Taxpayers just dodged a bullet. Even though Republicans on the so‐called supercommittee were willing to break their promises and support a tax hike, a 1990‐style budget deal was not possible because Democrats demanded too much and offered too little in exchange.
This is good news for fiscal responsibility. Simply stated, any agreement would have been a typical inside‐the‐Beltway pact featuring real tax hikes and empty promises of future spending cuts. And if the 1990 tax‐hike deal is any indication, that would have resulted in more red ink rather than less.
Moreover, the supercommittee’s failure means that we get sequestration, which is a budget‐wonk term for automatic reductions in the growth of spending.
Not that we should get too excited. The way the law is written, these automatic cuts don’t begin until 2013. Even more important, they’re “cuts” only if you use dishonest Washington budget math. In reality, spending will climb by nearly $2 trillion by 2021 if we have a sequester. Without the sequester, it will increase by about $2.1 trillion, so at least there could be a small shift in the right direction.
But the sequester isn’t a sure thing. It might be derailed if pro‐defense Republicans link arms with pro‐redistribution Democrats and vote to cancel the money‐saving provision.
Hawks on Capitol Hill correctly complain that defense would be disproportionately affected because the Pentagon accounts for less than one‐fourth of the federal budget but would have to absorb about one‐half of the sequester. As such, the defense budget would climb by only about $90 billion over the next ten years, which may wind up being less than inflation.
It does not require much imagination to see how a coalition could be formed to spend more money. President Obama has threatened to veto any legislation to cancel the sequester, but nobody believes him. And even if he were serious, politicians on Capitol Hill could do a back‐door repeal of the sequester by padding other spending bills.
Another threat is that the crowd in Washington may resuscitate one of the many tax‐hike plans that were proposed earlier this year. This includes the Gang of Six, Simpson‐Bowles, and Domenici‐Rivlin.
These plans are dangerous because many Republicans (regardless of the no‐tax‐hike pledge) are susceptible to a deal so long as something is being done to address entitlement costs and so long as the tax hikes are not based on class‐warfare ideology. And all of the aforementioned plans satisfy these criteria.
To understand what’s really happening, it helps to discard the usual Republican and Democrat labels and realize that there are several different camps in Congress, none of which has the ability to push through policy measures without help from at least one other group..
The hard‐left ideologues: This group of congressional crazies shares the views of the Obama administration, Paul Krugman, and the Occupy Wall Street crowd. They want much bigger government with no real entitlement reform and lots of class‐warfare tax hikes. Think Greece.
The rational Left: This is the most accurate description of the Gang of Six, Simpson‐Bowles, and Domenici‐Rivlin. They accept bigger government, but are willing to at least tinker with entitlements and also want to raise taxes in ways that don’t do as much damage. Think Sweden.
The big‐government Republicans: These are the so‐called compassionate conservatives, who side with the rational Left if they get some political cover but sometimes will support smaller government if they get pressure. Think England.
The Reaganites: Mostly the members of the House Republican Study Committee and Senate Steering Committee, they support fiscal restraint, entitlement reform, and lower taxes. Think Hong Kong.
In this admittedly oversimplified analysis, every group is willing in certain situations to join forces with the adjoining group. This is why some of the tax‐hike plans pose a clear and present danger. There are plenty of big‐government Republicans, for instance, who are willing to ally themselves with the rational Left and support a big tax hike. Fortunately, Obama and the hard Left are saving us from that fate.
While this seems like a very discouraging situation for fiscal conservatives, the 2012 elections almost surely will bring in more Reaganites. This doesn’t preclude an alliance of the rational Left and big‐government Republicans, but it does make it more difficult (thank God for Grover’s tax pledge).
Shifting from theory to reality, the real challenge for fiscal conservatives is figuring out how to adopt something akin to the Ryan budget. That means no tax increases, genuine spending cuts, and real entitlement reforms (i.e., not the policies promoted by the rational Left, such as unsustainable price controls or back‐door tax hikes via means testing).
Sadly, there is no way for such a budget to be enacted in 2011 or 2012. And it may not happen in the four years after that. That would be both frustrating and worrisome — particularly since every year of delay brings us closer to European‐style fiscal chaos.
But for fiscal conservatives there is no possible compromise with either the hard Left or the rational Left. Both of those camps want bigger government. Both want higher taxes. And both oppose real entitlement reform. The only real debate on the Left is how quickly to race in the wrong direction.