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What Happened to the Fiscal Courage of 1993?

November 17th, 2009 . by economistmom

clinton-signing-93-tax-bill-getty-giroux

CQ’s Richard Rubin writes in this week’s CQ magazine (as part of the cover story on “Health Care’s Taxing Questions”–here’s link to a LexisNexis reprint) that the current Congress has little experience surviving voting for tax increases, because so few of them were even around to vote for them the last time around, back in 1993.  Richard argues that even among the Democrats, the lack of numbers in members who have experienced the fiscal responsibility of the Clinton era will hurt the likelihood that fiscal courage will prevail today:

Of the 218 House members who voted for Clinton’s deficit-reduction package of 1993, only one-third of them, 73 Democrats, remain in the House. That measure included a $250 billion, five-year tax increase that remains the most recent substantive increase in income or payroll taxes. What that first statistic means is that, of the 258 Democrats now serving in the House, 185 of them (or 72 percent) have never cast a vote for a significant net tax increase that became law.

A somewhat larger percentage of sitting Democratic senators have voted for a tax increase, but that number is still only a bit more than half. Of the 50 Senate Democrats who voted for the 1993 measure, only 21 remain. In addition, 11 current senators voted for the legislation as members of the House.

But I don’t think it’s the lack of numbers that hurts us; one third or one half is not at all too small to matter.  After all, the “squeaky wheel” gets the grease, even if it’s only one wheel out of four –and in the 1992 presidential election it only took one “squeaky” candidate named Ross Perot to get incoming President Clinton to make reducing the deficit an even bigger priority than keeping his campaign promises for middle-class tax cuts.

But you need that “squeaky wheel” (at least a few politicians willing to “squeak” about fiscal responsibility) and you need the President to take a strong lead–to forcefully say “we’ve got to take care of it” (to oil that squeaky wheel).

The lack of fiscal courage in today’s Congress is a problem of quality, not quantity.

Today’s politicians who understand what was accomplished during the Clinton Administration aren’t too few; they’re just too cynical–not idealistic enough on policy, or maybe just too politically pragmatic.  Richard goes onto explain (and quotes me) in the CQ story:

Tax increases aren’t a part of the congressional repertoire for the most part because they are anathema to voters. Bush is widely believed to have lost his bid for a second term because of the 1990 measure, which violated his famously explicit “Read my lips: No new taxes” campaign promise. And the 1993 deficit-reduction law led, in part, to the Republican takeover of Congress the following year. It didn’t matter that Clinton attributed some of the country’s 1990s prosperity to the legislation; the electoral lesson was clear.

“We’re dealing with a generation of politicians who have been conditioned into thinking that the way to keep their jobs is to keep proposing deficit-financed tax cuts,” said Diane Lim Rogers, a former House Democratic aide who’s now the chief economist at the deficit-opposing Concord Coalition.

And Richard writes of my biggest gripe–that despite a new Democratic president who was elected as the candidate of “change” and whose top economic advisors were always extremely critical of the Bush tax cuts, the President is not taking the lead in insisting that the (few) squeaky wheels in Congress–those with the courage to say we cannot afford to extend tax cuts to all households with incomes under $250,000 (or to keep “fixing” physician payments)–are heard, listened to, and given the (presidential) grease:

Rogers laments how, in response to Republican criticism, Democrats have shifted their positions on the tax cuts pushed into law by President George W. Bush in 2001 and 2003. The party’s widespread sentiment of outrage at the time those laws were being debated has evolved — after a period in which ending the cuts was successfully labeled by the GOP as a big tax increase — into an acceptance that most of the Bush tax cuts are likely to remain on the books indefinitely. “It really bothered the Democrats,” she said. “It really shook them in a way that I think they lost confidence in their abilities to sort of take the high ground on fiscal responsibility in regard to the Bush tax cuts.”

Today’s Congress seems to fall far short of the fiscal courage of 1993–not just on tax increases but on federal tax and spending policy more generally–because this time congressional Democrats simply aren’t getting enough leadership from their President or encouragement from their people (their voters).  Thank goodness (for my job security) that the mission of the Concord Coalition is guaranteed to remain alive and well (i.e., unfulfilled) for awhile.  And it’s good that Concord’s online “Principles and Priorities” exercise, aka the “Federal Budget Challenge,” well illustrates that it’s not easy getting to a “better place” (a more sustainable budget outlook) without making some really “tough choices”–the biggest one of most immediate impact being letting most or all of the Bush tax cuts expire.  (And yes, more on that soon.)

18 Responses to “What Happened to the Fiscal Courage of 1993?”

  1. comment number 1 by: SteveinCH

    Diane,

    I know how much you hate the Bush tax cuts but, to give you an example of what’s missing from the Concord exercise, Medicare part D is a $500 billion plus spending program over a 10-year period. Why not eliminate it or at least provide it as an option within the larger budget management exercise?

    Even for those who are motivated by hating Bush (not saying you are), somehow tax cuts is the only fiscal issue that comes up. As a matter of personal preference, I would cancel Medicare part D and defund NCLB before I would rescind the tax increases. Unfortunately, those are choices that Concord’s exercise does not offer. Thus my claim in an earlier post that the exercise is strong biased in favor of tax increases (or ending of tax cuts if you prefer that framing).

  2. comment number 2 by: SteveinCH

    Sorry, second sentence of second paragraph should say “rescind the tax cuts”

  3. comment number 3 by: Brooks

    Steve,

    I do think the exercise should have some constraint of political plausibility. Eliminating Medicare Part D would not qualify. To use the NRA’s / Charlton Heston’s phrasing (on a different issue), you’ll only take prescription drugs from seniors if you pry it from their cold, …um, never mind. That said, coverage could be reduced a bit (e.g., with higher co-pays) and/or premiums raised a bit (I say “a bit” because “a lot” just ain’t gonna happen either). Remember, seniors vote, and their benefits are a big factor (to say the least) in their choice of candidate.

  4. comment number 4 by: B Davis

    Brooks wrote:

    I do think the exercise should have some constraint of political plausibility. Eliminating Medicare Part D would not qualify. To use the NRA’s / Charlton Heston’s phrasing (on a different issue), you’ll only take prescription drugs from seniors if you pry it from their cold, …um, never mind.

    Agreed. Right or wrong, it implausible that we will end an entitlement that benefits the nation’s most powerful voting block for the first time in our history. The most plausible way to address the rising costs of Medicare Part D is to increase co-pays, implement some sort of gradual means-testing, or slow its growth. That could certainly be a part of the budget management exercise. In fact, I seem to recall that various forms of constraining the growth in entitlement costs are a part of the exercise.

    However, the Bush tax cuts are different in that they are currently scheduled to expire under current law. It seems only fitting that this expiration (which was put in by proponents of the tax cut to make its cost appear smaller) be allowed to proceed. That said, it will likely be more difficult for political reasons to allow the increased tax credits and the fix to the so-called marriage penalty to expire. Still, the burden should be on those who wish to extend any portion of the Bush tax cut to show why current law should be changed to do so. The default action should be to let them all expire. If Medicare Part D were set to expire under current law, I would say the same about it.

  5. comment number 5 by: Brooks

    B Davis,

    I agree re: some degree of means testing. I should have mentioned that, and I do think we should have means testing, perhaps via higher/full premiums with less/no subsidy.

    My understanding is that another possible means of Medicare Part D reduction could be for Medicare to negotiate drug prices. See http://en.wikipedia.org/wiki/Medicare_Part_D#Criticisms I don’t know enough about that issue to speak to political plausibility and pros/cons.

  6. comment number 6 by: SteveinCH

    Guys,

    I hate to disagree with both of you but your logic inexorably means that tax increases are the only way to balance the budget regardless of what you might claim.

    Let’s review. You’ve just excluded any major changes in entitlements as “not feasible”. When you exclude entitltements and interest from the budget, there isn’t a whole lot left to cut and even radical cuts in other programs wouldn’t make much of a difference. Consequently, the only solution is to raise taxes.

    Regarding the expiration of provisions as a rationale, it’s arbitrary. You both want to use Clinton marginal tax rates as the base and Bush’s change in the law as the change. Why not use the Reagan or Bush I tax rates as the base? Well, if we did that, the argument wouldn’t work.

    Personally, if you want to enshrine entitlements as a permanent fixture of American society (albeit with occasional moderate changes), I will go back to AMT’s perspective and argue we are doomed.

    The Federal Government has instituted one major entitlement (at a cost of $50 to $100 billion a year) and is about to institute another one (at a cost of $150 to $200 billion a year). If entitlements are sacred, help me undestand how we ever balance the budget. These two entitlements alone add 6 to 8 percent to the baseline (oh and by the way, both are growing at greater than the rate of GDP). This is without the guaranteed inflation in other entitlements.

    The only solution that is stable in the long run is to put major changes in entitlements on the table. Note, I am not arguing against a solution that iincludes tax increases but I think you are being very short sighted by excluding entitlement changes.

    It’s one thing when we are arguing social security where some people have planned their whole life expecting it to be a source of income but Medicare Part D is less than 10 years old. If we can’t question it, we’ll never make any progress.

    Explain to me how you are going to achieve long-term fiscal balance without major entitlement reform. If you’re willing to endure the “wrath of seniors” for raising the retiremnt age or the Medicare eligibility age by 5 years (which we know is going to happen eventually), why not go all the way?

    Ultimately, “feasibility” is a value judgment that needs to come at the end of the process, not the beginning. You say big changes in entitlements are not feasible. Per se, this may be right but as part of a larger program, I simply don’t believe this can be accepted as it excludes too many solutions.

    Brooks, go back to the exercise if you don’t believe me, but the changes in entitlements are tinkering for the most part. None amounts to more than $125 billion savings over 10 years. This off a base of $1.7 to 2.0 trillion per year. So let’s see, $125 billion is about 0.5% of entitlement spending over the 20 year period.

    To me, it seems like you believe that changes in tax rates are (or at least ought to be) more politically feasible than changes in entitlement programs. As you are seeing in the current climate, this is only true if the tax increases are on “the rich” which means by definition, you can’t raise enough income to solve the problem.

  7. comment number 7 by: SteveinCH

    Brooks,

    On negotiating drug prices, I don’t think that’s the type of savings that makes any sense since it’s (at least in part) a cost shifting exercise rather than a real savings.

  8. comment number 8 by: Brooks

    Steve,

    Good point re: entitlement cuts vs. taxes, and I should be a bit clearer on the matter of degree. I consider it both politically plausible and desirable to:

    - Raise the retirement age over time.

    - Apply means testing to Social Security and Medicare.

    - Change the formula for initial Social Security benefit levels (indexing to price inflation rather than wages)

    - Eliminate of excess payments for Medicare Advantage

    - Change the Medicare system to contain costs (more managed care with gatekeepers; capitation, bundled payments or other shift from fee for service to fixed or partly fixed payment basis; use of comparative effectiveness research, etc.). Regarding the gatekeepers (mainly requiring approval from a primary doctor or other doctor to see a specialist), that may or may not be politically feasible.

    - Much better vigilance against fraud and abuse.

    - Perhaps negotiate drug prices. Again, I’d need to explore the pros/cons, and please elaborate on the “cost shifting”; my vague recollection is that the main objections were that it would be, in effect, price fixing that could reduce innovation, and that it would require or result in fewer choices of drugs and thus inferior treatment in some cases.

    All of the above can and should amount to substantial cuts in projected spending on seniors’ entitlements, which I agree are desirable given that, as you correctly argue, those entitlements make up much of the budget and the alternative to substantial cuts in those programs would be an approach to our fiscal imbalance that is very heavily weighted toward tax increases.

    Thanks for making that point.

  9. comment number 9 by: SteveinCH

    Brooks,

    Thanks for the clarifitication. I agree it’s a good starter list. To me, the biggest item on the list is means testing and it’s where I think our politicians are least willing to go. Parenthetically, I would point out that few of those items are in the Concord budget exericse but that’s not really core to the discussion

    On cost shifting, I guess the point is you have to think like a business manager in a pharma company.

    You have a plan to meet. Your biggest customer negotiates a 10 or 20 or 30 percent price cut. How do you meet plan? You can’t really drive demand up that much for most items on patent so your only real lever is price and the only place for you to go is “full paying” insurance plans so that’s where you go. If you can’t get enough, yes ultimately innovation will take a hit because you can’t afford it but your first line of defense is taking pricing where you can. I think this is why you see big price increases by the PharmaCos now. They see whether this train is headed and they are trying to get the basis for future negotations to be more favorable.

    Best

  10. comment number 10 by: Brooks

    Steve,

    Re: that business situation, if my biggest customer negotiates huge discount, it doesn’t change my profit-maximizing price with my other customers. Or put differently, if a higher price for those other customers would increase profits*, why haven’t I increased price already? Presumably I haven’t raised prices on those other customers because the volume I’d lose (due to customers shifting to competitors/substitutes or just foregoing that type of product) would outweigh the increase in profit margin (contribution margin, to be precise).

    That said, if the same change is occurring to competitors/substitutes, it may be that we can all anticipate (or observe) price increases by all competitors/substitutes and increase my price based on that assumption, so essentially no one loses market share and everyone earns more profit on customers other than the one that negotiated the discount. Perhaps that’s what happens with cost shifting (for uncompensated care for the uninsured) by hospitals, or perhaps hospitals’ pricing to those other customers has been limited by some factor other than profit-maximization (or surplus-maximization in the case of a non-profit) and that limiting factor may be relaxed if the hospital now needs the extra profit that a price increase would provide.

    * Short-term profit maximization is not the only basis for optimal pricing, but I’m making a general point. Also, sometimes there are regulatory constraints on pricing or a desire to limit prices to avoid regulation (i.e., avoid political pressure resulting in regulation), and that limit may increase if suppliers can make the case that they now need the extra profit.

  11. comment number 11 by: Brooks

    Steve,

    Oh, and the above refers to what is rational for the business manager (from the standpoint of the business — i.e., shareholder wealth). I realize that quite often pricing decisions are not made rationally, which could be another source of cost-shifting.

  12. comment number 12 by: B Davis

    SteveinCH wrote:

    Let’s review. You’ve just excluded any major changes in entitlements as “not feasible”.

    You’re mistaken. Referring to Medicare Part D in comment number 1, you said “Why not eliminate it or at least provide it as an option within the larger budget management exercise?”. In comment number 3, Brooks replied “I do think the exercise should have some constraint of political plausibility. Eliminating Medicare Part D would not qualify.” Then in comment number 4, I said “Right or wrong, it implausible that we will end an entitlement that benefits the nation’s most powerful voting block for the first time in our history.” We were all talking specifically about totally eliminating Medicare Part D, not all major changes.

    Regarding the expiration of provisions as a rationale, it’s arbitrary. You both want to use Clinton marginal tax rates as the base and Bush’s change in the law as the change. Why not use the Reagan or Bush I tax rates as the base? Well, if we did that, the argument wouldn’t work.

    If you look at the first graph at this link, you’ll see that the only time that we have achieved a surplus since 1969 was under the Clinton tax rates. Some of that was due to a decrease in spending but some was due to an increase in receipts from their relatively low level under Reagan, Bush I, and Bush II. Also, the third graph shows that the top marginal tax rate was higher than the Clinton level during the entire period from at least 1940 to 1981. Hence, the marginal tax rates under Clinton are associated with lower deficits (or surpluses) and were lower than they were for most of the post World War II period.

    Of course, the top marginal rate gives limited information about the overall level of taxes. For example, the first table at this link shows that the Tax Reform Act of 1986, which lowered the top marginal rate from 50% to 28%, actually had very little effect on the level of revenues. That’s because a number of the provisions raised taxes or cut existing deductions. Hence, nobody is suggesting that the top marginal rate be raised back to the 77% level where they were during the last pre-Clinton surplus in 1969. However, the data suggests that the overall tax structure under Clinton will put us in a better financial condition than the current tax structure.

    When you exclude entitlements and interest from the budget, there isn’t a whole lot left to cut and even radical cuts in other programs wouldn’t make much of a difference. Consequently, the only solution is to raise taxes.

    Nobody here is excluding entitlements. I have long made reference to the government’s own projections (shown in the second graph at this link) as evidence that the rising costs of Medicare and Medicaid are the biggest budget problems over the next 70 years. As I said in my prior post, I support any reasonable method to slow this growth including an increase in co-pays and means-testing. Also, I would add in some of the suggestions mentioned by Brooks.

    I do think that Medicare Part D should never have been implemented in the way that it was. I remember hearing it defended with the argument that prescription drugs when used correctly actually save on medical costs. It should have been implemented in such a way to insure that this would be the case. In any event, there is no credible way in which that the program could be totally eliminated at this point. The best that we can likely do on entitlements are the previously mentioned reforms and to immediately slow its growth (bend the curve, as they say). This will save massive amounts of money in the coming years. The best that we can likely do on revenues is to let the Bush cuts expire as dictated by current law.

  13. comment number 13 by: Brooks

    All,

    FYI, good article in this week’s Economist http://www.economist.com/displayStory.cfm?story_id=14903024&source=hptextfeature

    My favorite quote is Senator Conrad on the need for a commission to provide political cover: “The only way you do this is if everyone joins hands and jumps off the cliff together”. By the way, if my understanding is correct, unless it varies among the commission bills, The Economist is wrong that the commission’s recommendation cannot be amended. I think it can be, as long as amendments are scored as deficit-neutral.

  14. comment number 14 by: SteveinCH

    B Davis,

    I mostly agree with your post above. Thank you for it. The only part I disagree with is the commentary on tax rates. Yes, receipts as a percentage of GDP were higher during Clinton years and that does make it easier to balance the budget but so does a structurally lower lever of spending. Sure the data suggests that a higher level of receipts will more likely lead to balance but it also suggests that a) so will a lower level of spending (to wit, examine the data set pre-1968) and b) recently, the deficit has become relatively independent of receipts, ranging generally in the 2 to 5 percent range regardless of the level of receipts. Furthermore, the Obama budget continues this trend with receipts projected to rise above the level (as a percent of GDP) that existed under Clinton but deficits remaining in the 3 to 4 percent of GDP range.

  15. comment number 15 by: B Davis

    SteveinCH wrote,

    I mostly agree with your post above. Thank you for it. The only part I disagree with is the commentary on tax rates. Yes, receipts as a percentage of GDP were higher during Clinton years and that does make it easier to balance the budget but so does a structurally lower lever of spending. Sure the data suggests that a higher level of receipts will more likely lead to balance but it also suggests that a) so will a lower level of spending (to wit, examine the data set pre-1968) and b) recently, the deficit has become relatively independent of receipts, ranging generally in the 2 to 5 percent range regardless of the level of receipts. Furthermore, the Obama budget continues this trend with receipts projected to rise above the level (as a percent of GDP) that existed under Clinton but deficits remaining in the 3 to 4 percent of GDP range.

    Looking at the first graph at this link, Obama’s Budget Overview Document for FY 2010 (which was released last February) did project steadily rising outlays and receipts with receipts rising by 2019 to just about the midrange of their level under Clinton. Hence, receipts are not projected to rise above their 1998-2000 level, at least not until after 2019. In addition, I believe that these projections are based on current law, assuming that the Bush tax cuts do expire and that the AMT (Alternate Minimum Tax) is not adjusted and affects a larger and larger percentage of taxpayers.

    Regarding the level of spending pre-1968, the first graph and table at this link shows that the Medicare program started in 1967. Hence, it’s not really reasonable to try to go back to the level of taxes that we had before Medicare existed. Still, the second graph at the above link does show that Medicare is a major contributor to the projected growth in spending. For that reason, I believe that the Bush tax cuts should be allowed to expire but that Medicare growth will have to be constrained.

    On this topic, the excellent Economist article mentioned above by Brooks says the following:

    One way to moderate the political resistance to cutting entitlements and raising taxes is to bypass regular legislative procedures. Kent Conrad and Judd Gregg, the Democratic chairman and top Republican respectively on the Senate Budget Committee, have proposed a bipartisan commission, probably composed of legislators and administration officials.

  16. comment number 16 by: SteveinCH

    As I’ve said to Brooks before, I’m all for the commission with a few caveats.

    First, I think it needs to look at structural solutions (e.g., changes in laws or procedures around spending and taxes) not just spending and income today.

    Second, such a commission should not be solely composed of Washington insiders and a few favored CEOs or academics.

  17. comment number 17 by: B Davis

    SteveinCH wrote:

    As I’ve said to Brooks before, I’m all for the commission with a few caveats.

    First, I think it needs to look at structural solutions (e.g., changes in laws or procedures around spending and taxes) not just spending and income today.

    Second, such a commission should not be solely composed of Washington insiders and a few favored CEOs or academics.

    Agreed. The commission needs to be as diverse and balanced as possible. Also, it helps if its members do not have current political careers so that they are not under political pressure. Of course, we still need to strive to find ways to enable current politicians to make the right decisions.

    By the way, I have a correction to what I said in comment number 15 above. After thinking about it and checking Table S-2 in the Budget Overview Document for FY 2010, I see that the budget projections reflect the administrations budget proposals, not current law. Hence, Table S-2 contains an addition to the deficit for “Tax cuts for families and businesses”. Still, I believe that the steady growth in receipts as a percent of GDP after 2012 is largely due to the fact that the AMT (Alternate Minimum Tax) is not adjusted and affects a larger and larger percentage of taxpayers. Neither current law nor the administration’s proposals contain a permanent fix for this.

  18. comment number 18 by: B Davis

    Note: The correct URL for the Budget Overview Document for FY 2010 mentioned in my comment above is this link.