March 29 (Bloomberg) -- In 1979, with a bill to lift the debt ceiling moving through Congress, Phil Gramm, a first-term House Democrat from Texas, proposed an amendment that would require a balanced budget.
The amendment failed, yet Gramm didn’t give up.
He became a Republican, then a senator. And in 1985 President Ronald Reagan signed the Gramm-Rudman-Hollings Act, forcing Washington to either cut the deficit to zero within five years or face painful automatic cuts to discretionary spending, called “sequestration.”
It was the country’s first sequestration, and “no one wanted it to happen,” recalls Wendel Primus, a senior policy adviser to House Minority Leader Nancy Pelosi, the California Democrat who was a House Democratic staffer at the time.
Capitol Hill took to calling it an “automatic Pac-Man” that would gobble up parts of the budget indiscriminately, Primus says. These days, as Bloomberg Businessweek reports in its March 29 edition, Primus and others credit Gramm’s idea for ultimately bringing about the breakthrough budget deal of 1990, when George H.W. Bush was president, to reduce the deficit by $482 billion over five years.
“If politicians are going to catch hell no matter what they do, they will normally do the right thing,” says Gramm, now a partner with US Policy Metrics, a research firm for the financial sector.
The stakes are higher today; the country’s debt compared with the size of the economy is almost twice what it was in 1985. Still, if Gramm’s right, there’s hope the sequestration that took effect on March 1 will also lead to a broad deal on spending and taxes that reduces the deficit.
It just might take a while.
Before going into politics, Gramm taught economics at Texas A&M University in College Station. As an academic he followed a school of thought called “public choice,” which holds that politicians aren’t motivated by their own beliefs, rather by the desire to get re-elected. To public choice economists, this is a simple truth, not a moral judgment.
The way they see it, it’s a waste of time to wish for better politicians -- or to persuade the ones you have to do the right thing just for the sake of it.
Once in Congress, Gramm saw that the appropriations process was designed to cause deficits.
“I concluded that the average amendment was producing high benefits per beneficiary,” he says, “but the cost was low, because there are a lot of taxpayers.”
Translation: Federal money for a hospital rewards the congressional district that gets the hospital. Yet since the cost is spread out over the entire country, the district pays essentially nothing. Politicians wanted hospitals in their districts because voters wanted them, and that caused deficits.
Gramm wanted better incentives for politicians not to overspend. After his 1979 amendment failed, he tried again to pass legislation requiring Congress to balance the budget in 1980. This time he attached the threat of a sequestration to the measure. The idea was to make it too painful for lawmakers not to get the books in order that year. The bill failed.
Five years later, Congress considered raising the federal debt limit above $2 trillion for the first time (the debt is $16.7 trillion now).
Gramm tried again with Senators Warren Rudman, a Republican from New Hampshire, and Earnest Hollings, a South Carolina Democrat. They made one crucial change: Instead of giving lawmakers a year to cut the deficit, they gave them five.
To get it through the Republican-led Senate, Gramm agreed to exclude Social Security. To satisfy the Democratic-run House, he exempted Medicaid and some means-tested entitlement programs, leaving only defense and non-defense discretionary spending at risk of automatic cuts.
Initially, sequestration didn’t work out as Gramm had planned. A small set of cuts, about 5 percent, were triggered in 1986, but after that lawmakers found ways around the law.
They fended off the cuts planned for 1987 through onetime asset sales and some accounting tricks, like shifting a military payday that fell on the last day of one fiscal year to the first day of the next. Then they rewrote the law and reset their targets, avoiding a sequestration again.
By the end of 1989, Gramm-Rudman-Hollings had helped the U.S. trim its discretionary spending by only $59 billion, according to a 1992 paper for the Journal of Policy Analysis and Management. Because the law didn’t apply to spending on the major entitlement programs so cherished by voters, lawmakers still had no real incentives to make major changes.
“Any bright bunch of people that devise something for Congress, another bunch of bright people will find a way around it,” says John Ellwood, a public policy professor at the University of California at Berkeley. He believes sequestration will always fail, because Congress designs its own trap and can always redesign it when it needs to.
Wriggling out of sequestration was no longer an option by 1990. It was designed to inflict even greater pain with each passing year that Congress didn’t act. Even after rewrites and evasions, lawmakers went from facing cuts of 5 percent in 1986 to 36 percent in 1990. The pain would have been too great.
“We could have rewritten it, we could have suspended it,” says Primus, “but the feeling was that was not good.”
Instead, Congress and the White House moved their budget talks to nearby Andrews Air Force Base for two weeks and produced what had eluded them for so much time: a substantive compromise on taxes and spending.
Call it the longest Pac-Man game of the 1980s.
“I never intended sequesters to be a way of governing year after year,” says Gramm. If politicians have a convenient way to avoid painful decisions, they’ll take it, he believes. Unless there’s “hell” to pay.
By that logic, Washington will eventually come to a compromise, but the roughly 10 percent in cuts brought on by the 2013 sequester are only the beginning.
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