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Iwan Morgan: Seeing Red: The Budget Deficit - Past, Present and Future

Iwan Morgan: Rosy Scenarios and Red Realities: Ronald Reagan, George W. Bush and the Deficit

If revenue enhancement is the nettle that Republicans must grasp in the cause of deficit control, entitlement reform has the same significance for Democrats.  This has been evident for some time but adjusting the New Deal-Great Society legacy to the fiscal realities of the twenty-first century poses a huge challenge to the party of Roosevelt.  For Democrats, entitlements are the fundamental cement that binds their middle-class, blue-collar and low-income constituencies in support of social welfare activism.  Weaken this and the coalition of interests that underwrites the liberal state could fall apart.   When making the transition to being the party of deficit control in the late twentieth century, therefore, the Democrats held back from substantive reform of entitlements – even as automatic payments mandated by these programs rose from 47 percent of total federal spending in 1980 to 60.5 percent in 2001. 

Jimmy Carter split his party and provoked Edward Kennedy into challenging him for its presidential nomination through his efforts to balance the budget in the battle against inflation instead of pursuing an expansionary fiscal policy to combat unemployment.  However, the most fiscally conservative Democratic president since the New Deal ducked the challenge of enhancing Social Security’s long-term solvency.  True, he supported program amendments in 1977 to deal with an imminent funding shortfall but backed away from the more substantive economies advocated by Health, Education and Welfare Secretary Joseph Califano to run the pension system more tightly without hurting the needier beneficiaries.  The threat of a senior citizens’ backlash orchestrated by Social Security champions allied to his administration, including his own Counselor on Aging Nelson Cruikshank, carried more weight with Carter. 

In the early 1980s House Democrats led by Speaker Tip O’Neill did much to stall Ronald Reagan’s initially successful assault on government by adopting “Save Social Security” as their political mantra.  This strategy dissuaded the Republican White House from attempting retrenchment of pensions in the name of deficit reduction and prompted its agreement to establish a bipartisan reform commission, adoption of whose 1983 report ensured Social Security’s existence and trust fund solvency into the next century.  Nevertheless defense of Social Security against further economies and adjustments became the central plank of Democratic strategy in later Reagan-era negotiations to bring the budget deficit under control.  This proved to be smart politics but made for no real progress in resolving deep-seated fiscal problems and preparing for the explosion of pension demand with the retirement of the baby-boomer generation.

Indicative of Democratic success in portraying the GOP as the enemy of Social Security, the Republicans did not target it for reform in their Contract with America agenda.  Once in control of Congress in 1995-96, they focused instead on radical change of Medicare (aimed to encourage seniors to opt for low-cost private health plans) and Medicaid (set for transformation into a block grant).  Bill Clinton’s high-risk but ultimately successful resistance to these GOP initiatives reflected his belief that they threatened the very existence of the liberal state.  In his calculus, defense of Medicare was essential to safeguard Medicaid lest diminution of middle-class entitlements made it impossible to protect low-income benefits.    In affirmation of his priority to protect the poor, Clinton told his Republican adversaries at their last White House meeting to discuss a budget compromise that would avoid government shutdown, ‘I will never sign your Medicaid cuts.  I don’t care if I go down to five percent in the polls.  If you want your budget passed, you’re going to have to put someone else in this chair.’    

Clinton’s triumph over the attempted GOP revolution persuaded Newt Gingrich that more could be achieved through constructive engagement on reform in his second term.  Moving towards an unexpected fiscal rapprochement, the president and the Speaker agreed to significant entitlement savings in the Balanced Budget Act of 1997.  The second phase of their cooperation was to have been a Social Security compromise that would have combined partial privatization of individual accounts with investment in the program trust fund of the bumper federal surpluses that were now expected to stretch far into the future. As a corollary to this, the two leaders also established a national commission on the future of Medicare.   However, the Monica Lewinsky scandal and the consequent Clinton impeachment extinguished all prospect of substantive change owing to their revitalization of political tribalism.  Whether Clinton and Gingrich could have persuaded their respective parties to support their entitlement reform initiatives without this development and whether their projected solutions were indeed viable is open to debate. What is not in doubt, however, is that Democrats and Republicans have never again been as close to working together in this common cause.

The present imbroglio over the healthcare bill, particularly its costs and proposed public insurance option, indicates that the divisions of recent history on entitlement reform have intensified rather than diminished.  For most Democrats, extension of health insurance to over 30 million Americans unable to afford coverage is a moral obligation and the most significant unfinished business of their party’s welfare-state building history.  However, it is difficult to see how this can be achieved without adding to the fiscal deficit, whose inexorable growth will eventually diminish the living standards of many Americans – particularly those whom healthcare reform is intended to help.  The Obama administration and its congressional allies might have done better from both a political and policy perspective to devise a comprehensive initiative combining insurance liberalization and robust cost containment – or to organize an independent task force of experts that would have produced recommendations for both ends.  As matters now stand, enactment of any health bill can only be the first legislative step towards broader cost control that will require boldness and radicalism, but a White House defeat will diminish its ability to shape this next stage of the agenda.  In remarks to a health reform forum in March, Barack Obama acknowledged, ‘The greatest threat to America’s fiscal health … is the skyrocketing cost of health care.’  How he deals with this danger will arguably be as important for the historical reputation of his presidency as his foreign policy initiatives to safeguard national security.