House Republicans are struggling to produce any budget plan, let alone one that balances the budget within 10 years as they originally promised. House Budget Committee Chair Jodey Arrington (R-Tex.) admits that a balanced budget is now “aspirational.”
It’s a stark cry from the GOP that was once the champion of balanced budgets. What changed?
First, Presidents Ronald Reagan and George W. Bush turned Republicans into the party of tax cuts, and now former president Donald Trump has transformed them into one that won’t touch Social Security and Medicare either. That makes balancing the budget exceedingly difficult — if not practically impossible.
The story starts with Reagan. In his first seven months in office, the 40th president pushed through the largest tax cut in American history, coupled with major spending cuts — an achievement so novel it earned its own name, “Reaganomics.” Reagan had promised that cutting the size of the state would usher in an economic boom. But Reaganomics started coming apart almost as soon as the ink was dry. Just weeks after Reagan signed both pieces of legislation, markets lurched, house and car sales hit historic lows, and the deficit rose instead of falling.
What Reagan did next explains the difference between his era and ours. His team quickly started working on, and eventually signed into legislation, the largest tax increase in American history.
Reagan’s attempts to close the deficit show the constraints he was operating under in 1982. First, members of Congress in both parties worried about how bond markets would react to the deficit, which was hitting new highs. Bond traders thought that big deficits meant government would compete with private investors for financing. Second, poll after poll reminded Reagan and congressional Republicans that the public hated deficits, and might punish elected officials for them in the 1982 midterm elections. And most importantly, Reagan’s own party believed in balanced budgets. He came under intense pressure from people like Senate Finance Committee Chairman Bob Dole (R-Kan.) to do something about the numbers. So he backpedaled furiously and tried to close the deficit with a big tax increase.
The end result was that while we remember Reagan as the model for the GOP’s era of tax cutting, federal tax revenue as a percentage of gross domestic product changed only very slightly over his two terms. In 1980, the year Reagan was first elected, federal tax revenue was 18.5 percent of GDP. In 1989, when he left office, it was 17.8 percent.
What did change during Reagan’s presidency was the deficit. The 1982 tax increase failed to close it. Because of Reagan’s increased military spending, deficits rose to what were then extraordinary levels.
But history throws us surprises. Reagan became the pioneer of the Republican era of tax cuts not because his tax cut was an economic success, but precisely because it failed and created a deficit — and then nothing disastrous happened. In fact, far from crippling the economy or hurting Republicans, Reagan’s deficits burst all of the constraints that had forced him to raise taxes in 1982. Bond traders’ fears never came to fruition because over the course of the 1980s, global investors — especially from Japan — began to pile their savings into America, effectively freeing the United States from worries that government deficits would crowd out private investment.
And when the bond markets no longer worried about the deficit, voters also stopped worrying. Americans continued to say in polls that they hated deficits. But they didn’t punish politicians who produced deficits, nor did they reward politicians who tried to balance the budget. Reagan’s successor, George H.W. Bush, learned this after he put together a broad bipartisan coalition to reduce deficits in 1990 — and lost the presidency in 1992. The next president, Bill Clinton, also focused on deficit reduction in 1993 and then saw his party lose control of the House for the first time in 40 years.
The GOP realized that balancing the budget was not a vote winner. Over the course of the 1990s, under House Speaker Newt Gingrich (R-Ga.), they moved away from being “the tax collector for the welfare state” (as Gingrich had once called Dole) and definitively became the party of tax cuts. Ambitious governors like Christine Todd Whitman (R-N.J.) and George W. Bush (R-Tex.) sought to make their stamp on national politics by proving that they could cut taxes.
When Clinton left office in 2001, the budget was in surplus, but as president, George W. Bush brought the deficit back by repeating Reagan’s tax cut trick not once but twice, in 2001 and 2003. Crucially, though, unlike Reagan, when deficits rose, Bush did not back away. Even in 2003, with the budget surplus gone and the country at war, Bush had no trouble pushing through another round of tax cuts. That had simply become what Republicans did.
In the span of a decade, from George H.W. Bush to George W. Bush, the Republican Party overthrew its core ideological commitment to budget balance.
The GOP also underwent another major change. Early in his political career, Reagan had crusaded against Medicare, which he thought was a step to socialism. By his presidency, however, Social Security and Medicare were too popular to cut significantly. Even so, as late as 2005, George W. Bush tried to privatize Social Security — the closest any Republican president came to addressing the costs of the entitlement programs. Bush’s plan got nowhere despite unified GOP control of government. Still, in 2008 Rep. Paul D. Ryan (R-Wis.) produced a plan to cut Medicare spending that brought him enough attention to get him a slot as presidential nominee Mitt Romney’s running mate in 2012. But Ryan’s plan also went nowhere.
Then came Trump. He was a typical Republican president when it came to producing a tax cut that created deficits, but on entitlements he was a revolutionary. He pledged not to cut Social Security or Medicare and recently has even ridiculed rivals who once supported proposals like Ryan’s.
Once Trump moved Republicans away from the rhetoric of reining in Social Security and Medicare, they were suddenly appalled to be accused of wanting to do so. This was clear during the State of the Union address in January when Republicans heckled President Biden for suggesting that some of them wanted to cut Social Security. Biden responded by getting the entire Congress to “stand up for seniors.” As they all stood there he said: “We will not cut Social Security. We will not cut Medicare.” And just like that, the entire polarized and fragmented American political world had agreed to exempt these two programs, which represent almost a third of federal government spending, and most of its growth as well.
Republicans also don’t want to cut defense spending and veterans’ programs, and practically speaking, the government has to make interest payments on the debt. But if those things are off the table, and Republicans won’t raise taxes, then balancing the budget would require getting rid of 86 percent of the rest of government, according to the nonpartisan Congressional Budget Office. That would mean radical cuts in everything from the Children’s Health Insurance Program to Republicans’ beloved Border Patrol, not to mention the increasingly popular Affordable Care Act as well as Medicaid, which is the only source of public funding for long-term care for American seniors.
It turns out that most government expenditures are for things that many Americans, even most Republicans, want government to spend money on. This reality is what makes it difficult to balance the budget without tax increases.
There might be a new twist in the story this summer, however: the role of interest rates.
For decades, low interest rates have made the deficit manageable, saving politicians in both parties from having to choose between lower taxes and higher spending. But as in the early 1980s, inflation has once again prompted the Federal Reserve to dramatically increase interest rates. As they go up, they raise the cost of government borrowing, and raise anew the threat of crowding-out of private investment.
Is it possible that a real threat to the country, the threat of a default on the debt or the threat of real economic consequences, could bring politicians from both parties together? Was the era of polarization a symptom of low interest rates, which allowed politicians to indulge themselves, and revealed the country at its worst? Will the political class now be forced into bipartisan compromise, and will the country rise again to a challenge, as it always has in the past? Could we even now write a heroic ending to our era of impasse and imbroglio?
Maybe. But it’s more likely that inflation comes under control, interest rates fall, the crisis is averted and we go back to the same political show we’ve been watching for decades.