You need to put politics aside to shrink government budget deficits — or that’s the conventional wisdom, anyway. Heidi Heitkamp disagrees. Heitkamp, who served one term in the U.S. Senate as a Democrat from the red state North Dakota, argues that it’s impossible to cut deficits and restrain the growth of the national debt without politics.
“To Get Our Fiscal House in Order: Put Politics First” is the title of an essay that Heitkamp wrote for the Peter G. Peterson Foundation, which focuses on long-term budget challenges. I was given an early look last week at a new collection that includes her essay and eight others commissioned by the foundation.
Heitkamp told me last week that by politics, she doesn’t mean the kind of skirmishing for electoral advantage that Washington is famous for. She means the art of listening and persuading: getting voters to buy into difficult compromises. Her essay quotes President Abraham Lincoln, who said: “Public sentiment is everything. With public sentiment, nothing can fail; without it nothing can succeed.”
“When you’re faced with tough choices, as certainly Lincoln was, you can’t expect people to follow you,” Heitkamp told me. “You have to bring the people along. Ultimately they’re your boss.”
There’s a burst of interest in deficits lately. Last Friday, Moody’s Investors Service lowered the outlook for its AAA credit rating of the federal government to negative from stable, citing among other factors “continued political polarization.” Speaking of polarization, the federal government will shut down this weekend if the House speaker, Mike Johnson, can’t cobble together a temporary budget deal.
Politicians and others who are tired of the can-kicking drama are talking about forming another blue-ribbon, bipartisan commission to recommend ways for Congress and the White House to get America’s fiscal house in order, not just for months but for years.
A fiscal commission bill was introduced in the Senate on Thursday by Joe Manchin, Democrat of West Virginia, Mitt Romney, Republican of Utah, and eight other senators. A similar bill was introduced in the House in September by Representatives Scott Peters, Democrat of California, and Bill Huizenga, Republican of Michigan.
Lawmakers are focusing on the debt because the cost of servicing it has soared, thanks to a combination of large, chronic budget deficits and a big increase in interest rates. In this year’s third quarter, federal interest payments were running at an annual rate of $981 billion, up 54 percent from the first quarter of 2022 and up 91 percent from the second quarter of 2020.
Olivier Blanchard, a Massachusetts Institute of Technology economist, pointed out four years ago that it’s possible for a government to run moderate budget deficits with no problem forever so long as the economy’s growth rate exceeds the interest rate on the debt. “Put bluntly,” he wrote, “public debt may have no fiscal cost.”
The problem is that deficits in the United States have been large, not moderate, and the interest rate on the debt now exceeds the economy’s growth rate, rather than vice versa. “I shall freely admit that I did not predict” the big increase in long-term interest rates, he wrote last week in a post for the Peterson Institute for International Economics (also founded by Peter G. Peterson, but otherwise unrelated to the foundation).
The risk for any country, even one as powerful as the United States, is that investors will panic if they don’t see any credible plan for bringing deficits under control. They will demand higher interest rates, which will make the deficits even bigger. Blanchard wrote: “If markets are right about long real rates, public debt ratios will increase for some time. We must make sure that they do not explode.”
I expect to receive email from adherents of Modern Monetary Theory who will point out, correctly, that as long as the United States owes dollars, it can always print more of them, so it never has to default. But that doesn’t solve the real problem, which is that the nation is on a trajectory of spending beyond its means — that is, beyond its productive capacity.
Even my Opinion colleague Paul Krugman, who likes to poke fun at the Very Serious People who constantly harp on deficits, wrote in October: “Serious deficit reduction, a bad idea a decade ago, is a good idea now.”
The Aspen Institute’s Economic Strategy Group also warned against over-indebtedness in a book released last week, “Building a More Resilient U.S. Economy.” “Although changes in policy that substantially narrow the deficit have economic and political disadvantages, they are necessary to put the federal budget on a sustainable path,” Karen Dynan, a professor of the practice of economic policy at Harvard, wrote in one chapter.
That brings us back to Heidi Heitkamp and politics, because agreeing that something needs to be done is only the first step. The political part is figuring out what and how. Should it be achieved entirely through budget cuts, or entirely through tax increases, or more likely a combination of the two? (I wrote recently that tax increases have to be part of the fix.)
A bipartisan commission can achieve something if it’s made up of people whose opinions are respected and who get along well enough with one another to compromise. In the Peterson Foundation document, several essayists favorably cite President Barack Obama’s National Commission on Fiscal Responsibility and Reform, led by the Democrat Erskine Bowles and the Republican Alan Simpson.
“A fiscal commission will not obviate lawmakers’ responsibility to make hard choices, but it will make those choices easier to understand and explain to voters,” Mark Zandi, the chief economist of Moody’s Analytics, wrote in his essay for the Peterson document.
Unfortunately Congress absorbed the wrong message from Bowles-Simpson. It cut discretionary spending a lot, which slowed the economy’s bounce-back from the 2007-9 recession. It did little to nothing about “gradual pro-growth tax and entitlement reform” that would put the budget on a sustainable trajectory, the Committee for a Responsible Federal Budget wrote in 2015. That’s something that needs to be avoided this time.
I’m not ready to evaluate the pros and cons of all the deficit-cutting ideas in the collection of essays, but I want to share a few of the essayists’ interesting remarks.
“For the next 15 years, more people will convert to Medicare in America than people being born,” wrote Dana Peterson, the chief economist, and Lori Esposito Murray, the president of the Committee for Economic Development, both of the Conference Board.
Leon Panetta, a former defense secretary, wrote: “In the negotiations at Andrews Air Force Base in the 1990s, the agreement was that if the Democrats would propose $250 billion in spending savings, the Republicans would propose $250 billion in taxes. It worked because both sides were willing to deal with their sacred cows.”
Brian Riedl, a senior fellow at the Manhattan Institute, wrote: “Commissions have historically been more successful when used for narrow issues, such as Social Security solvency or closing military bases. At the same time, separate commissions for Social Security, Medicare and other health programs run the risk of producing incompatible solutions, such as relying on duplicative new taxes, overly targeting the same seniors for cuts, or altering the interaction between programs.”
One more: The Progressive Policy Institute has proposed basing Social Security benefits on how many years people worked, without regard to how much they earned. “This structure would preserve Social Security’s nature as an ‘earned benefit’ but make the program more progressive,” Ben Ritz, the director of the Progressive Policy Institute’s Center for Funding America’s Future, wrote. “A low-level employee and a CEO who put in the same amount of work will get the same benefit out of Social Security.”
The Readers Write
Forget inflation, deflation and the job market, which you focused on. The average American thinks about the cost of living. I am lucky enough to have a six-figure job but I live in the Northeast. My income barely covers my expenses. Prices are high and taxes continue to rise. It is challenging.
Mary Falco
Floral Park, N.Y.
I am a female Hispanic and a retired federal employee. I am also a veteran. I look at all sides of the issue and vote for what benefits me and the country the best. Biden has not addressed the needs of issues that pertain to me. He has often focused on younger generational issues or on group issues (such as Medicare costs, when dealing with retirees). The Republicans have not done any better. I believe this is why so many people are scoping out alternatives such as Kennedy. They are being left behind.
Mayjo D. LaPlante
Topeka, Kan.
A tax-and-transfer approach encourages imposition of punitive bureaucracy out of fear that someone might get a nickel more than they deserve. It also smacks of a handout that is begrudgingly given and even then through some arcane schedule on a tax form. People don’t like being told they have to jump through hoops to get something because someone else worries they might not deserve it. Predistribution has the advantage of feeling like the recipient earned it in the first place instead of having to get it as a handout at the back end.
James Petrie
Norwood, N.J.
Regarding how Democratic policies have lost less-educated and working-class voters: It is almost impossible to overstate how much student loan forgiveness, for those who chose college, infuriates working people who didn’t choose college.
Robert Hackney
Charleston, S.C.
Quote of the Day
“The secret to enjoying your job is to have a hobby that’s even worse.”
— Bill Watterson, “Calvin and Hobbes” (April 5, 2015)