Oct. 17 (Bloomberg) -- Say this for Tea Party Republicans: They don’t back down. No apologies for triggering a partial shutdown of the federal government, then refusing to raise the debt ceiling without concessions.
Condemnation rains down on them from the White House, from foreign capitals, from public opinion polls, yet the Tea Party rages on. Its supporters say they have no choice: Deficits are out of control; something must be done and soon.
“Politicians have very effectively addicted Americans to government, but it’s not sustainable,” says Republican Senator Ron Johnson of Wisconsin. It’s that sense of being on the brink of disaster that feeds Tea Partiers’ determination to fight to the end. For them, the debt-ceiling deal reached by the Senate on Oct. 16 is merely a cease-fire, Bloomberg Businessweek reports in its Oct. 21 issue.
Yet the Tea Party’s belief that things are slipping away is misplaced. Obamacare aside, events have actually gone the movement’s way ever since Republicans wrested control of the House of Representatives in the 2010 midterm elections.
Discretionary spending has been falling. Federal-employee head count is down. And since 2010, deficit reduction has been more rapid than in any three-year period since the demobilization following World War II.
Discretionary spending, which excludes transfer payments and interest, will fall even more in the decades ahead if the laws that the Tea Party helped get on the books stay there.
The nonpartisan Congressional Budget Office projects that, under current law, by 2038 total spending on everything other than the major health-care programs, Social Security, and interest will decline to the smallest share of the economy since the 1930s.
President Ronald Reagan had nothing on today’s Tea Party when it comes to shrinking the parts of government that require annual appropriations by Congress.
“That part of the budget has been cut very significantly, I think more than anyone would have expected or would have thought even was possible before the 2010 elections,” says Ed Lorenzen, executive director of the Moment of Truth Project, which was started by would-be budget cutters Alan Simpson and Erskine Bowles.
Tea Partiers like to see themselves as underdogs in a war against profligate spending. The truth is they’ve already won.
That victory, however, has come at a high price. The Tea Party pushed for heavy spending cuts when the economy was weak, needlessly depressing output and keeping the unemployment rate high.
The International Monetary Fund, which supports long-run deficit reduction, declared in June that the U.S. program was “excessively rapid and ill-designed.”
It almost tipped the economy into recession, says Mark Zandi, chief economist of Moody’s Analytics. The Congressional Budget Office estimated in September that waiving spending caps now would create about 800,000 jobs by the end of 2014.
What’s worse, the cuts the Tea Party achieved have come almost entirely on the discretionary side of the budget, choking everything from medical research to antipoverty programs to food inspection.
Discretionary spending is the most vulnerable because it must be appropriated annually. The Tea Party, and Washington in general, have scarcely touched the real problem: entitlements such as Social Security, Medicare, and Medicaid, which are on track to soak up huge portions of the national income in coming decades.
“Most economists, I dare say all economists, recognize that we have a long-run fiscal problem that needs to be addressed,” says Joel Prakken, co-founder of Macroeconomic Advisers, a St. Louis-based forecasting firm. “But you can’t address it by cutting discretionary spending alone.”
In political terms, the Tea Party’s scorched-earth strategy has produced some impressive legislative wins yet damaged the movement’s popularity. Now its blunt tactics threaten to make deficit reduction seem like a fringe issue, one of concern only to extremists.
The Greek king Pyrrhus, after whom Pyrrhic victories are named, once said, “If we are victorious in one more battle with the Romans, we shall be utterly ruined.”
To understand why Tea Party heroes such as Senator Ted Cruz of Texas and Representative Michele Bachmann of Minnesota rail against compromise, it’s instructive to recall how the Tea Party got started in the first place.
Federal debt jumped by nearly $5 trillion during the eight years in office of Republican President George W. Bush, for whom most Tea Partiers have little but disdain. Then the Obama administration used deficit spending to fight the worst economic downturn since the Great Depression.
The debt has grown an additional $6.1 trillion during President Barack Obama’s four and a half years in office to its current level of $16.7 trillion.
Each year of the historic run-up, deficit hawks heard the same thing from leaders of both parties: “Now isn’t a good time to get the debt under control.” “Maybe next year, when the economy’s healthier.”
That maybe-next-year message left Tea Partiers determined not to be fooled again. The 2010 midterm elections produced the biggest realignment of congressional seats since 1948, giving Republicans a majority in the House.
Although the economy remained weak, stimulus was henceforth off the table. The debt-ceiling struggle in the summer of 2011 gave deficit hawks an opportunity to flex their new muscle: The Budget Control Act that emerged from the last-minute debt-ceiling deal put tight caps on discretionary spending for 10 years starting this year.
Conservative Republicans, however, insisted even those cuts didn’t go far enough. So the deal also created a -12-member bipartisan supercommittee to agree on additional reductions. The fallback in case the supercommittee failed -- which it did -- was sequestration: automatic, across-the-board spending cuts. Those sequestration cuts were never supposed to take effect, but they did on March 1, because Congress couldn’t agree on a more rational plan.
Sequestration, though indiscriminate and destructive, looks enlightened in comparison to what’s happened to the budget this fall.
The government went into a partial shutdown on Oct. 1, the start of the fiscal year, because Congress failed to pass either a 2014 budget or a continuing resolution to keep spending going at last fiscal year’s levels.
That has reduced spending below sequestration levels while wreaking havoc on everything from Head Start to collection of delinquent taxes. It’s cut the economy’s annualized growth rate by 0.1 percent for each week it’s lasted, although presumably most of the lost output will be recovered via catch-up spending and back pay.
Things could get worse. Failure to raise the debt ceiling either now or in the future would limit the government to spending only what comes in. The country would have instant budget balance -- and, most likely, an instant recession.
Decision-makers in business are worried, and it’s crimping their hiring, according to a survey by CEB, a business advisory firm formerly known as the Corporate Executive Board.
Says Executive Director Michael Griffin: “It’s like bringing a caged bear into the boardroom. Even if you’re confident that it’s not going to escape, it’s hard to ignore it and go on with your plans.”
While the downward spending ratchet gets most of the attention, the Tea Party has won on taxes, too -- insisting successfully that deficit reduction should come from lower spending, not higher revenue. In 2010, Obama agreed to temporarily extend the Bush tax cuts of 2001 and 2003. The justification at the time was that they were a kind of stimulus, albeit one benefiting the rich.
Last winter, under heavy pressure from Republicans, Obama signed a law making permanent most of the Bush tax cuts except those for individuals with taxable incomes over $400,000. The bill also ended the payroll tax holiday, which was always intended to be temporary and in any case was of less value to the wealthy.
Obama has barely broached tax increases since; vociferous Tea Party opposition could have pushed them off the agenda.
Fiscal policy is probably subtracting 1.5 percentage points from the economy’s growth rate in 2013, taking into account this year’s spending cuts and higher taxes, estimates Zandi of Moody’s Analytics.
The Federal Reserve can’t offset the harm by cutting interest rates because the federal funds rate is already at zero. So the economy is expected to grow only about 1.5 percent this year, barely above stall speed.
“At stall speed,” Zandi says, “job growth is no longer sufficient to forestall an increase in unemployment. As soon as unemployment ticks higher, you’re in recession. You’re in a vicious cycle down.”
He says the U.S. economy should avoid that fate -- unless Congress stumbles into a default at some point: “The minute Treasury doesn’t pay someone, we’ve opened Pandora’s box.”
Fiscal policy wouldn’t look like this if the key players in Washington trusted one another more.
Tea Partiers insist on “front-loading” cuts in discretionary spending disregarding the harm to a still-recovering economy -- and to the fabric of government -- because they don’t trust others’ commitments to cut entitlement spending at some point in the future.
The breakdown in trust is tragic because pivoting toward long-run entitlement changes really would be better for all concerned.
“We’ve drifted into this environment where we have these calendar-created crises,” says Prakken of Macroeconomic Advisers. “It’s nobody’s idea of the best way to do things.”
Prakken, a hawk on long-term deficits, backs the idea of a gradual, long-term deal.
“It would be wonderful, would it not, if our elected officials announced some grand bargain that seemed credible, realistic, with enforcement mechanisms that make it very difficult for future regimes to overturn,” he muses. “Maybe coupled with fundamental tax reform and higher revenues. Implemented over 30 years with very little fiscal drag created - - that would be a wonderful outcome.”
He’s right. The federal government really does need to tighten its belt eventually, though not with the scale and immediacy the Tea Party insists on.
Tea Partiers are in no mood for nuance. They fear that the Republic is in danger from wily liberals who are skilled in the art of brinkmanship.
Democrats are “very good at this. We’re obviously very bad at it,” Michael Needham, chief executive officer of Heritage Action for America, the political arm of the conservative Heritage Foundation, told the Wall Street Journal this month.
In fact, the Tea Party is all too good at brinkmanship. The true believers are winning their battles in Washington. It’s the rest of the country that continues to lose.
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