Policy Options Put In Context of Shifting Political Scene

By Susan Doolittle
NABE Executive Director Emeritus

With the stakes high for this fall’s Congressional election, leadoff speakers at the Economic Policy Conference put likely fiscal policy options in the context of the political mix that makes choices tough for both parties.

Congressional Budget Office Director Douglas Elmendorf outlined key policy choices and made it clear that restraining federal outlays and considering new taxes must be part of the solution if the rapidly rising national debt is to be brought under control.

Political analysts Charlie Cook and Greg Valliere took a critical look at the gridlock on Capitol Hill and its implications for getting major legislation passed.  They agreed that it will be an uphill battle for Democrats to hang onto their majority in the House and to not lose ground in the Senate in the November elections.

Elmendorf outlined the two fiscal policy choices faced by Congressional decisionmakers:

• For near-term policy, the key choices are “whether to enact additional tax cuts or spending increases to provide more stimulus to the economy,” given CBO’s projection that “the deficit will shrink rapidly in the next two years under current law.”
• For medium- and long-term policy, the key choices are “how quickly and in what way to restrain federal borrowing” given CBO’s projection that the “debt is on a trajectory that poses significant economic risks and becomes unsustainable.”

Underlying the framework for near-term policy choices is a slow-recovery forecast, with unemployment falling over the next five years and then stabilizing at five percent to 2020.  Fiscal policy, if properly designed, could contribute to faster economic growth during that time, Elmendorf said, but it would also add to the deficit.  (Elmendorf provided evidence that the American Recovery Reinvestment Act (ARRA) did just that.]   Decisionmakers also confront whether or not to extend the tax cuts and to index the alternative minimum tax (AMT).  The baseline projection for the budget deficit, without these two tax initiatives, shows a reduction from nine percent of gross domestic product currently to four percent of GDP in 2020 and total debt rising from about 60 percent of GDP to slightly over 65 percent.  With the tax cuts extended and the AMT indexed, the federal budget deficit is forecast increase to six percent of GDP, and total debt will increase to 90 percent of GDP by 2020.

Elmendorf emphasized the problem is not with the current federal deficit when the economy is weak, but rather with its future path, which is bleak.  He noted that rising federal debt does matter:  it jeopardizes the ability to finance current programs, lowers future output and income, reduces the ability of the government to respond to future needs, and increases the risk of a sharp jump in interest rates.  So, the policy question is not whether to change course on the federal budget, but rather how quickly and in what way.

In 2020, CBO forecasts the federal government will collect the same tax revenue as a percent of GDP as it did 50 years prior while outlays will increase.  Elmendorf noted that over the past several decades, cuts in defense spending financed the entitlement programs; he indicated that approach is not feasible for the future.  So the real choices facing decisionmakers are significant changes in taxes and/or in “spending directly visible to many Americans,” i.e., entitlements.

Mid-term Elections: Bipartisanship, Gridlock, Change

In this lively general session moderated by Diane Swonk of Mesirow Financial, Greg Valliere of the Soleil Group, and Charlie Cook, The Cook Political Report, discussed the lack of bipartisanship in Congress, the resulting gridlock and what might be done about it, and the possibility that Democrats might lose their majority in the House in the November 2 elections.

Valliere characterized the current political climate as lacking bipartisanship and generating gridlock.  On the deficit, he believes the sentiment is to do nothing—gridlock again.  There will be no meaningful reform until after the next election.  It’s not possible for the economy to simply grow out of the deficit—it is too large.  Discretionary spending can be cut, but that is only 17 percent of the budget—not enough to make a material difference.  Basically three items compose the remaining 83 percent: defense, interest on debt, and entitlements, all difficult or impossible to cut at the current time.  A level of hypocrisy about the deficit exists. e.g., ranting about the deficit but voting in favor or pork.  On the revenue side, tax hikes are “toxic”—there is no sentiment for a value added tax (VAT) or to change the way corporate income is taxed.  Obama cannot break his campaign promise and increase taxes on incomes below $200,000.  Valliere believes the current tax cuts will be allowed to expire because the sentiment is to do nothing—another example of gridlock.

How can bipartisanship be encouraged?  In the House, changes to allow House members to spend more time together socially, to develop relationships, would help.  This could include schedule changes so that representatives are in Washington for longer periods before traveling to their districts.  Currently, they work short weeks (Tuesday afternoon to Thursday afternoon) and spend the rest of the time in their districts.  More travel together would also strengthen relationships, although no one is in favor of boondoggles.   Meaningful redistricting reform would also help.  Under current redistricting procedures, elected officials choose their voters rather than voters electing the officials.  Redistricting reform would allow voters to elect officials who can work together, rather than having a political party select divisive candidates who are bound to win because of gerrymandering.

Cooks Expects Change in Majority Status

“Change” is the watchword of the U.S. political environment, according to Charlie Cook.  He cited evidence from the 2006 and 2008 mid-term elections when Republicans lost first the Congress and then the White House. Will the Democrats lose their majority in Congress?  The outlook does not look favorable for the party to win seats to keep its margin in the House.

Since last summer, polling trends have favored the Republications.  Further, Democrats hold critical seats that traditionally have gone Republican, making them even more vulnerable to change, he pointed out. 

What can Democrats do to save their current majority?   Lower unemployment by November 2 would help, but Cook feels this is highly unlikely.  It might also help Democrats if Republications nominate “extremists” as candidates, rather than “standard” Republicans, or if Republicans nominate “standard” Republicans, and the “extremists” then launch additional candidates.

Cook concluded his remarks by noting that both Presidents Reagan and Clinton lost Congress in midterm elections—voters wanted change.  Will this happen in the 2010 mid-term elections?

Share: