Why Make a Deal?

May 27, 1997 • Commentary
This article appeared in the Weekly Standard.

American taxpayers have come to regard Washington’s budget deals much the way a dental patient responds to the whirling sound of the surgical drill. And for good reason. From Ronald Reagan’s ill‐​fated support of the 1982 Tax Equity and Fiscal Responsibility Act (we’re still waiting for the phantom three dollars of spending cuts promised for every dollar of new taxes from that misadventure) to George Bush’s catastrophic 1990 Andrews Air Force Base summit, bipartisan budget deals invariably lead to bigger government, higher taxes, or both. This is one of those painful recurring lessons that the Republican establishment seems genetically incapable of learning.

To be sure, the 1997 budget deal between the White House and GOP congressional leaders is not nearly the disaster of 1982 or 1990. Those deals raised taxes. This will cut them–though by less than Republicans are advertising. Reasonable people can disagree on the merits of this plan. Republican leaders like Dick Armey and Tom DeLay have worked tirelessly to get the best deal out of Bill Clinton and moderate Republicans. But the price that Republicans are paying for the tax cuts–including $15 billion of new entitlements, the largest education spending increase in 30 years, and other increases in Clinton’s domestic initiatives–may be too high.

From the very start, what Newt Gingrich, Trent Lott, and the rest of the GOP negotiators have never been able to explain satisfactorily is: Why a budget deal at all? The case for a deal has always been predicated on flimsy premises. Foremost among these is the contention that the only hope for substantial deficit progress is through a negotiated settlement with the Clinton White House. History proves this tragically wrong. Contrary to Washington conventional wisdom, the nation’s fiscal health improves most when bipartisanship breaks down.

The two periods of greatest budget austerity in the past 20 years were, first, the late Reagan years of 1986–89, when the fiscal shackles of Gramm‐​Rudman dragged domestic spending growth down below the inflation rate while the deficit tumbled from $220 to $152 billion, and second, 1995, the first fiscal year of the Republican‐​controlled Congress. The protracted budget stalemate, the two federal shutdowns, and the continuing resolution that funded agencies at 90 percent of the previous year’s level caused the deficit to plunge by $57 billion. That was the second steepest single‐​year decline in red ink since the end of the Second World War. No budget deal has ever come close to this deficit‐​cutting performance.

These two episodes highlight a compelling political lesson that fiscal conservatives inside and outside of Congress should take to heart: If the goal is truly to sweat out savings from our bloated $1.7 trillion federal budget, there is a lot to be said for blessed gridlock.

Here lies the problem: These budget negotiations are not primarily motivated by a desire to sweat out savings from the budget. Just the opposite. “The popular perception that Republicans want to cut domestic spending is false,” noted Sen. Phil Gramm during a burst of candor in his office before a gathering of conservative budget analysts. “Many Republicans want to increase it.” On April 17, Gramm, Sam Brownback of Kansas, and eight other seething Senate Republicans shot off a letter to Lott protesting that they “cannot in good conscience support a budget deal” that does not at least freeze domestic nonentitlement spending “A bad budget deal,” they wrote, “is worse than no deal at all.

This deal does not freeze domestic spending–far from it. Although the final numbers are still being tweaked, the totals are truly gaudy. Gingrich recently confessed that “to get this deal we will probably have to swallow more domestic spending than we would like.” That may be the understatement of the year. The latest draft document endorses discretionary spending levels from 1998–2002 at $70 billion above a freeze. This is well above inflation. In fact, the deal is to the left of the Clinton White House circa 1996: It envisions spending some $80 billion more over the next five years on domestic agencies than Bill Clinton agreed to in his own budget last year.

Almost all of this windfall for the federal government–$70 billion–would fill the political war chests of left‐​wing special‐​interest groups, from Planned Parenthood to the National Council of Senior Citizens to the Children’s Defense Fund to the National Education Association. These new funding levels would also mean clemency for the National Endowment for the Arts, the Legal Services Corporation, Americorps, and scores of other programs and agencies conservatives have been trying to end for years

All this extra spending is said to be justified in order to resuscitate “vital domestic investments” suffocating from years of alleged fiscal neglect. This is one of those fairy tales told and retold so many times that they become embedded in the Washington culture. Over the past 10 years, 1988–97, federal domestic spending has soared from $622 billion to $1.116 trillion. After adjustment for inflation, this is an increase of 40 percent. During this supposed era of restraint, we have been in the midst of the steepest and most prolonged domestic spending build‐​up since Lyndon Johnson launched the Great Society. Today, domestic spending consumes 66 percent of the federal budget– its highest share in American history.

Two years ago Newt Gingrich and the Republicans boldly declared they would prove to America that they could end federal programs, not just start them. So how many cabinet agencies will the budget deal call for eliminating? None. How many major spending programs, of the hundreds upon hundreds in the budget, would it terminate? My bet is that in the end the final number will be close to zero. This is a victory?

The so‐​called entitlement reforms in the package are probably the greatest fantasy of all. The vaunted $110 billion in Medicare “reforms” are trumpeted as a major victory for Republicans. Hardly. The savings level is only slightly higher than what Bill Clinton already offered Republicans in last year’s budget fight. Moreover, the reforms themselves will be worthless if they simply require Republicans to defer to Clinton’s policy proposals of raising premiums and squeezing Medicare savings out of doctors and hospitals through price controls. Price controls and premium hikes might marginally reduce Medicare’s insolvency in the short term, but they do nothing to fix the fundamentally flawed structure of Medicare. And by planting the seeds of $15 billion in Medicare and Medicaid expansions, such as a kiddie‐​care program, the budget deal may ultimately make the long‐​term entitlement problem worse.

The fatal flaw in the GOP’s health‐​care strategy for three years now has been a preoccupation with budget numbers, not the policy reforms themselves. By far the most valuable health‐​care reform of all, Medical Savings Accounts (MSAs), would permanently pre‐​empt the Left’s attempt to nationalize health care. It is worth increasing the deficit in order to make MSAs widely available. Yet the latest version of the budget deal does not force Clinton to accept even minimal expansions of MSAs.

To be sure, the tax cuts–particularly the reduction in the capital‐​gains rate to 20 percent, the doubling of the estate‐​tax exemption to $1.2 million, and the expansion of IRAs–are valuable White House concessions. The capital‐​gains tax cut will liberate hundreds of billions of dollars of captive capital and contribute to an increase in tax revenues, both in the short and long terms. And there will be a scaled‐​down version of the $500 tax credit for children that was part of the Contract With America.

But are these tax cuts worth Republicans’ waving the white flag in virtually every other area of the budget? Are they worth granting the White House $70 billion of extra funds to pump into the Left’s playpen of failed New Deal and Great Society programs?

The answer is probably no, especially considering that the tax cut is smaller than advertised. The reported net tax cut is $85 billion over five years. Up to $23 billion of this could pay for Bill Clinton’s college‐​tuition tax credits, which will simply inflate tuition and prove worthless. And the $85 billion number is inflated in any case, because the deal includes a change in the consumer price index that will actually raise taxes $20 billion by pushing many middle‐​income Americans into higher tax brackets.

So the actual net tax cut is about $65 billion over five years. Five years ago Bill Clinton raised taxes by three times that amount. Three years ago Republicans promised a Contract With America containing tax cuts three times this large. Out of an $8 trillion revenue base, the budget deal will trim Americans’ tax burden by less than one cent on the dollar.

The most compelling argument against the budget deal is that there is another path that offers greater fiscal gain. If Republicans killed the budget deal, they could instead pass individual spending and tax bills. This would set up a series of political battles that would force Clinton either to sign the bills into law or to issue unpopular vetoes. This is the strategy that worked so brilliantly for Republicans on welfare reform. They trapped Clinton in his own “New Democrat” rhetoric, and they could do so again and again on the budget this year.

Here’s how a non‐​budget‐​deal strategy would work:

First, Republicans have to take the possibility of a government shutdown out of play. The funding bill for Red River flood victims should include John McCain’s idea of automatically funding all government programs at 98 percent of last year’s level if an appropriation has not been approved by the beginning of the fiscal year. The White House will be tied into knots explaining why it would veto a bill that protects against a shutdown–not to mention a bill intended to help Americans whose homes have nearly been washed away. Once the McCain provision is in place, if Clinton rejects congressional spending bills, the GOP can make the case that any federal agency in Washington can tighten its belt enough to save 2 cents on the dollar.

Second, Republicans could freeze domestic appropriations at the 1997 level. This would simply enforce what liberal Democrats agreed to back in 1993; it is what Clinton’s own budget last year endorsed. Why retreat from it?

Third, Republicans could accept Bill Clinton’s Medicare and Medicaid savings, but adopt free‐​market reforms. In its February budget the White House endorsed roughly $100 billion of Medicare and Medicaid savings. Congress can inoculate itself from another “Medi‐​scare” campaign by simply accepting Clinton’s numbers, but replacing his policies with market‐​based reforms. This might involve instituting an income‐​tested increase in Medicare deductibles and expanding MSAs. After all, the stampeding costs of Medicare and Medicaid are as much a political headache for the Left as for the Right. If the Left really wants the entire federal budget in the next century to be devoted to sending checks to wealthy senior citizens, so be it; that would probably be an improvement over the way money is misspent in Washington today.

Fourth, Republicans could pass a $100 to $200 billion tax cut, pay for it through cuts in corporate welfare, and force Bill Clinton to say yea or nay. Republicans seem to forget that Clinton campaigned in 1996 on cutting taxes. So they could send him a tax cut he would be hard pressed to veto. A $100 to $200 billion, five‐​year tax cut could easily be financed by cutting spending from the $65 billion annual corporate safety net, starting with closing down the Commerce Department, the Overseas Private Investment Corporation, the Export‐​Import Bank, sugar price supports, and others. Ending business subsidies would pay for the complete elimination of the capital‐​gains and estate taxes. Cutting welfare for the well‐​off is good policy and good politics. Republicans shouldn’t be funding Robert Reich‐​style industrial‐​policy programs.

Finally, Republicans could use the fact that there is no overarching deal to pick popular fights with the Left and keep the pressure on government. There are some things worth fighting against, like the National Endowment for the Arts and the Commerce Department. Boarding up these agencies would allow Republicans to show the electorate the tangible accomplishments in 1998 they think they need from a budget deal.

Going in another direction would also allow the party to abandon the fraud of five‐​year budgeting. Polls show that almost two‐​thirds of Americans do not believe that any plan will balance the budget by 2002. And they are right. The useful life of any budget is at most one year. Five‐​year plans have been failures in China, Russia, and now Washington, D.C. The goal of the budget this year should be to downsize government and cut taxes as much as possible now.

In the end, despite the tax cuts, fiscal conservatives should oppose the new budget deal because it simply allows the government to grow far too much–and in all the worst places. A bad deal really is worse than no deal at all. On balance, this is a bad deal. Republicans should just say no.

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