The Cruel Political Paradox of Deficit Reduction

I was chatting the other day with a fellow budget wonk who noted the cruel paradox of fiscal politics: When the economy is bad, deficits rise and the public support for reducing them grows. Yet a poor economy is the worst possible time to raise taxes and cut spending. By contrast, a period of strong growth is the best time to tackle the deficit. But when the economy is healthy, deficits normally fall and so does the political motivation for pols to do anything about them.

And as the Congressional Budget Office’s fiscal outlook released today shows, deficits are dropping like the proverbial stone. As the economy improves and the growth in health costs slows, the deficit is likely to continue to decline, at least for the next few years. CBO figures deficits will fall to just 2.9 percent of GDP in 2016, their lowest level since 2007. That’s far below their 9.8 percent peak in the depths of the Great Recession in 2009.

Despite this good news, we are hardly out of the fiscal woods. The national debt will continue to rise, and CBO warns that annual deficits will return to troublesome levels of around 4 percent of GDP by the early 2020s. But those predictions are unlikely to drive policy since they are both uncertain and far beyond the short-term vision of either the public or most pols.

You can see the turn in public opinion in a new poll by the Pew Research Center. The share of those who see deficit reduction as a top priority fell from 72 percent in January, 2013 to 63 percent in last month.  Eight in ten of those surveyed think strengthening the economy should be the nation’s top priority now.

Sagging interest in the deficit is no surprise. But it makes it very hard for lawmakers to make tough choices at the time the economy gives them the flexibility to do so.

You can see this in the evolving fiscal policy debate. My friend and I talked a couple of days after President Obama delivered his State of the Union Address. This was a speech where the president—who once spoke boldly about the need for a grand fiscal bargain—effectively ignored long-run budget issues.

And it isn’t just Obama. Congressional Republicans seem to have lost their stomach for fiscal combat as well. Stories circulating this morning suggest the House GOP wants to use the coming need to increase the nation’s debt limit to demand approval of an oil pipeline or repeal provisions of the Affordable Care Act that limit risk for health insurance companies. Whatever you think of these issues, insurance company risk corridors are a long way from a grand bargain.

Some of this has to do with Washington’s seemingly endless fiscal deadlock. Republicans simply will not consider any deficit reduction plan that includes new revenues. And Democrats won’t discuss changes in Medicare, Medicaid, and Social Security spending until taxes are on the table.

Thus it isn’t surprising that battle-weary pols have agreed to disagree—at least until the next election. Republicans may also be feeling less heat on fiscal issues as the clout of the anti-government tea party seems to be waning—another phenomenon driven in part by an improving economy.

But that begs the question: How do lawmakers tackle deficits when they should—at a time when the economy is strong and the flow of red ink slows to a relative trickle?

The answer may have emerged in the heated budget debates of 2011-2012 when some policymakers proposed combining a short-term fiscal stimulus with long-term deficit reduction. The idea died, another victim of the deep mistrust that has infected policy debates in the Capital. But it may ultimately be the solution to this troubling political paradox.

via:http://taxvox.taxpolicycenter.org/2014/02/04/the-cruel-political-paradox-of-deficit-reduction/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+taxpolicycenter%2Fblogfeed+%28TaxVox%3A+the+Tax+Policy+Center+blog%29