework of government is what happens to global superpowers at the point when they begin to lose their edge. By the time one party or the other finally wins this battle of political attrition, the country will have likely fallen into greatly reduced economic and geopolitical circumstances.

Sadly, much of the public discourse that surrounds our budget debate ranges from politically naive to economically moronic, with the fault to be laid at the feet of politicians who simply refuse to lead.

While my policy sympathies in this debate lie more with Democrats, it must be acknowledged that most Democrats and their allies remain unserious about the necessity of reducing federal spending to levels realistically supported by politically acceptable amounts of federal taxation. It is not possible to balance the budget simply by raising taxes on rich people and closing corporate loopholes.

It is also ludicrous to complain, as many Democrats do, that by running a federal deficit next year of only $1.35 trillion (and $1 trillion-plus more in 2012), the United States has suddenly embarked on a misguided policy of “austerity.” The U.S. economy is growing, unemployment has begun to decline, corporate investment and consumer spending have picked up, and monetary policy remains exceedingly accommodating. All of those provide sufficient economic headroom to begin the process of bringing the federal budget into some sort of balance, including reasonable reductions in the long-term growth rates of Social Security, Medicare and Medicaid. To insist that these can be avoided or put off until some more ideal moment is political fantasy and ideological obstinacy.

As for the Obama White House, it has miscalculated badly about the politics of the budget battle. It is now clear that it was wrong not to have insisted on passing a 2011 budget last year, when Democrats controlled both houses of Congress. It was a mistake not to have immediately embraced the recommendations of the bipartisan deficit commission and used it to take the lead role in defining the parameters of the budget debate. And it was a mistake not to have engineered a make-or-break showdown with Republicans in December, when the forcing issue was the expiration of the Bush tax cuts rather than a shutdown of the government or the default on U.S. Treasury bonds.

Instead of leading on the budget issue, the president opted to play a cynical inside game, hoping to trap Republicans into proposing unpopular cuts in spending and entitlement programs that could be used against them in the 2012 election. That strategy has now backfired, as evidenced by the haste with which the White House moved to schedule Wednesday’s budget speech in an effort to reframe the debate and regain the upper hand.

The one thing Obama will have going for him Wednesday afternoon is that his Republican opponents have, predictably, overplayed their hand. By their own admission, theirs is a radical agenda, one that would not simply shrink government but undermine it — providing windfalls to the wealthy while denying sustenance and opportunity to Americans who have the least. Obama’s challenge will be to highlight these inequities by showing that there is both a fairer and more effective way to bring the federal budget into balance.

Perhaps more important, the president has a chance to bring this political trench warfare to an end. While remaining open to compromise on where to cut and whom to tax, he needs to make clear that he will no longer allow the U.S. government or the U.S. economy to be held hostage by partisan thugs and ideological zealots.

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