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Lessons From History Tell Us How This Budget Battle May End

Alice Rivlin takes us back to 1982-1983

By Sheri Rivlin and Allan Rivlin

January 31, 2023

Today we find ourselves in a familiar pattern. Both political parties profess concern about the national deficit and debt. Republicans say they want to cut spending, but other than decrying government waste, they resist specifying what cuts they propose and are yet again trying to maneuver Democrats into proposing budget cuts that would be unpopular with voters. President Biden is right to refuse to negotiate cuts in response to the House Republicans’ threats to cause a national debt default, but Biden should enter negotiations over the budget. Alice Rivlin explains why we keep returning to this place and how a bipartisan agreement, like 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, is the most likely long-term solution in these excerpts from two chapters from “Divided We Fall, Why Consensus Matters.”

All Jump Together

(from the Introduction pages 8-9)

A bipartisan legislative strategy is necessary to do the difficult things leaders must do to govern responsibly. Even though Republicans are associated with tax cuts and Democrats are associated with spending increases, both parties are more comfortable doing those things than their opposites, tax increases and spending cuts. But tax cuts and spending increases add up to large deficits. The only way to reduce deficits is to “all jump together” and share the blame for reducing benefits while raising revenue to take credit for achieving the goal, as Republican President Ronald Reagan and Democratic Speaker of the House Tip O’Neill did in passing the Social Security Amendments of 1983. “The essence of bipartisanship is to give up a little in order to get a lot,” President Reagan said in signing the legislation, which reduced cost of living increases to Social Security benefits and raised the retirement age for future beneficiaries to extend the solvency of the program. Because revenue increases and benefit cuts are politically unpopular, lawmakers have found that the only antidote to runaway deficit spending is bipartisan cooperation.

As I say spending cuts are unpopular, I can hear the disagreement from partisan Republicans pointing to polling data that says Americans want an end to runaway government spending. And as I say tax increases are unpopular, I can hear the disagreement from partisan Democrats pointing to polling data that says Americans want higher taxes on the wealthy and large corporations. I believe these objections help illuminate the point I am trying to make. Both parties employ pollsters and message strategists to frame issues in ways that garner majority support in polls, but polling does not accurately capture political reality.

Because tax increases are unpopular, Democrats have learned to be very specific about whose taxes they propose to increase. By proposing tax increases only for the wealthy and large corporations, Democrats are telling most taxpayers that they will not have to pay additional taxes. Republicans, by contrast, have learned to be very general in their calls for spending cuts.

Because spending cuts are unpopular, it is never in the Republicans’ interest to propose specific cuts that could tell voters a program they support is on the chopping block. In the real rough andtumble of political debate and elections, neither side gets to frame the issues the way they want, and in a never-ending battle, Democrats charge Republicans with wanting to cut popular programs, and Republicans attack Democrats for their taxing and spending.

Revisiting the Budget Battles of 1982

(from Chapter 5 pages 115-117)

The economy which had been recovering from the recession of 1980, plunged into a deeper "double dip" recession in 1982, due in large part to efforts by the Federal Reserve chair, Paul Volker, to stop inflation by dramatically raising interest rates. When the economy recovered, the "Reagan deficits'' declined but did not disappear, and they dominated economic policy debates for more than a decade. The stock market crash of 1987 was widely, albeit somewhat dubiously, attributed to huge deficits, and the level of taxes and deficits were central issues in the presidential elections of 1988 and 1992.

This pattern – of Republicans proposing and often passing large tax cuts, large military spending increases, and large but unspecified cuts in non-defense domestic programs while expecting strong economic growth, leading to large and increasing budget deficits – would repeat itself several more times. The tax cuts happen, the military increases happen, but the growth does not happen, and the cuts in domestic programs are not made-and so, the red ink piles up. Republicans blame Democrats when the domestic spending cuts are not made, but this is not entirely fair.

The Republicans are not brave enough to specify which spending programs should be cut, and the Democrats know that the Republicans don't support cutting specific programs. Government spending may be unpopular at times, but the public opposes specific cuts to programs like Social Security, Medicare, education, food safety inspections, national parks, veterans' benefits, and on and on, until there is nothing in the entire domestic budget that the public will approve of cutting. If it were easy to specify unpopular domestic programs to cut, Republicans would do so, and David Stockman would not have needed his "magic asterisk" [the spending cut targets assumed, but not specified, in Reagan’s 1982 fiscal year budget proposal].

Within a year of passing the budget for fiscal year 1982, policymakers and economists of both parties, myself included, were concerned that the United States was "living beyond its means" by accumulating public and private debts that future generations of Americans would have to deal with. Even the White House and both parties in Congress were realizing the tax cuts had gone too far. Bipartisan tax bills like the 1982 Tax Equity and Fiscal Responsibility Act and the 1984 Deficit Reduction Act reversed a substantial part of the revenue loss from Reagan's earlier cuts. Ronald Reagan is not generally thought of as a tax raiser, but he signed bills that raised income taxes, payroll taxes, gas taxes, a telephone excise tax, and taxes on distilled spirits and cigarettes, and eliminated business tax deductions in nearly every year of his presidency after the first one.

Ronald Reagan and Tip O'Neill "Save Social Security"

The most celebrated of all the big bipartisan agreements was the 1983 deal reached between Ronald Reagan and Tip O'Neill to strengthen the long-term financing for Social Security. Reagan had campaigned against the New Deal and suggested Social Security should become a voluntary program. After beating Jimmy Carter to win the 1980 election, Reagan put those ideas into a 1981 proposal that was quickly shot down in Congress by lawmakers on both sides of the aisle. But actuaries and budget analysts like me were warning that the system for paying Social Security was unsustainable.

Reagan created the National Commission for Social Security Reform, headed by Alan Greenspan (before he became chair of the Federal Reserve) and with members appointed by the President, Tip O'Neill, and Howard Baker (R-TN), the Senate majority leader. The commission floundered in the months leading up to the 1982 election, in part because the Democrats were using Social Security as an issue to gain seats in the House, but after the election, Senators Daniel Patrick Moynihan (D-NY) and Bob Dole (R-KS) revived the stalled talks, engaging a "gang of five" senators to negotiate with the White House chief of staff, James Baker.

The breakthrough came when the Democrats in the gang of five, who had been proposing increases in revenue to close the fiscal gap, started to privately float some reductions in outlays, which the Republicans were seeking. Together, they reached an agreement in principle that the gap should be filled by equal amounts of revenue increases and benefit reductions, and they evaluated dozens of proposals, seeking the least politically painful combination of changes to achieve the needed closure of the funding gap. Both sides knew that neither side could have done this alone, because the other side would beat them up in the next election for hiking the payroll tax or cutting grandma's Social Security benefits. They reached an agreement to jump off the cliff together, with a package of Social Security changes under which Reagan and the Republicans and Tip O'Neill and the Democrats would share both the credit for "saving" the Social Security System and the blame for the unpopular benefit cuts and tax increases necessary to do it.

The final deal moved all federal government employees and members of Congress and their staffs into the Social Security System, delayed the scheduled cost-of-living adjustment (COLA) for six months, and indexed benefits increases to the lower of the change in wages or consumer prices. The deal raised the employer and employee shares of the payroll tax rate in stages spread over 15 years, from a little over 6 percent to 7.65 percent. It also raised the retirement age for full benefits by one month per year. (That meant a retiree in 2007 would have to wait until age 67 to get full benefits – two years longer than a retiree in 1983, when the deal was signed, who could retire at age 65.) The plan worked: the life of the Social Security Trust Fund was extended, and most people agreed that there was more credit than blame to share around.

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