March 25, 2011

March 25, 2011 | Commentary on Budget and Spending

A (Cautionary) Tale of Two

These days there are two types of people on Capitol Hill: those who believe little or nothing has changed since the last round of government shutdowns in 1995 and 1996, and those who think everything has changed. Perhaps the most striking fact one encounters in comparing the last shutdown with the current budget mess is this: Back then, the Republican-controlled Congress sent President Clinton a legislative package that ranks among the most ambitious efforts to scale back the federal government in our history, even as the economy was growing, inflation and unemployment were on the decline, and the level of federal debt and overall federal spending were, by any historical standard, at manageable levels.

In 1996 the economy was humming along, with growth at an acceptable 3.7 percent. Inflation was 3 percent and falling. The unemployment rate stood at what many economists then theorized to be the level of full employment, 5.4 percent and falling. At 21 percent of GDP, total federal spending was as low as it had been in three decades. The budget deficit clocked in at less than 2 percent of GDP. Likewise, total federal debt held by the public was considerably lower than today, both in absolute terms (about a third of its current level) and as a percentage of the overall economy (50 percent, compared with a projected level of 70 percent of GDP for 2011).

For most voters, life was good. Any threat posed by excessive debt and unbridled entitlement expenditures was purely theoretical — a blip on the distant horizon.

So, what did the new Republican Congress put in front of the American people? A remarkable — and remarkably prescient — set of reforms designed to forestall precisely the sort of fiscal calamity we face today.

Let’s review the highlights of the proposal Clinton found worthy of his veto pen:

● Medicare: A broad-based reform of this perennial third rail of politics would have lowered projected Medicare spending by $270 billion over seven years through a mix of structural reforms (seniors would have been able to choose from among an array of plan options), means-testing, and lower reimbursement levels for Medicare providers.

● Medicaid: Even more ambitious reforms would have given the states enormous flexibility to design the intricacies of the program. Medicaid would cease to be an open-ended entitlement program and become instead a block grant to the states with the federal contribution capped at levels that would have shaved $163 billion off of baseline spending over seven years.

● Welfare reform: A precursor to the ultimately successful 1996 welfare reform, this set of policies included work requirements, a five-year limit on eligibility, limits on the Earned Income Tax Credit, and denial of benefits to non-citizens. All of this would have saved taxpayers nearly $115 billion over seven years.

● Freedom to farm: Farmers would have had more freedom to plant the crops they wanted to plant in exchange for limits of agriculture subsidies, saving $13 billion.

● Arctic National Wildlife Refuge: The proposal would have opened up this oil-rich region of Alaska to exploration and drilling in hopes of ultimately producing 1 million barrels of oil per day.

● Tax relief: The proposal contained both a $500-per-child tax credit and a significant cut in the top rate on capital gains, from 35 percent to 28 percent. Over seven years, these changes would have reduced the tax burden by $183 billion. 

● And more: The package also would have scaled back a wide array of politically sensitive programs, including ones for student loans, veterans, and low-income housing. It would have required federal workers to contribute more to their pensions (imagine that!) and increased the fees charged to use our national parks.

Now that’s what you call an agenda. Had Speaker Gingrich and company prevailed, this would arguably have been the most dramatic instance in history of a Congress reversing the policy direction of a sitting president of the opposing party.

Today, the contrast couldn’t be greater. America faces a debt crisis that threatens to crush the American Dream for future generations. Unemployment remains stubbornly high. Employers, leery of the policy uncertainty that permeates our tax code and the energy, environmental, health, and financial-services sectors, have parked $2 trillion in liquid assets on the sidelines rather than invest it in new plants, equipment, and jobs. The deficit, at $1.5 trillion, is 15 times its 1996 level and projected to remain high. All this adds up to an explosion in what we pay to service our debt. Interest payments on the debt are projected to quadruple over the next decade, from $260 billion a year today to $931 billion. As the Washington Times explains:

That means 3.9 percent of the nation’s entire productive output will be devoted not to funding present government operations, but to covering the excess spending of an administration long past.

Yet the legislation that has brought us to the edge of this latest government slowdown (it’s a “slowdown” rather than a “shutdown” because high-profile government activities such as the delivery of Social Security checks and patrolling the border continue even in the absence of a budget agreement) would make nary a dent in the overall size and scope of government. In fact, the most ambitious proposal put forth by Hill Republicans, which has provoked cries of anguish from big-government liberals, would cut less than a week’s worth of the current level of annual deficit spending. And, worse, when the Democrats scoured the entire $3.7 trillion federal leviathan they could agree to sacrifice — drum roll, please — all of a half day’s worth of interest.

The ultimate irony would be if the ghosts of 1996 were to teach today’s elected leaders precisely the wrong historical lesson. Voters, after all, seem to appreciate that this time the stakes are greater. Polls find that majorities are willing to cut domestic spending (61 percent in a recent Pew poll) even if an impasse were to result in a “partial” government shutdown. A Rasmussen Poll found that 58 percent of all likely voters feel this way, including 62 percent of seniors and 59 percent of independents.

Yet their expectations with respect to our elected leaders couldn’t be lower. Remarkably, 70 percent tell pollster Scott Rasmussen that they would be more likely to cut spending than their elected officials. True, when pressed, most Americans still say they don’t want to cut funding for noble-sounding (if poorly performing) programs. All the more reason, then, for conservative lawmakers to keep the debate focused on the big picture and what is at stake if we don’t begin the process of shrinking the federal leviathan, even a week’s worth of deficits at a time. 

The stakes will jump next month when House Budget Committee chairman Paul Ryan (R., Wis.) unveils his much-anticipated budget plan. Here’s hoping it will include spending cuts, entitlement reforms, and pro-growth tax cuts that are every bit as ambitious as those championed a decade and a half ago by Gingrich and Co. The times require nothing less.

Mike Franc is vice president of government studies at The Heritage Foundation.

About the Author

Michael Franc Distinguished Fellow
Government Studies

First appeared in National Review Online