A recent report from Goldman Sachs highlights what has been clear for some time now: the federal budget deficit is declining rapidly. Our economic recovery – sluggish but steady – is one reason: much of the sharp rise in the deficit beginning in 2009 simply reflected depressed tax revenues resulting from poor economic performance. We’ve also both cut expenditures and raised revenues significantly over the last couple years. The Congressional Budget Office projects federal deficits of 5.3 and 2.4 percent for 2013 and 2014, respectively.
The current situation is hardly optimal. Given the continued weakness in the economy, we should probably be running higher, not lower, deficits this year and next. In a recent report, the International Monetary Fund attributes our poor economic performance, at least in part, to “overly strong” fiscal consolidation – i.e., cutting our budget deficit too much and too quickly. The so-called “sequestration” is a particularly unwise way to reduce the deficit. Not only does it represent a short-term drag on the economy, it imposes across-the-board cuts that bear little relationship to budgetary priorities. But the odds of securing agreement to additional stimulus from congressional Republicans are vanishingly slim.
We still have longer term fiscal issues to address — in particular, rises in expenditures associated with Medicare and Medicaid. (Social Security is a much smaller and more manageable problem.) But there’s no immediate fiscal crisis facing the country. And there is an ongoing crisis driven by low economic growth and a weak labor market, one reflected in high unemployment and stagnant wages. Yet the obsession with the budget deficit continues to dominate the debate in Washington. It is as though millions of unemployed Americans simply do not exist.
Whatever the merits of a so-called “Grand Bargain” – a package of long-term expenditure cuts and revenue increases aimed at putting the federal budget on a sustainable fiscal path – it seems strange that that the Obama administration is expending so much effort at this time to achieving one. Perhaps the president sees concluding a “Grand Bargain” as a way to burnish his legacy, even if any deal will last only until the next shift in power in Washington. Perhaps the president views the offer of a “Grand Bargain” as a way to score political points with congressional Republicans, who — at least to date — appear unwilling to countenance any further tax increases.
But there is simply no economic urgency to brokering an agreement right now. And there is a real risk that any compromise between the administration and congressional Republicans might actually worsen the situation by further front-loading fiscal consolidation. Western Europe provides ample evidence of the price of austerity; the United Kingdom has just – barely – averted a triple-dip recession. In any case, we should be wary of fetishizing bipartisanship. It is a means, not an end in itself. Just because Democrats and Republicans agree to something does not make it wise. The sequestration itself is an example of bipartisan folly.
Under the circumstances, it might be best simply bite the bullet, accept the sequestration, ugly as it is, and defer a Grand Bargain until – with luck – the current hysteria over the budget deficit catches up with the fiscal facts.
Why we should waste any time on forging some “Grand Bargain” – particularly if it’s only likely to last until the next shift in political power in Washington – is inexplicable.
Joe Barnes is the Baker Institute’s Bonner Means Baker Fellow. From 1979 to 1993, he was a career diplomat with the U.S. Department of State, serving in Europe, Africa, the Middle East and South Asia.