Why Washington won’t address soaring deficits

Seemingly no one cares about the budget deficit anymore. Republicans recently cut taxes by $2 trillion, while Democrats are promising a spending spree that could top $40 trillion over the decade. And this is on top of the current budget trajectory that shows annual deficits exceeding $2 trillion within a decade, and totaling a staggering $84 trillion over the next 30 years.

The cost of paying interest on this debt is projected to become the largest federal expenditure within a few decades, consuming one-third of all federal taxes. Even that assumes continued low interest rates. Every percentage point they rise adds another $13 trillion in budget interest costs over the next three decades.

In short, an avalanche of debt is upon us. Yet pandering politicians promise even more free lunches, paid for by our kids.

America desperately needs a “grand deal” on deficits, where Republicans and Democrats come together and make the difficult choices to avert a debt-based calamity. We’re all in this together, so everything should be on the table, with no sacred cows.

Such a deal seems wildly implausible. But it has not always been. In a new study, I analyzed the 14 largest deficit-reduction negotiations since 1980. Six of these negotiations successfully led to a deficit-reduction deal, and eight of them failed. Yet the outcome of nearly every negotiation was determined by the same three variables. Satisfying at least two of them always led to a deal. Satisfying one or zero produced failure.

First, there should be a “penalty default” that brings negotiators to the table. This is some painful policy — such as a government shutdown, debt limit default, or deep automatic spending cuts — that would be implemented automatically if a deal is not enacted by a certain date. The 1983 Social Security reforms were motivated by the program’s impending trust fund exhaustion that would bring automatic benefit cuts. The 2011 Budget Control Act was motivated by the need to quickly raise the debt limit and avoid a default on federal obligations.

Today’s challenge is that government shutdowns and debt limits have proven to be increasingly ineffective and dangerous ways to motivate a deal. New penalty defaults are needed to bring lawmakers to the table.

Second, the public must want a deficit-reduction deal. The budget deals enacted between 1985 and 1997 — which helped balance the budget — were driven by voter deficit concerns that made it politically safer for politicians to impose spending cuts and tax hikes. Today, most voters either do not care about the deficit, or are willing to address it in only a partisan fashion.

Third, Congress and the White House must engage in healthy, good-faith negotiations. During the 1995 deficit-reduction negotiations, President Clinton and the Republican Congress attacked each other publicly (even running TV ads against each other) and relied on deception and intimidation to bully the other side into accepting a lopsided deal. These negotiations inevitably failed, leading to a lengthy government shutdown.

Two years later, both sides tried again. Each side honestly laid out their priorities, made generous concessions, avoided hardball tactics, and worked towards a deal in which both sides could claim victory. Neither side relied on leaking to the media or publicly bullying the other. The result was a popular, bipartisan budget deal that was followed by a balanced budget the following year.

This “healthy negotiations” variable was regularly present in the 1980s and 1990s budget negotiations — and has never been present since. That is the lead reason why only one successful deficit-reduction negotiation has occurred in the past 20 years. Republicans and Democrats no longer know how to negotiate with — or even tolerate — each other. And yes, both parties are to blame on that.

Future deficit negotiations also will be more difficult because past negotiations picked the low-hanging fruit. More than half of all savings from past deficit-reduction deals came from discretionary spending (mostly defense) — reducing the discretionary spending share of the budget to less than one-fourth within the next decade. Savings from small entitlement programs, modest tax changes and user fees also have played a role in past deficit-reduction deals.

What’s left? The Social Security and Medicare systems face a $100 trillion cash shortfall over the next 30 years, while the rest of the budget is projected to run a $16 trillion surplus. Closing this gap will require some combination of Social Security and Medicare reforms, and new taxes that include the middle-class. Defense cuts, social spending cuts, and millionaire taxes should be on the table, but cannot close more than a small fraction of that combined $84 trillion shortfall. The math is unforgiving.

This represents a challenge to both politicians and voters. The president and Congress need to get off of Twitter, rebuild relationships and learn to negotiate despite their strong disagreements. The public must also stop demanding more free lunch policies from politicians. After all, the climate change movement focuses on imposing relatively-modest reforms now to avoid calamity later. Imposing modest budget reforms now, before an $84 trillion deluge of debt brings a Greece-style economic calamity, also should be a top priority.

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.