Was Dick Cheney right about deficits? In 2002, a month before he gave George W. Bush's first treasury secretary, Paul O'Neill, the news that he was fired, then-Vice President Dick Cheney is supposed to have told O'Neill, "You know, Paul, Reagan proved deficits don't matter. We won the midterms." Cheney was not making an economic case that deficits don't matter. He was making a political case, with his reference to the midterm elections of 2002.
Polls show that many Republicans favor tax cuts, even if that means higher deficits. Ever since Ronald Reagan was elected in 1980, the Republican answer to every policy question has been tax cuts. Democrats and the dwindling number of Republican fiscal conservatives think that Republican conservatives are crazy. And they are crazy -- crazy like a fox.
Republican strategy is based on the fact that the American public is deeply confused. Americans may be against big government in the abstract, but they favor more spending on most government programs that are specified by name, except for foreign aid. At the same time, majorities favor cutting taxes and balancing the budget. This might be called the Budgetary Trilemma. When asked whether they favor higher spending, lower taxes or a balanced budget, Americans answer "Yes."
Back in the 1980s the GOP developed its own approach to victory in this game of scissors-rock-paper. The original Reagan revolutionaries were small-government conservatives with a "starve the beast" strategy. They would cut taxes first, and then take advantage of the clamor over the resulting deficits to cut spending. Reagan, however, flinched when it came to the deep cuts in both military and domestic spending that would have been necessary to balance the budget. As a result, the deficit tripled during his two terms. But the American public did not seem to care. They reelected him and Reagan left office on a wave of popularity.
As Mark A. Smith points out in his book "The Right Talk: How Conservatives Transformed the Great Society Into the Economic Society" (2007), during the Reagan years the Democrats and Republicans traded places on the deficit issue. In the New Deal era, when Democrats dominated the White House and Congress, the penny-pinching deficit hawks were mostly to be found in the minority Republican Party. But as early as the 1984 election, Walter Mondale tried to discredit Reagan by accusing him of fiscal irresponsibility. In his convention acceptance speech, Mondale declared:
Here is the truth about the future: We are living on borrowed money and borrowed time. These deficits hike interest rates, clobber exports, stunt investment, kill jobs, undermine growth, cheat our kids and shrink our future.
Whoever is inaugurated in January, the American people will have to pay Mr. Reagan's bills. The budget will be squeezed. Taxes will go up. And anyone who says they won't is not telling the truth.
I mean business. By the end of my first term, I will cut the deficit by two-thirds.
Let's tell the truth: Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did.
This was a campaign speech that only accountants with green eyeshades could love. Reagan won 49 states. Mondale won only his home state of Minnesota.
Smith makes a convincing case that Mondale was the first of the deficit-hawk Democrats: "Mondale proposed to create a Deficit Reduction Trust fund to which the tax increases, by law, would be directed and would be used only for that purpose. The relatively small amounts the Democratic nominee requested for new programs would be funded by cuts in other areas."
Meanwhile, the Republicans calculated that the public was more hostile to tax increases and spending cuts than to high deficits. FDR aide Harry Hopkins is supposed to have summed up the electoral formula of New Deal Democrats: "Tax and tax, spend and spend, elect and elect." The Reagan Republican electoral formula is: "Tax cut and tax cut, spend and spend, elect and elect."
Michael Dukakis, campaigning as a fiscally responsible deficit hawk, lost in 1988 to George Herbert Walker Bush, who famously said: "Read my lips: No new taxes." Bill Clinton won in 1992 because he was a deficit dove by comparison with the two deficit hawks he was running against. Ross Perot had made deficit reduction his major issue, and Bush had alienated many Republican voters by breaking his "no new taxes" pledge and supporting a deficit-shrinking combination of tax increases and spending cuts. In contrast, although Clinton paid lip service to the goal of reducing the deficit, his "Putting People First" agenda emphasized a populist liberal program of public investment and social welfare, not deficit reduction. Clinton won.
Unfortunately, on gaining office Clinton repudiated his own campaign agenda and sacrificed New Deal-style public investment to balancing the budget, at the insistence of the Wall Street wing of the party identified with Robert Rubin and Larry Summers. Instead of promoting infrastructure investment, R&D, apprenticeships and education, Clinton promised economic growth through balanced budgets and trade agreements like NAFTA tailored to the economic interests of Wall Street and multinationals. In "The Right Talk," Smith cites polling data that suggests that a backlash against Clinton's 1993 tax increases and NAFTA contributed to the Republican capture of both houses of Congress in 1994.
The obsession of Clinton and the Democrats with deficit reduction prevented them from proposing the bold but expensive programs like Social Security and Medicare on which the Democratic majorities of the New Deal era had been built. As early as Reagan's first term, Democrats like Sen. Daniel Patrick Moynihan had suggested that the Republicans were deliberately creating deficits in order to have an excuse to prevent new spending programs. Whether or not that was the intent, that has certainly been the result.
Having abandoned the ambitious agenda of 1992, Clinton and the other center-right New Democrats, focused on deficit reduction, proposed only symbolic, inexpensive and distinctly "disciplinarian" programs, like federal funding for 100,000 new police officers, the Americorps public service program and White House support for making school children wear uniforms. FDR and LBJ would have been appalled.
The New Democrats claimed that Clinton's deficit reduction policies contributed to the booming "new economy" of the late 1990s. This claim reversed cause and effect. Only the revenues pouring into the IRS thanks to the stock market bubble, together with post-Cold War cuts in defense spending, permitted the budget to be balanced briefly by Clinton and the Republican Congress.
Absurdly, the Clinton administration and Fed Chairman Alan Greenspan, oblivious to the existence of a stock market bubble that would soon burst, debated what to do with perpetual federal surpluses. Even more absurdly, Al Gore in 2000 declared that he would use the imaginary perpetual surpluses not to invest in infrastructure, R&D and an expansion of social insurance, but to retire the entire national debt. He lost to George W. Bush, who called for tax cuts.
In 2004, John Kerry denounced Bush's fiscal "profligacy" (a French term for excessive spending). Bush trounced him. In 2008 Barack Obama made deficit reduction one of his priorities. Following the Republican convention, McCain gained on Obama in the polls and if not for the fortuitous collapse of the world economy in September 2008 there might be a Republican in the White House today. There might be a Republican in the White House again in January 2013, if the 2012 election pits a Democrat promising to reduce the deficit with painful tax increases and painful tax cuts against a fiscally carefree Republican running, like Reagan and Bush the Lesser, on a variant of "Après nous, le déluge."
All of this was foreseen by the late Irving Kristol, the "godfather of the neoconservatives." In "The Battle for Reagan's Soul," published in the Wall Street Journal on May 16, 1980, Kristol wrote:
When in office the liberals (or social-democrats, as they should more properly be called) will always spend generously, regardless of budgetary considerations, until the public permits the conservatives an interregnum in which to clean up the mess -- but with the liberals resuming their status as the activist party, the party of the "natural majority." The neo-conservatives have decided that two can play at this game -- and must, since it is the only game in town ... And what if the traditionalist conservatives are right and a Kemp-Roth tax cut, without corresponding cuts in expenditures, also leaves us with a fiscal problem? The neo-conservative is willing to leave those problems to be coped with by liberal interregnums. He wants to shape the future, and will leave it up to his opponents to tidy up afterwards.
Since 1980, the Republicans have "shaped the future" by defining the agenda -- deregulation, privatization, deindustrialization and offshoring, the neglect of infrastructure, the abolition of federal social insurance (Aid to Families With Dependent Children, or AFDC) or its gradual erosion through means-testing or voucherization (Social Security, Medicare). The only two Democrats elected since Reagan, Clinton and Obama, have accepted the broad outlines of Reaganism, while seeking to put it on a more solvent basis in "liberal interregnums" in which they "tidy up" inherited messes. This is a complete reversal of the pattern during the New Deal era, when Republicans like Eisenhower and Nixon sought only to create a slightly more solvent version of the New Deal.
The Republican tax-cut strategy creates a triple trap for Democrats. The first trap: Deficit reduction by means of painful tax increases and spending cuts creates a backlash by voters against Democrats. The second trap: Because they have denounced Republican-created deficits, Democrats cannot undertake ambitious and necessary new public investments. The third trap: Their own logic pushes deficit-hawk Democrats not only into rejecting expensive new public programs but also into cutting existing, popular public programs.
President Obama has walked into all three of the traps that the Republican Party has laid. First, his administration has promised to cut the deficit in half by the end of its first term. This makes no political sense, because the voters hate tax increases and spending cuts more than they dislike deficits. And premature budget balancing could lead to a disastrous contraction of the American and world economies, at a time when massive public spending is needed to avert a depression or lost decade.
Obama fell into the second trap when he dismissed more expensive but more sensible approaches to healthcare reform in favor of a policy of subsidizing private insurance, in which unfunded mandates on many businesses to provide employer-based health coverage disguise the true costs of the healthcare program. The same desire to avoid costly but direct programs has led Obama and the Democrats to prefer the disguised costs of cap-and-trade to large-scale government investment in the development and deployment of technologies that might make clean energy cheap.
The third and final trap closed on Obama, when, invoking the deficit caused mostly by the tax cuts of his predecessor plus the Great Recession, he called for a freeze on non-military discretionary spending.
Even worse, Obama has consistently talked as though he believes deficit-hawk nonsense about Social Security's alleged looming insolvency. He called for a bipartisan budget commission that would have had the power to force Congress to take only an up-or-down vote on its proposals, including any proposals to gut Social Security -- a terrible idea that Congress rejected in favor of a powerless commission.
Clinton collaborated with the Republicans to destroy one New Deal entitlement, AFDC. Will Obama collaborate with the right to means-test Social Security and Medicare, in the name of reducing the deficit? If he does, then he might as well make Walter Mondale's 1984 convention speech the basis of his reelection campaign in 2012 and be remembered as a martyr by the green-eyeshades crowd.
An editorial published in the conservative journal National Review on April 4, 1980, and quoted by Smith in "The Right Talk," provides a warning for the Democratic Party, if the names "Democrats" and "Republicans" are transposed:
During the past thirty years of inflation the Republicans championed the Balanced Budget while the Democrats denied there was a problem. The budget could of course be balanced either by reducing expenditures or increasing taxes. The Republicans sturdily but blindly advocated both, became famous as The Enemy of the Little Guy, and dwindled to a permanent minority in Washington.