Along with other famous putative quotations such as Bismarck’s supposed comment on legislation and sausages and Deng Xiaoping’s on the glories of getting rich, the witty remark about Americans doing the right thing once they’ve exhausted other possibilities, probably didn’t originate with Winston Churchill, even if it should have. Whoever first offered that characterization of how we in the U.S. reach decisions, plenty of pundits have used it to describe recent and on-going negotiations over federal spending, taxation and debt. I object. The New Year’s eve compromise on impending tax increases and spending cuts, the so-called fiscal cliff, certainly followed from the exhaustion of most other possibilities (and the exhaustion of the negotiators), but it could hardly be called the “right thing.” The best this outcome deserves is to be considered not the worst possible thing.
The best thing that can be said for the compromise, officially called The American Taxpayer Relief Act of 2012, is that, blocked the process of tax increasing and spending cuts that would have taken four percentage points away from the two percent or so of economic growth broadly expected during 2013. Two minus four equals a negative number, also known as a recession. That became less likely even though the compromise will probably still subtract a percent to a percent-and-a-half from this year’s GDP.
The problem is what comes next. Not only do Congress and the President still need to figure out by March 1 what if anything they can do about spending cuts mandated under sequestration, but they also need to address the government’s borrowing limit when its capacity is exhausted—as early as mid-February. More importantly, what we really need is a five-to seven-year plan to match what we demand that government spend with what we’re willing and able to pay in taxes. This is the “grand bargain,” which would address the long-run trajectory of entitlements (especially healthcare), limit the spending we do by not collecting taxes (loopholes if they apply to you; incentives if they apply to me), and leave room for investment in our defense, infrastructure, and human capital.
When you outline out even the broad categories of a grand bargain, you have to recognize how unlikely such a huge deal really is. It’s so unlikely that focusing on reaching it is part of our problem. As I’ve written in this space before, the country doesn’t make policy in grand plans; it makes policy incrementally. Best example: for nearly 40 years we’ve failed to produce a national energy policy, but now, thanks to some public facilitation and a lot of private initiative, we’re on a path toward real energy dependability. Or consider the fiscal cliff compromise itself. We all denigrate its failure to do more than it did, but the federal deficit will still be about $6 to 7 billion less over the next 10 years than it would otherwise have been.
I’d expect the sequestration and debt ceiling debate to resolve itself in a similar fashion. Well informed Washington observers are currently divided between those who expect sequestration to begin, and then get modified provision by provision, and those who think Congress will pass a deal that gives itself another few months to produce a schedule of equivalent cuts and revenue increases that gets to the same 10-year goal in a more constructive manner. Either way we’d see some reduction in the rate of spending increases as the Pentagon gains cover for closing out World War II relics, and domestic programs whose constituencies have weakened, finally disappear. Remember that even President Reagan succeeded in slowing but not reversing the growth of federal spending. And while Republican legislators insist that there will be no more tax hikes, I wouldn’t be surprised to see “tax reform” used as a vehicle to find additional revenues. Everything, insiders tell us, is on the table.
The result of this process won’t be the perfect entitlement fix or economically neutral tax system that purists would wish and it might not be enough to prevent another rating agency from downgrading our debt, but keeps the Republic solvent and allows us to attend to improving, though again not fixing, other pressing issues such as immigration and infrastructure investment. So we may never do the one “right thing” as someone or another said we would, but we do seem to make progress in spite of ourselves.