Sunday, July 10, 2011

The deal that Democrats shouldn't strike

As Republicans pull back from debt ceiling talks (again), it's becoming ever more difficult to see how this whole thing plays out. I plan to revisit the possibilities a few times today, but first, let's talk about the conclusion which the pundits (and bond markets) still seem to expect: the parties find a deal.

We now know a little more about how this deal would need to be shaped. For Republicans, avoiding new tax revenue is more important than pursuing large-scale entitlement cuts. It's less clear what Democrats would or would not accept, but there does seem to be growing congressional resistance to entitlement cuts. At this point, both parties seem to be moving towards a smaller deal: as the amount of deficit reduction envisioned by any particular compromise gets smaller, the need to raise new revenue or cut entitlements also shrinks.

Unfortunately, most of both parties' preferences also point towards a deal that, compared to Obama's Grand Bargain, more heavily favors Republicans. That's because the Democrats' second highest priority, after avoiding entitlement cuts, seems to be "getting the debt ceiling raised." There's a middle ground here where a viable deal might still exist, in which Republicans cut giant chunks out of the discretionary budget, while Democrats, having successfully protected Medicare and Social Security, just grimace and let it happen.

That would be a terrible mistake and a terrible outcome. When politicians talk about wasteful spending, they generally are doing two things:
-deceptively playing off the expectations of their audience, who have heard horror stories about $40,000 hammers and thus are convinced that the deficit can be fixed by cutting the Pentagon's coffee budget.
-but in actuality, reclassifying entire government functions as "wasteful." For example, if you don't believe the government should regulate pollution, the very existence of the EPA qualifies wasteful spending, regardless of how efficiently the agency puts its money to use.

In reality, there's less near-term bloat and waste in discretionary spending than just about anywhere else in the federal budget. Significant cuts immediately degrade the functioning of government, make it less efficient and more error-prone, set the stage for large-scale regulatory failures (think of the Gulf oil spill), and generally undermine civil society.

They would also undermine the economy. Discretionary government spending creates jobs and cycles money back into the private sector pretty much instantly, and cuts to discretionary spending would need to be relatively front-loaded, unlike cuts to entitlements, which would likely phase in over time. Nor do private industries function well when confronted with an unreliable, poorly-enforced administrative state.

For its part, the American public would only know two things: that the government wasn't doing its job very well, and in the meantime, the economy had continued its decline. Furthermore, the public, never terribly adept at ascertaining cause and effect, would almost certainly lay the blame for the continuing rot of the American state on the heads of the president and his party. This is, in short, a recipe for yet more spending cuts and small-government nonsense.

Democrats, focused on protecting Social Security, should not allow themselves to be coaxed into cutting the legs out from underneath the American government. But what alternatives do they have? Not many good ones, as we'll see later.

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