Posted by Shyam Moondra
During 1995 and 1996, Congressional Republicans, under the leadership of Speaker Newt Gingrich, passed bills that would have severely cut spending in such areas as education, Medicare, environment, and public health (areas favored by Democrats) to tame the run away budget deficit caused primarily by tax cuts enacted by Republican President Ronald Reagan as part of his so-called “trickle-down” economics. Those partisan budget actions forced Democratic President Bill Clinton to veto the bills that led to government shutdowns for several weeks in the late 1995 and again in early 1996. The twin government shutdowns resulted in interruption of essential services, causing delays and hardship to the citizens. The public’s outrage led to Clinton’s victory in his re-election bid in 1996. During his second term, Clinton managed to increase taxes for the rich to reduce budget deficit in return for agreeing to reform the welfare programs and subsequently the economy took-off. The stock market set new records and the unemployment rate fell to 4.5%, which is considered as the lowest possible "full employment" rate. By the end of his second-term, Clinton not only balanced the budget but he left the office with a small budget surplus. Many historians consider the Clinton era as one of the most prosperous periods in the nation’s history. After the poor showing of Republicans in the mid-term elections of 1998, Gingrich was forced to resign as the Speaker of the House. Ultimately, Republicans lost the control of the House and Senate to Democrats.
One would think that Republicans learned their lesson and would not make the same mistake again. But, a decade later, Republicans’ extreme tactics on budget issues are backfiring on them, once again. In 2011, Republicans waged an ugly debate on extending the debt limit which resulted in the historic downgrade by rating agencies of the U.S. government securities from AAA to AA+. Then came the “fiscal cliff” (convergence of expiration of Bush tax-cuts and mandated spending cuts), which was avoided only when Republicans, at the last minute, blinked and agreed to tax rate increases for the rich (those making more than $500,000 a year) to seal a deal with Democratic President Barack Obama. The public’s disapproval of Republican tactics led to the re-election of Obama in 2012 and a net loss of seats for Republicans in the Senate and House. Now, Republicans are again engaged in extreme budget tactics via sequestration that are highly unlikely to produce any better results for them than last time.
Sequestration, agreed to by both Democrats and Republicans in 2012 as a way to avoid making hard compromises on tax and spending issues during the election season, involves across-the-board cuts in discretionary federal spending (entitlement programs such as Social Security, Medicare, and Medicaid are unaffected) amounting to $85 billion between March 1 and September 30 of this year (if these cuts are continued over a period of ten years, they would reduce the budget deficit by over $1 trillion). Both Republicans and Democrats have mixed feelings about these automatic cuts – Republicans are happy that sequestration would finally force the government to slim-down but they are also unhappy that these cuts would hit the Defense Department the severest, thereby negatively affecting national security, and that the entitlement programs are off-limit; Democrats are happy that sequestration would reduce the bloated budget for the Pentagon that they have been trying to cut down for years, but they are also unhappy that these automatic cuts would negatively affect many of their favorite programs such as Head Start. At the time when sequestration was agreed to, it was thought that both sides would find parts of these automatic cuts so drastic that they would never dare to carry out these cuts and perhaps be more amenable to compromises.
Sequestration may not produce hardship to the citizens immediately, but over the coming months as these cuts start biting, the people would begin to feel the pain (reduced federal services, canceled contracts, military base closings, and job furloughs and layoffs). The government has estimated that as many as 700,000 jobs would be lost and these cuts would reduce the GDP growth by at least 0.5%. When that happens, as the recent polls show, Republicans would face the wreath of public anger over their intransigence. With the 2014 mid-term election season beginning soon, it’s smart politics for Republicans to back off from their uncompromising positions. Unless Republicans soften their rigid ideology of “no new taxes” and they embrace a balanced approach to spending cuts and new tax revenues, as Obama and Congressional Democrats are advocating, they may end up repeating history and losing the control of the House in 2014. Then Obama and Congressional Democrats, with a firm control of the White House, Senate, and House, would be free to aggressively pursue their agenda on fiscal matters in the last two years of Obama’s second term.
The deficit is too big (caused by Bush's two costly wars, unnecessary tax cuts to the rich, and bank bailouts that became necessary because of lax regulations under Bush) to be remedied by spending cuts alone; new tax revenues would have to be part of the solution. When special deductions and exclusions enable rich people like Mitt Romney and billionaire Warren Buffett to pay only 13-20% in taxes, it raises the question of fairness. When tax loopholes, added to the tax code over the years at the behest of lobbyists of special interest groups, enable rich companies like GE, Google, Apple and Goldman Sachs to pay only 0 -10% in taxes, that’s a problem. Clearly, rich individuals and corporations are not paying their fair share of taxes. Closing tax loopholes and eliminating tax giveaways is not the same thing as increasing taxes. This is more about cutting tax expenditures that we can’t afford.
If Republicans work cooperatively with Obama and Congressional Democrats in resolving the sequestration, they might improve their chances of winning the 2014 Congressional elections as well as the next presidential election in 2016. The sequestration, which no one likes, is the last opportunity for Republicans to repair their shattered image caused by their serial manufactured fiscal crises. Obama has already offered to put on the table entitlement reforms (that Republicans want) in return for higher tax revenues via tax reforms (that Democrats want). Several bipartisan groups, including the commission on deficit and debt led by Erskine B. Bowles and Alan K. Simpson, have called for one dollar of tax increase for every $2-3 of spending cuts. If Republicans and Democrats work together over the next few weeks and come up with a grand plan which would replace sequestration with a more balanced mix of spending cuts in discretionary as well as entitlement programs and fair tax reforms with a net increase in tax revenues, the country would be set for a sustained recovery for the long-term with millions of new jobs created. This is what an overwhelming majority of people want and this is what will restore the good image of the Grand Old Party.
If Republicans fail to seize this last opportunity that sequestration has presented to them for redeeming themselves, the consolation prize for the people would be that if the “fiscal cliff” and sequestration agreements on spending cuts and tax increases are carried out in full, the budget deficit would be reduced by about $4 trillion over ten years. This level of austerity would certainly cause some hardship in the near-term, but it would also be a big leap in improving the long-term fiscal health of the country. Of course, a grand plan, which includes entitlement reforms and tax revenues, would put us on a path of stronger recovery sooner and everybody would win, including the Republicans.
