“Washington’s traditional approach to balancing the budget,” former Reagan White House official Peter Ferrara writes in today’s Wall Street Journal, “is to negotiate an agreement on a package of benefit cuts and tax increases. President Obama’s deficit commission seems likely to recommend just this strategy in December. The problem is that it never works.”
Wow, that’s a mouthful – and not a particularly accurate one at that.
Simply put, the history of the 1980s and 1990s shows conclusively that budget deals of the kind Ferrara disparages not only work, they are the only proven way through which a White House and Congress can reduce deficits. The deals of 1990 and 1993 in particular, along with deficitcutting legislation in 1982, 1984, 1997, and other years, played a huge role in converting thenrecord deficits to a budget surplus in 1998.
That’s not to say, of course, that deficit-cutting legislation explains it all. Supportive monetary policy and a booming economy for much of that period played a huge role as well – though, as I note below, the deficit-cutting deal of 1993 helped create the conditions for the growth that followed.
As for Ferrara, let’s take a closer look at how his claims stack up against the actual historical record.
First, he writes of deficit-reduction deals: “What happens is the tax increases get permanently adopted into law. But the spending cuts are almost never fully adopted and, even if they are, they are soon swept away in the next spendthrift budget.”
Nonsense. As his prime example of fiscal perfidy, Ferrara states, “In 1982, congressional Democrats promised President Ronald Reagan $3 in spending cuts for every dollar in tax increases. Reagan went to his grave waiting for those spending cuts.”
Democrats made no such promise. It was Republican Bob Dole, the Senate Finance Committee chairman in 1982 and later the Senate Majority Leader, who dismissed this age-old legend about $3 in spending cuts for every $1 in tax increases as “an agreement between the President and his speechwriters.”
Besides, Ferrara himself seems to acknowledge that his general point – spending cuts never stick – isn’t quite accurate. He writes that after Republicans took over in 1995, Congress “cut federal discretionary spending by 5.4%, measured in constant dollars” and that as a percent of gross domestic product (GDP), it “dropped 17.5% between 1995 and 1999.”
If Ferrara really means that Democrat-imposed spending cuts don’t stick, well, that’s not right either. Total federal spending fell every year as a percentage of GDP under President Clinton (including the first two, when Democrats ran Congress), as the Historical Tables book from the Office of Management and Budget makes clear. So, too, did discretionary spending, except for a tiny rise from 6.2% to 6.3% of GDP from 1999 to 2000.
Second, Ferrara writes about the futility of tax increases: “In 1993, President Bill Clinton tried again as the Democrat-controlled Congress passed a tax increase as part of another budget deal. By 1995, however, Mr. Clinton greeted the new Republican-controlled Congress with a budget that projected $200 billion deficits indefinitely into the future.”
Despite the implication – that Clinton’s tax increase made the fiscal picture worse – the deficit fell every year under Clinton from the record $290 billion that he inherited from President George H.W. Bush until the budget reached balance in 1998.
The notion that, somehow, things started to turn around when Republicans took over Congress in 1995 is absurd. So, too, is the notion that Clinton’s tax increase generated higher deficits or hurt the economy.
What actually happened, as I was fond of writing as OMB’s communications director from 1994 to 1997, was that Clinton’s 1993 budget deal with congressional Democrats – which every Republican opposed – helped generate what the White House called a “virtuous cycle” of lower interest rates, more business investment, more jobs, lower inflation, stronger growth, and higher living standards.
Third, Ferrara writes about how to balance the budget going forward: “Start with the tax reforms necessary to maximize long-term growth and shoehorn spending into that revenue base.”
Ferrara would cut the corporate tax rate, impose a flat tax on individuals, close tax loopholes, eliminate the estate tax and alternative minimum tax, kill all unspent funds under last year’s stimulus bill, restructure Social Security and Medicare, reform all means-tested programs including Medicaid, roll back other spending, phase out farm subsidies, and end “corporate welfare.”
That’s a radical agenda for addressing our looming budget deficits, but one that deserves a hearing as much as any other.
In mulling it, however, policymakers should not be fooled by the falsities and unsubstantiated claims that Ferrara puts forward in today’s piece.