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  • Sheri Rivlin Allan Rivlin

Fiscal Policy Negotiating Principles

Recapping our recent posts about the US federal budget: It was always an empty threat for the House GOP to refuse to raise the debt ceiling without Biden negotiating spending cuts. If the battles of 2011 are a guide, Republicans will likely capitulate, not to Biden, but to the bond and stock markets if they plunge in anticipation of a debt default. Biden has all the leverage on his side to refuse negotiations over the debt limit, and he has the correct rhetorical response in his call to Republicans to “show me your budget,” but Democrats and Republicans, and the economy all need substantive negotiations over the 2024 budget, and eventually we would all be more prosperous if political leaders could get beyond budget standoffs and crises and take a cooperative, long-term, strategic approach to our fiscal policy and economic policy.

Once again, we are facing divided government and the possibility of a major standoff over the federal budget, where we could find ourselves, as we did during the Obama Administration’s budget battles with the Tea Party Republicans, lurching from crisis to crisis, reaching a series of deadlines, and reacting to events rather than planning long-term fiscal policy. It does not have to be this way and Republicans must choose between the bipartisanship that prevailed in 2022, and a return to the confrontational tactics that dominated Washington in the years following the 2010 midterm election that like 2022 delivered divided government.

The best outcome would be bipartisan cooperation and a substantive multi-year deal on taxing and spending levels that raises enough revenue to meet the government’s commitments, fund needed investments in future productivity and the programs voters support while eliminating wasteful spending and slowing the rate of spending increases, without harming vulnerable groups, putting our long-term national deficits and debt on a sustainable path. At present, this does not look very likely.

Republicans in the Senate could choose cooperation, but House Republicans clearly are choosing confrontation as their current strategy. If Biden is right to ignore the manufactured crisis of threats to allow the US to default on the national debt, he will still need to negotiate a bipartisan budget deal before the end of the fiscal year on the last day of September. It is common for this deadline to get pushed back by one or more continuing resolutions that would keep funding the government at the current levels as set in the budget for fiscal year 2023 that passed the Senate with bipartisan support and the House on a mostly party line vote and was signed by President Biden in late December. If they fail to pass a budget or a continuing resolution, there would be a government shutdown until they reach agreement on a bill to fund the government.

We would like to offer the following set of principles to help guide negotiations toward agreement on sound long-term fiscal policy:

The first principle is the need for a balance between spending reductions and revenue increases. The formula of long-term spending cuts equal to the amount of new revenue helped drive the 1983 deal reached between Republican President Ronald Reagan and Democratic Speaker of the House, Thomas “Tip” O’Neil to extend the life of Social Security. Since 2011, Republicans have been taking the position that deficits must be reduced through spending cuts alone, rejecting any compromise with the Obama Administration that included new revenue from any tax increase or tax loophole closure, adding to the deficit with tax cuts whenever they control Washington, and repeatedly demanding that Democrats identify spending cuts equal to the amount by which the debt ceiling would be raised.

After the tax cuts in the George W. Bush and Trump administrations, Americans are under-taxed. We all know high spending causes deficits contributing to inflation, but it is equally true that tax cuts cause deficits and contribute to inflation. We must reduce the deficit by finding a balance that allows government to raise the revenue needed to pay for the programs that the public wants and expects. The position that 100 percent of the deficit reduction must come on the spending side and none from raising revenues and closing tax loopholes is not politically acceptable to the vast majority of Americans, whenever the spending cuts are made specific. This is why Republicans are constantly demanding that Democrats identify the cuts and are unable to specify where they believe the budget should be cut. Republicans interrupted President Biden’s State of the Union speech to shout that they do not support cuts to Medicare and Social Security, but we will not know what they propose to cut until we see the FY2024 budget from the House Budget Committee.

The second principle is that nothing can really be completely “off the table,” certainly not the vast majority of government activity. The national debt is currently over $31 trillion and climbing at a time when interest rates are low relative to historical norms but also climbing. Just because this has not caused a global debt crisis yet does not mean it will not trigger one in the future, and by the time the crisis is evident, it could be too late to avoid a global economic catastrophe. Political leaders cannot take any tax increase off the table and expect to reach agreement to meaningfully address this problem, but it is also true that the largest and fastest growing categories of government spending cannot be shielded from consideration of potential program changes that that could slow their rate of growth.

The current agreement to take Social Security and Medicare off the table is politically expedient for both parties. Donald Trump realized that the old Republican formula of cutting taxes while cutting Social Security and Medicare was no-longer politically viable. The Democrats pounced on Republican divisions to protect the popular programs and also to highlight the weakness in the Republican negotiating position. We find ourselves in a familiar box where leaders of both parties are expressing concern about the deficit and rising national debt, but voters support higher spending and lower taxes. To do more than just talk about the national debt, politicians will have to agree to unpopular choices. This is not politics, this is just arithmetic – but within the details, there are policy choices we could enact that would raise more tax revenue without crushing the business sector or the middle class, and we can get control of spending without withholding needed services and benefits from the poor, the elderly, and other vulnerable groups.

The third principle is the need to continue to invest in the future health of the American economy. As we figure out how to live within our means, we cannot cut back on investments that will create growth and prosperity over the long-term. These include our commitment to educate and train America’s workforce; build and maintain our critical infrastructure; and fund research in basic science, computer science, medicine, and the development of the new technologies needed to support America’s position of global leadership. We must invest in areas such as clean energy, advanced manufacturing and agriculture, technology, medicine, and public health. Investments in education, innovation, infrastructure, and healthy communities will create jobs, increase productivity, drive innovation, and increase our quality of life.

The fourth principle is the importance of public-private partnerships and federal, state, and local collaborations. The investments in our future economy do not have to come from the federal government alone. Investment from the private sector, non-profits, foundations, universities, hospitals, and religious institutions can be coordinated with state and local government efforts to strengthen community and regional economies. Our economy needs more manufacturing, so federal, state, and local governments encourage businesses to make investments in new and retooled factories by planning, building, and maintaining the roads, rails, ports, and airports that serve them. Businesses need well educated and trained workers, so they provide job training, but they are building on a complex web of local public and private schools from pre-school and kindergarten, through high school, community college, technical training academies, and universities. The federal government’s role in education and training is a relatively small fraction of the total, but our current and future competitiveness would be harmed without it. The federal government has a role to play helping to foster the conditions for economic success, facilitating partnerships that create economic opportunity, providing income and healthcare for retirees, veterans, people with disabilities and the poor, and in contracting with for-profit and non-profit organizations to provide social services to those in need.

The fifth principle is a commitment to address inequality. Our society and political structures are being destabilized by the increasing gaps in wealth, income, economic opportunity, and cultural and political power, with half of our population having no measurable wealth, and half of our wealth being controlled by a small fraction of the population. This has geographic and political dimensions as the surging blue cities mostly on the east and west coasts separate economically and culturally from struggling and resentful midsized cities, small towns, and rural counties in America’s heartland. Our economic policy reflected in our budget should consistently work toward closing the gaps by creating growth, opportunity, and economic security for the people and places that need it the most.

Finally, we must focus on the long-term. Beyond our national debt and rising inequality, America faces other large challenges, including an aging population, a warming planet, a vulnerable global supply-chain, and a broken immigration system. None of these are insurmountable but each require smart policy responses that are focused on the long-term. In the 2010s, political battles and crisis-to-crisis negotiations often led to bad public policies including budget sequesters, and deep across-the-board spending cuts in the parts of the budget that were not growing while the parts of the budget that were growing rapidly continued on autopilot. Our economic policy process was held hostage by our broken political process and many solvable issues festered. We have an opportunity to do better this time.

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