Republicans wanted sweeping cuts in public spending. Then-President Barack Obama was willing to meet them halfway, but only if they joined him in raising taxes on the rich. In the end, the big bargain didn’t happen. But discretionary federal spending has been curtailed, tax cuts enacted under President George W. Bush have been partially reversed, and the deficit has shrunk.
Remarkably, all of this happened at a time when unemployment was high, inflation was low and interest rates were at zero. In other words, the macroeconomic circumstances were perfectly suited for the reverse policy mix – a bipartisan deal to give Obama more spending and Republicans extended tax cuts.
These days, perhaps marked by the futility of young teenage deficit mania, no one talks about bipartisan deficit reduction, commissions or bargains anymore. But a return to the political obsessions of ten years ago would be appropriate at the present moment. The deficit, as a percentage of GDP, is declining rapidly from its pandemic lows, but is expected to be about the same this year as a decade ago and increase in the future as the share of older people in the population increases.
Right now, Americans are feeling good about falling gas prices. But the Federal Reserve is convinced that it has fallen behind in the fight against inflation, and last month Chairman Jerome Powell made it clear that the bank was prepared to “suffer households and businesses” in order to reduce prices.
That means higher interest rates to slow economy-wide spending, and that’s generally the right approach. But rate hikes come at a cost, even if they’re perfectly executed: they’re essentially a tax on investment. Under these circumstances, fiscal policy would ideally help to slow spending, thereby minimizing the need to raise rates.
This was the deficit reduction formula during former President Bill Clinton’s first term, which, unlike his Obama-era equivalent, was driven by the real economy rather than hysteria. In an implicit deal with the Fed, Clinton and the Democrats in Congress raised taxes and cut spending in their 1993 budget, which allowed the central bank to be more restrained in its monetary policy and contributed to a economic boom.
In politics today, two groups are fundamentally opposed to this idea of balanced fiscal consolidation: conservatives and progressives.
Conservatives oppose it because, despite all the changes and turmoil of the Trump era, the Republican Party remains fanatically committed to the idea of low taxes, especially for the wealthiest Americans. The left opposes this because they believe that the American economic model should be completely transformed into something resembling the states of Northern Europe where taxes are much higher. It is therefore loath to waste hard-earned tax increases on anything other than increased spending.
But that’s what made it a politically privileged place for centrist Democrats like Clinton and Obama. By embracing deficit reduction now, President Joe Biden could send a clear signal to moderate voters: Supporting Democrats doesn’t mean greenlighting two more years of big, progressive policy change.
Progressives, of course, would not appreciate this message. But Biden would only tell activists what they already know. They took big swings with Build Back Better and won big victories on climate change and student debt. Now they simply don’t have the votes to pass any more big partisan bills, even if every possible midterm vacation suits them.
As I said, people who care deeply about politics know all this. There’s no real downside – and plenty of upside – to ensuring it’s clearly communicated to less observant voters.
Focusing on the deficit would also help underscore a key truth about the GOP: While Republicans tend to trust issues like “the economy” and “federal spending,” whenever they come up with ideas to reduce the deficit without raising taxes, they are proposing something horribly unpopular. This tension is even worse today, when the party is largely dependent on the votes of older, economically low-class cultural conservatives who depend on the welfare state.
Forcing a National Conversation on Priorities – Should the United States Limit Tax Deductions or Raise the Age of Eligibility for Full Social Security Benefits? What should be cut, military spending or Medicaid spending? Are the “Buy America” rules and current salary requirements worth the cost? – could help launch the boil of populism by taking politics out of the realm of pure symbolism. Yes, the choices and trade-offs can be tedious and unpleasant to contemplate. But they’re also the real job of government, and trying to put them back at the center of political conversations is a useful strategy for restoring some common sense to public discourse.
It is even possible that bipartisan overtures on deficit reduction will lead to real politics. Some conservatives, like my Bloomberg Opinion colleague Ramesh Ponnuru, are already calling on Republicans to engage more seriously on the future of Social Security. Senate Minority Leader Mitch McConnell has hinted that he thinks Republicans made a tactical mistake in rejecting big talks during the Obama era. And unlike a decade ago, a policy of deficit reduction would be a real boon for American owners and growth-oriented companies.
Biden was a huge deficit hawk in the 1990s. Now that he’s brought back full employment the ’90s way, it’s time for him to get back to his roots.
More from Bloomberg Opinion:
• The return of the deficit economy: Karl W. Smith
• Should we worry about deficits? : Stephanie Kelton and Noah Smith
• Size doesn’t matter for Republican deficit ‘Hawks’: Jonathan Bernstein
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Matthew Yglesias is a columnist for Bloomberg Opinion. Co-founder and former columnist of Vox, he writes the Slow Boring blog and newsletter. He is the author, most recently, of “One Billion Americans”.
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