Executive Policymaking. Andrew Rudalevige
House concessions to expand Medicaid and the earned income tax credit (EITC). The Balanced Budget Act of 1997 cut the capital gains tax, a priority for Speaker Newt Gingrich, but also created the State Children’s Health Insurance Program to extend health coverage to millions of children, a major priority for President Clinton. Each side achieved its highest priorities, and under President Clinton we balanced the budget and ran a surplus not once but three years in a row. Sadly, the idea of such compromise now feels quite distant, and I worry that the very idea seems to have become synonymous with being compromised.
The United States today faces multiple challenges. We are running massive and growing budget deficits during a period of economic growth, and we also face pressing challenges from inadequate infrastructure, a ticking clock on climate change, and income and wealth inequality that is harming our democracy. Solutions will require significant government action and investment, and policies must be workable and sustainable. When there is once again political will to make hard trade-offs, OMB will play a critical role.
There is no urgency to balance the budget immediately as we continue uninterrupted, if modest, growth ten years after the worst recession since the Great Depression. But it is a problem that we seem to have an appetite to spend at a rate between 20 to 23 percent of GDP but only to raise revenue at 16 or 17 percent of GDP. And it is not the moment to plow ahead and add enormous amounts of new debt.
This situation cannot go on forever, and it did not come about by accident. Since the 1980s, relentless attacks on government spending as wasteful have fueled the idea that government spending delivers little value. Ironically, one hears that some Americans do not believe the services they most value, like Social Security and Medicare, are even government spending. And for decades, tax cuts have been used to create fiscal pressure to shrink spending and “starve the beast.”
In the current political climate, it is hard to find a strong base of support for a balanced fiscal approach on either side.
Republicans passed a tax cut that added trillions of dollars of deficits, and this was not the first or the second, but the third, time we slashed our revenue base on the false promise that tax cuts would pay big fiscal dividends. The current administration budget plans trillion-dollar annual deficits as far as the eye can see, but is short on long-term investments and would make dangerous cuts to Medicaid, Medicare, and domestic discretionary spending. It would be wrong to cut social programs to pay the bill for the most recent tax cut, and there is a need for new revenues to fill the gap.
It is encouraging that Democratic legislators and candidates are debating aspirational goals to deal with profoundly serious challenges. But some are calling for major new spending without a clear sense of whether it should be paid for, and if so, how. New economic theories will not erase the cost of servicing the debt, or the risk to our financial future if we simply abandon the notion that there is a limit to how much we can borrow and how much money we can print. Even in a low interest rate environment, our growing debt is likely to present challenges. In coming years, foreign demand for Treasuries may soften, particularly as countries like China see current account surpluses turn to deficits. And turning more heavily to U.S. domestic markets to finance our debt is likely to drive up borrowing costs. As interest rises as a percentage of our budget, there will be growing pressure to curtail spending, and we know from history that presents a special risk to the social safety net and domestic investments for a better economic future.
For anyone who believes, as I do, that government must address pressing national challenges—including income inequality, aging infrastructure, and climate change—maintaining a stable fiscal foundation should also be a priority. To me, this is the definition of a pragmatic progressive agenda. If we need to debate new revenue proposals to pay for the government we need, we should do so, a view I also held when I was OMB director and we balanced the budget while extending health care coverage to millions of kids and expanding tax credits for people working their way out of poverty.
Political pendulums swing in both directions, and when market or political conditions change, there is likely to be renewed concern about deficits. With a demographic reality that the baby boom is retiring, literally every day, fiscal pressures would be real even without the recent tax cuts, but the pace of the challenge has accelerated. And the prospect for bipartisan cooperation to address that challenge is strained by the recent tax cut. We need to start by filling at least some of the hole it created before we are likely to be able to find compromises to address longer-term trends.
As OMB looks to the future, there is much need for clear-headed analysis that falls squarely in OMB’s wheelhouse.
First, we must prioritize investing scarce resources where investments will improve the lives of poor and middle-class Americans, while tackling critical gaps like infrastructure, apprenticeships, child care, and investments in sustainable energy. These policies would help millions achieve or maintain middle-class living standards, while building the physical and human capital we need for the future.
Second, we need to ensure the financial soundness of tremendously successful programs like Social Security, Medicare, and Medicaid. Too many people today worry these programs will not be there when they need them. While I might see more revenues in a solution and others may see more benefit reductions, surely it would be better not to wait for a moment of crisis to act, when it will be too late to avoid much more difficult solutions.
Third, new programs should be paid for, and we need a realistic and honest assessment of how much revenue is required for the government we want and need. There are many ideas about how to raise revenue while addressing income inequality, and my suggestion is to start by looking again at how we tax unearned income and, particularly, appreciated assets. If we are really concerned about income and wealth inequality, how can we allow substantial gains to escape taxation forever as their value steps up when passed from one generation to another without any tax?
We may also need to link new revenues with desired expenditures. For example, investments to repair, build, and reduce the environmental footprint of infrastructure could be funded by a carbon tax, or other measures that encourage more sustainable behavior. A menu of complementary options would help policymakers when they are ready to address these difficult issues.
Finally, policies must be administrable to be effective: technical details can be the difference between a real solution and a measure that wastes time, resources, and political capital—like a tax plan that inadvertently opens new loopholes or fails to produce the intended outcomes. Practical considerations are not a reason to think small, but they remind us to double down and get the details right.
Ultimately, the responsibility of leaders is to budget sustainably for a safer, healthier, and more equitable future, and we should settle for nothing less. I still believe what I said during my first term as OMB director, that budgets are not just books of numbers. They are a tapestry, the fabric, of what we believe. The numbers tell a story that is a self-portrait of who we are as a country.
Some of my reflections may not match the reality of Washington today, but it is critical that we maintain OMB’s proud tradition and its careful internal balance as both the leading source of accurate information and analysis and the fulcrum of presidential policymaking. And as we learned from the response to impoundments in the 1970s, we need to be mindful that the price of overreaching in the use of broad executive authority, such as ill-founded emergency designations, can lead to a backlash that could erode the executive flexibility we will need to respond to real emergencies in the future.
OMB is a resilient and adaptable institution with a proud and strong culture. When the political winds blow even slightly toward compromise, I am confident that OMB will be ready to help pave the way for a return to more responsible and sustainable budgeting, and a more secure and prosperous path for the future of our country.
a A slightly different version of this chapter was delivered as the keynote address to the “Prioritizing Presidential Policies: How Does OMB Influence Executive Policymaking?” Symposium held at the Peter S. Kalikow Center for the Study of the American Presidency, Peter S. Kalikow School of Government, Public Policy and International Affairs, Hofstra University, on April 11, 2019.
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