Transforming a Futile Budget Politics

We want to brighten budget politics by providing the politicians a reward: if they take the recommended action, a $50 billion, real, no-fooling package, the deficit crisis will be solved. "Do this and we won't bother you again," our refrain would be; "then you can get on to the rest of the task of governing." Interest groups would get a similar reward; increases would still be difficult, but they would be freed from endless battles to protect their programs.

The deficit reductions would have to be enacted in one package—no magic asterisks—and the political leadership, especially the president and the chairman of the Federal Reserve, would have to make very clear that, if the economy did worse than our pessimistic economic scenario, further deficit reductions would not be appropriate. If any deficit reductions were left to later years, participants would lose part of their

reward: a clear limit on losses. If nominal deficit figures were made the target, as in Gramm-Rudman, the government would again become hostage to the economy's swings. Politicians could not be sure of their safety.

Immediate action and certainty about goals are the proper response to financial markets' supposed fears. Credibility, if it can be won at all, requires performance. Performance would also encourage foreign governments and central banks to support U.S. policy; they do not want to base their actions (buying dollars, pumping up their own economies) on promises. Clarity of purpose and standards is the best defense against market panics.

Governments should not calibrate their annual budgets to short-term swings of financial markets. It is a bad way to manage agencies and a worse way to manage markets. A government should try to minimize fluctuations by limiting speculation; changing policy frequently only encourages speculation about it. A government must try to sell its interpretation of the world. If it wants allies to agree, it must show that it is sure of its own policies, not about to pull the rug out from under those who go along.

The federal government cannot control the markets, but it can try to create circumstances in which individuals hesitate to bet against the government. A consistent and coherent and practical policy, supported by the Federal Reserve and our allies, is the best defense against such bets.

Any display of resolve behind a policy that most market participants considered a disaster probably would fail. Of course, nobody knows what markets really want. Still, few analysts would choose to risk bigger deficit reductions than we are suggesting in the short term. A $50 billion package would lower the deficit to levels where there is no rational argument for panic. As a display of will it would be impressive, the biggest deficit reduction in memory. The markets might still panic, but you cannot guard against irrationality.

Public opinion may never approve of unbalanced budgets. For this reason, many politicians might be scared to endorse our proposal. Public opinion, however, is not the real cause of the budget deficit panic. The public views the deficit as one of many evils. The general trend of the economy, as both polls and elections show, is far more important. The budget deficit panic is mainly a phenomenon of the public sphere, national experts and news organizations and politicians themselves excoriating our elected representatives for their supposed lack of courage.

This book is our attempt to use reason against that panic of the center. We can do less about the fact that the struggle over deficits involves basic values about the role of government in our society. Believers in less government may never accept a solution that leaves government bigger

than they prefer, nor should they be expected to do so. They will invoke any consensual, "public interest" notions they can in support of their beliefs. We ourselves disagree about the proper size of government, so must believe ideological differences are legitimate. But such differences should not be confused with response to a crisis of the economy or of governance.

Only if the public interest is defined as acts that are not in the interest of any substantial segment of the public would the clamor for budget balance above all other values make sense. The untold story of the deficit is that the political stratum has transformed a middle-sized, complicated problem into a moral test, leading to a policy panic that most Americans, by contrast, have had sense enough to avoid. Group-think on the deficit has led economists, editorial writers, and politicians to set impossible standards, demoralizing themselves, delegitimizing their procedures, feeding whatever fears may whip through those mysterious financial markets. Ignoring the policy and political lessons of the past decade, the forces of responsibility unwittingly increase our economic and political risk.

Whatever one thinks of the Reagan era, one thing is clear. The debate and politics of the deficit have been among the most stultifying experiences in our political history. From one year to the next we heard the same arguments, fought the same battles, prophesied the same doom. Nobody seems to have learned anything. Politicians of the right and left have so much fun beating one another over the head with the deficit that they cannot put it down. Besides, their heads hurt too much to think straight. Politicians of the center have come to see the deficit as a symbol of their own inadequacy. Having made elimination of the deficit the test of their ability to govern, they have come to see the deficit as a crisis because they cannot solve it, not because of any harm it causes. If that seems harsh, just listen to how they talk about their failure to eliminate the deficit.

The deficit has become an all-purpose weapon, used to oppose or support virtually any position. This is bad policy and worse analysis; it has paralysed our political system. Fixated on the deficit, we ignore other questions. Do we want more savings or more job training? Should we forget about full employment, define it as what we have already achieved, or try to lower unemployment further? What is a sensible defense policy—as opposed to a convenient way to fit into Gramm-Rudman? What is, or should be, our place in the world economy?

Until we end the deficit "crisis," we cannot even ask these and other questions. $50 billion will be very difficult, but possible. It should be enough. Let's do it and start thinking about other problems.