Authors: David Wessel
Red Ink (6 page)
The deal extended the 1990 limits on annual appropriated spending through 1998, squeezed payments to health care providers, and raised taxes, primarily on upper-income taxpayers. This time the deficit-reduction effort worked as promised.
The deficit came down even faster than the CBO projected as the economy picked up momentum and incomes of the rich—whose taxes had been raised by the law—rose sharply.
In 1995, the IRS counted 87,000 returns with incomes of more than $1 million, up from 66,500 in 1993. These millionaires saw their incomes rise by $57 billion over those two years, and they paid $18 billion more income taxes.
Republicans gave Clinton no credit for the shrinking deficit. At one unusually testy appearance before the House committee he had once chaired, Panetta, then White House budget director, exploded under questioning from Olympia Snowe, a moderate and mild-mannered Republican from Maine.
“You know,” he said, “does it really hurt that much to admit that
we are impacting on the deficit? Does it really hurt that much to say that we are going in the right direction? Does it really hurt that much to give us a little credit for what we are trying to do …?” Even for those familiar with Panetta’s behind-the-scenes outbursts, the harsh words were startling, a display of frustration and a reminder that partisanship over budgets is hardly a recent phenomenon. A few minutes later, Panetta apologized: “Sometimes the Italian part of me gets in control of my emotions.”
In the 1994 elections, Republicans took the House for the first time in four decades, their campaign aided by their attacks on Democrats for raising taxes in 1993. Newt Gingrich became the speaker. Emboldened Republicans confronted Clinton over spending, producing two government shutdowns before agreement was reached. After a couple of years as Clinton’s chief of staff, Panetta went home. He sounded bitter. “
In the time that I’ve been in Washington politics has gotten meaner … where instead of spending time talking about the broader issues—on education, welfare reform, health care, and what have you … it’s become much, much more of a political temptation … to grab that 30-second spot on the evening news to engage in this kind of attack politics.” Referring to Republicans, he said, “I honestly think they’re losing points with the American public, but … there’s still a mentality that if they can score the first punch, that somehow that benefits them.”
Two years after Gingrich led the Republican takeover of the House, Bill Clinton went to Capitol Hill to deliver his 1996
State of the Union address, and sounded a Reaganesque theme: “
We know big government does not have all the answers. We know there’s not a program for every problem.… The era of big government is over.” Republicans cheered. Clinton and Gingrich had economic winds at their back—a strengthening economy, a rising stock market, soaring incomes in the top tax brackets. Suddenly, a balanced budget appeared to be within reach. In 1997, Gingrich and Clinton—with Panetta’s successor as chief of staff, Erskine Bowles, doing much of the negotiating—reached a deal to cut taxes but restrain spending more, at least on paper. One money saver would later become a headache, though. The deal legislated unrealistically large cuts to fees Medicare pays doctors in the future; in later years, Congress would waive the cuts regularly.
The pact marked a high-water mark in recent cooperation on budgets between Republicans and Democrats. From the Obama White House in 2012, Jack Lew reflected almost wistfully on the 1990s: “
Leon [Panetta] and John Kasich [the Ohio congressman who was the senior Republican on the House Budget Committee] would get in a room and scream at each other. It was awkward to be in the room sometimes. But at the end of the day, they could do business together. You go through that, and you do business together.”
Emboldened by their success, Clinton and Gingrich flirted with a once-in-a-generation fix to Social Security so its finances could withstand the retirement of the baby boomers.
But Clinton’s dalliance with intern Monica Lewinsky and the impeachment trial that followed destroyed any chance of a grand bargain between the president and Congress. “
Gingrich wanted to do it; Clinton wanted to do it. It was a real missed opportunity,” Bowles says. “Monica changed everything.”
Lew and the deficit-fearing contingents in both parties look at the Reagan tax increases of the 1980s and the Bush deficit deal of 1990 as the good old days, and keep searching for ways to re-create the politics that spawned those compromises. Paul Ryan and the small-government, antitax slice of the Republican Party see them as evils to be avoided because they reduced the deficit without permanently shrinking the government. “
Why would we go back to the ’82 and ’90 deals where we put taxes on the table, and we didn’t get spending cuts?” says Grover Norquist, the influential antitax crusader and strategist.
For four years, 1998 through 2001, the federal government ran surpluses, a remarkable development that put deficit worrywarts nearly out of business and made all the warnings about rising health care costs and the approaching retirement of the baby boomers much less threatening. As a presidential
candidate, George W. Bush promised to tap the surpluses to cut taxes. Federal Reserve chairman Alan Greenspan, at the time the most credible economist in the country, widely hailed as
the
voice of fiscal rectitude, was called to the Senate Budget Committee in January 2001 to testify. As is the custom, the Fed sent an advance copy of the written testimony to the committee. Kent Conrad, the fiscally conservative Democrat who chaired the committee, read it—and winced. “
[T]he highly desirable goal of paying off the federal debt is in reach before the end of the decade,” Greenspan said. The money would burn a hole in the government’s pocket: if taxes weren’t cut, it would be spent. Greenspan favored tax cuts, and said so, with carefully worded qualifications that he could point to later but few heard at the time.
Conrad called Greenspan to his office and told him his words would trigger “
a feeding frenzy.” He made no headway and asked Bob Rubin, the former Treasury secretary, to call. Rubin was no more successful. Greenspan delivered the testimony as written and got precisely the reaction that Conrad and Rubin had foreseen. The headline in the next morning’s
Wall Street Journal
said, “Greenspan, in About-Face, Backs Tax Cuts.” In his 2007 memoir, Greenspan allowed that he had “
misjudged the emotions of the moment.” The most prescient part of his testimony was little noted at the time: an admonition against “
policies that could readily resurrect the deficits of the past.” Indeed, 2001 would be the last year that Washington ran a surplus.
WHERE DID THE SURPLUSES GO?
In January 2001, the CBO, then headed by Dan Crippen, a burly, bearded former aide to Ronald Reagan, issued the annual ten-year budget projections to which Greenspan referred. If current policies continued and the economy, which was weakening at the time, rebounded as anticipated, the United States would run budget
surpluses
each year from 2002 through 2011. Collectively, these surpluses would total $5.6 trillion, enough to pay off the entire federal debt, according to the CBO.
In January 2012, the CBO, now headed by a slender, bearded economist who had worked for Bill Clinton, Doug Elmendorf, issued another ten-year update. The tables in the back showed that from 2002 to 2011, the government had run
deficits
each year. The total: $6.1 trillion worth of deficits over ten years.
How did those surpluses turn into deficits? How could the CBO be off by nearly $12 trillion, an astounding sum? The short answers: a lousier than anticipated economy, some big tax cuts, two wars that weren’t paid for, an expansion of Medicare to cover prescription drugs that wasn’t paid for, and—later—the damage done by the worst recession since the Great Depression.
Let’s take them one at a time.
First, the economy did worse than the CBO and most other forecasters anticipated. The dot-com bubble burst,
precipitating the recession of the early 2000s, which was compounded by the shock of the September 2001 terrorist attacks. The recession was mild and the economy recovered. But the hits kept coming: first the housing bubble burst, then the financial crisis hit, and the Great Recession was on. That hurt revenues—fewer capital gains, fewer profits, and fewer jobs mean less tax revenue to the Treasury. And it increased spending because more people were eligible for government unemployment, food stamps, and health benefits.
Net from economy:
$3.3 trillion.
Two, Congress cut taxes—repeatedly. The big one was George W. Bush’s 2001 tax cut, enacted at a moment when there was genuine concern about the prospect that government might run such persistent surpluses that it would pay off all its debt, which would have raised such unfamiliar problems as a shortage of Treasury debt for financial markets to trade. The first Bush tax cut reduced revenues by about $1.2 trillion over ten years, according to the CBO. Smaller tax cuts followed over the years, and then came the ones that Obama pushed to fight the deep recession that was afflicting the country when he was sworn in.
Net from tax cuts: $2.8 trillion.
Three,
the government spent more—a lot more. The cost of the wars in Afghanistan and Iraq came to roughly $1.2 trillion over the decade, and there was extra spending on homeland
security after 9/11. The expansion of Medicare to cover prescription drugs cost about $275 billion just through 2011. The much-criticized Troubled Asset Relief Program, which was used to bail out the banks, and the Obama-backed stimulus package added another $500 billion through 2011, but much of that was later recouped as banks paid off their loans.
Net from spending: $4.3 trillion
.
Four, bigger deficits mean more borrowing. In January 2001, CBO projections anticipated that the entire federal debt would be paid off by now, which would have meant no interest costs. Instead, the debt held by the public—everyone from the Chinese government to the savings bonds in American desk drawers, but excluding the Social Security trust fund—stood at $10 trillion. And more borrowing means an ever-larger interest tab.
Net increase in the deficit from interest: $1.4 trillion.
In the late 1990s and early 2000s, chief executives of corporations became celebrity heroes, and politicians seemed increasingly irrelevant amid the centrifugal force of the Internet. The pace of federal spending increases slowed, and the reforms to which Clinton and Gingrich had agreed pushed many from welfare to work as the economy boomed. Then the stock market plunged, chief executives became celebrity crooks, and the September 11, 2001, attacks shattered the notion that with the
Cold War over, the market could cope with nearly everything. Despite Clinton’s State of the Union declaration, government grew, again. “
The era of big government wasn’t over,” said Allen Schick, the Maryland professor. “Look at what happened with spending. It was hibernating under Clinton and revived under Bush.”
Once in office, George W. Bush delivered on his campaign promise to cut taxes. His first tax cut, in 2001, was smaller than Reagan’s but was followed by additional tax cuts the following four years that collectively exceeded Reagan’s. Simultaneously, most of the spending restraints written into his father’s 1990 deficit deal expired. Then, at the end of Bush’s first year in office, his presidency was redefined by the 9/11 terror attacks, and so was the federal budget. Two wars and intensified efforts at homeland security increased spending significantly. In 2001, defense spending was 3 percent of GDP, half the Reagan-era peak.
In 2011, it was 5 percent. (Each percentage point of GDP is about $150 billion.)
Bush also signed into law the first significant expansion of Medicare in forty years. When Medicare was designed in the 1960s, prescription drugs weren’t a big part of health care so the program didn’t cover most drugs. By the first decade of the twenty-first century, they accounted for 12 percent of all personal health care spending, and pressure to expand Medicare to cover them was intense. The drug insurance program created in 2003 was built around two elements of lasting consequence to the budget: One, the government would subsidize
the purchase of competing private drug insurance policies and wouldn’t negotiate directly with drug companies. And, two, no attempt was made to pay for the bill. The only constraint was an agreement to limit the tab to $400 billion over ten years, even though everyone knew it would cost more in the future.
By 2010, the
annual
tab exceeded $60 billion, about $1 of every $8 in Medicare outlays. Government actuaries projected the cost would climb nearly 10 percent a year in the following decade.
Obama summed this up in an April 2011 speech at George Washington University: “
[A]fter Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program—but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts.”
A year before the 2008 election that would bring Leon Panetta back to Washington—and before the Great Recession had hit—he and a few other veterans of the 1990s deficit wars were called by Kent Conrad to appear before the Senate Budget Committee. Panetta had been out of government for years, building a public policy institute in Monterey. He came to Washington periodically to scold his successors in his role as cochairman of the Committee for a Responsible Federal Budget, a hardy antideficit lobby that brings together aging budget experts from both parties to wring their hands and offer advice, welcomed or not.
In congressional testimony, Panetta recalled the surpluses that the government had been running when he left Washington. He remembered hoping that his successors “
would never again permit runaway deficits to undermine [the nation’s] economic strength.” But, he said sternly, “events, partisanship, and a failure of leadership on all sides have conspired to produce the kind of irresponsible fiscal behavior that again threatens our future.”