Going Forward Is More Important than ‘Going Big’
Why the Special Joint Committee on Deficit Reduction Might Achieve More by Trying for Less
SOURCE: AP/Barry Thumma
If the goal is to actually improve the federal government’s finances over the next several decades, the Special Joint Committee on Deficit Reduction should be careful about aiming for bigger deficit reduction than the country is ready for. Those pushing the so-called “super committee” to “go big” and come up with a massive package of deficit reduction have their hearts in the right place—we do have a serious medium-term deficit problem and an even bigger long-term one. But as history has shown us, and as the current political environment strongly suggests, deficit reduction is more likely to be actually achieved through multiple rounds of small steps than one giant leap. In fact, there are at least three good reasons why, if we want real deficit reduction, the super committee should be cautious about setting an overly ambitious target.
Last time we balanced the budget, it took more than a decade and multiple legislative attempts
The budget deficit in 1983 exceeded 6 percent of gross domestic product for the first time since 1946. The Congressional Budget Office projected in February of that year that it would remain well above 5 percent throughout the next five years (at the time, the CBO only projected five years forward). Concern over the widening and persistent budget gap led to multiple efforts over the next decade and a half to bring the federal deficit under control. Those efforts were spread over at least four separate major pieces of legislation, starting with the “Deficit Reduction Act of 1984,” which was projected to cut the deficit by about 0.4 percent of GDP, mostly through higher tax revenues.
Even after DEFRA, as the 1984 legislation was known, the budget deficit was still projected to exceed 4.8 percent of GDP five years later. That led to the passage of the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985. Gramm-Rudman established declining overall limits on the federal budget deficit, and a “sequestration process” whereby spending was automatically cut if the limits were breached.
Though Gramm-Rudman was ultimately a failure—Congress found lots of ways around the limits—it did introduce the idea of budget enforcement rules that could be used to push policymakers in the right direction. Since Gramm-Rudman was unable to force deficits down to acceptable levels through process reforms alone, however, the deficit from 1985 through 1990 stayed well above the statutory limits.
The fast-rising deficit prompted a new round of budget negotiations in 1990. In December, Congress passed and President George H.W. Bush signed another major piece of legislation designed to bring down future deficits. The Omnibus Budget Reconciliation Act of 1990 was projected to reduce the deficit over the subsequent five years by nearly $500 billion, or about 1.5 percent of projected gross domestic product. The 1990 budget deal included nearly $160 billion in new revenues, $80 billion in savings from mandatory spending programs, $200 billion in cuts to discretionary spending, and $60 billion in savings from lower interest payments on the debt. But even with all that, the federal budget was still not expected to get back in the black any time in the following five years.
Indeed, over the next three years, deficit projections grew steadily. By January 1993, the CBO was predicting that the federal budget gap in 1995 would be 4.1 percent of GDP. The continued rise in annual deficits prompted yet another major effort at deficit reduction—the Omnibus Budget and Reconciliation Act of 1993. The 1993 legislation—commonly known as President Clinton’s budget plan—was enacted in August, and was projected to reduce the deficit by $433 billion, or about 1.2 percent of GDP, through 1998. Like its predecessor, this legislation was projected to leave a deficit in place five years out. Unlike its predecessor, what followed were deficits that shrunk faster than projected. In 1998, the budget was actually fully balanced for the first time in nearly 30 years.
Getting to balance took more than a dozen years of effort, multiple separate attempts, and a few outright failures. It was accomplished in fits and starts, not in one big push. The super committee, Congress, the president, the markets, and the public should keep this in mind as we try to address our nation’s current fiscal challenges. It may be theoretically possible to solve our problems in one shot, but if we don’t, that doesn’t mean we’ve failed. It simply means we’ll be following the well-trodden historical path of deficit reduction.
And as we travel that path, it’s worth remembering that the one piece of legislation that tried to solve the whole deficit problem at once—Gramm-Rudman-Hollings—was the biggest bust. And that brings us to the second reason why the super committee should be cautious about “going big.”
With deficit reduction, trying to do too much at once can backfire
The Congressional Budget Office projected in August 1985 that the deficit would be 5.1 percent of GDP in each of the following five years. Four months later, Congress passed and President Reagan signed the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985. The law set overall deficit limits that were supposed to culminate in a balanced budget by 1991. In other words, Gramm-Rudman-Hollings was designed to take a budget that was permanently and badly out of balance and, within five years, get it back in the black. Things didn’t work out that way. Instead of declining to zero, the deficit stayed above 2.8 percent of GDP throughout the rest of the 1980s and was on its way back up as the new decade began.
There were many things that contributed to the failure of the Gramm-Rudman legislation. But surely one of the factors was that it tried to do too much too fast. The amount of deficit reduction that it mandated was simply more than the political system was able to absorb at that time. Worse, once it became clear that Gramm-Rudman was unpalatable, it wasn’t just evaded; it was essentially ignored and the deficit hardly budged. That is not something we want to repeat. Trying to force such a huge fiscal turnaround in one sweeping reform proved to be folly.
Today, if the super committee far exceeds its $1.5 trillion mandate, it will be repeating the mistakes of the mid-1980s. “Going big” might produce a plan that the Congressional Budget Office projects will save trillions of dollars, but will such massive savings ever materialize? Not if getting those savings means implementing changes with which the country and both political parties aren’t yet comfortable.
Of course, any deficit reduction is going to arouse some opposition. And the super committee shouldn’t allow itself to be paralyzed by the existence of opposition. But there is a world of difference between adopting policies that the majority of Americans support or that both parties can live with—even if they don’t love it—and adopting policies that vast majorities of Americans currently hate and that are absolutely anathema to one party or the other.
To go much beyond their $1.5 trillion mandate, the super committee will necessarily have to cross the border from the former category into the latter. And if they do that, then any savings they claim from such changes are likely to be illusory. This isn’t to say we can’t or won’t ultimately find our way to those larger changes, but that’s going to take time and effort. Abruptly imposing them on an unready country in a way that triggers a hardening of opposition will make real progress much more difficult.
$1.5 trillion is a lot of deficit reduction
$1.5 trillion in deficit reduction won’t solve our entire deficit problem but it’s hardly a token. In fact, combined with the $1 trillion in savings already passed into law as part of the Budget Control Act—the legislation that set up the super committee—this round of deficit reduction is very much in line with the earlier successful efforts of 1990 and 1993.
At the time it was passed, the Congressional Budget Office projected that the 1990 budget deal would reduce the deficit over the subsequent five years by about 1.5 percent of GDP. CBO projected that President Clinton’s 1993 budget would reduce the deficit by 1.2 percent of GDP. Assuming the super committee finds precisely $1.5 trillion in deficit reductions over the next 10 years, overall deficit reduction deriving from the Budget Control Act will total 1.2 percent of GDP—the same size as the 1993 effort.
Of course, that assumes the super committee will find real savings, not use budget gimmicks to make it appear as if they found savings. A deal full of gimmicks that purports to achieve the necessary savings but doesn’t actually do so would be worse than no deal at all. In fact, if the super committee is unable to come to an agreement, or if Congress won’t pass it, the Budget Control Act will automatically trigger $1.2 trillion in additional spending cuts. In that case, total BCA deficit reduction will amount to about 1.1 percent of GDP. That’s still a lot of deficit reduction.
Getting to “yes”
The super committee would be taking a huge risk by attempting to achieve a deficit reduction package that far exceeded its assigned goal of $1.5 trillion. Any such proposal will have to rely on some wrenching policy changes that vast swaths of the country won’t like, and will almost certainly include components that are absolutely unacceptable to one party, the other, or even both. That makes it unlikely that Congress will pass the super committee’s package. If Congress should pass such a proposal, it raises the prospect of sparking a movement to undo the agreement, and makes it ever more likely that future Congresses will find ways to circumvent, ignore, or otherwise subvert the projected savings.
History suggests that the cause of deficit reduction would be better served by the super committee finding between $1.2 trillion and $1.5 trillion in savings that come from acceptable menu options already on the table. The Center for American Progress has offered our recommendations for a plan that would reduce the deficit by $1.5 trillion without cutting Medicare, Medicaid, and Social Security benefits, or raising taxes on the middle class. Our recommendations are broadly supported by large majorities of Americans, which means they could stick.
Of course, $1.5 trillion in deficit reduction won’t solve all of our budget problems—and certainly not if Congress insists on extending massive deficit-increasing measures like the Bush tax cuts. But we need to be careful about trying to balance the budget in one fell swoop. Like the last time the country faced dire projections of future red ink, the best road to take may be to handle this budget dilemma in multiple steps. The super committee won’t be the last bite at the deficit reduction apple. And if the super committee tries to bite off more than it can chew, it, or Congress, might well choke.
Michael Linden is the Director for Tax and Budget Policy at the Center for American Progress.
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