Two decades ago, President George H.W. Bush, Senate Majority Leader George Mitchell and House Speaker Tom Foley agreed to "the largest and most comprehensive deficit reduction package in U.S. history," according to the president's Council of Economic Advisers, on which I served as a member at the time. We estimated that the deal would "reduce the Federal deficit by a total of nearly one-half trillion dollars over the next 5 years."
Economists still debate whether the deal actually reduced the deficit over those five years, let alone by a half trillion dollars. But there's little debate that by agreeing to the Democrats' request to increase tax rates, Bush lost the White House in 1992 to Bill Clinton, who then raised taxes again, with the top rate going up to 39.6 percent, well above the 28 percent rate before the 1990 deal.
After that lesson, is it any wonder that Republicans are saying "no" to the same request made by President Barack Obama today? Is it a surprise that economists who value low marginal tax rates for economic growth and efficiency are advising Republicans to do so?
I remember calling Milton Friedman, the Nobel laureate and free-market economist, about the 1990 deal. As a member of the Council of Economic Advisers, it was my job to ask him and other economists for their support on the tax-increase agreement. He was at Stanford University's Hoover Institution at the time, and I was in Washington, on leave from Stanford. I didn't even have to ask the question before Milton realized why I was calling and simply said, "No!" He added, "You better come back to Stanford right away, John. Washington is corrupting you."
Today, the budget gap is much larger than in 1990 -- $6 trillion over 10 years. At least that's the difference between the budget that Obama originally put forward and the House's proposed budget, which reaches balance. A good two-step approach would be to agree now to $2.5 trillion in spending-growth reductions and to raise the debt ceiling. Then have an open debate about how to close the remaining $3.5 trillion gap next year, during the 2012 election campaign.
Democrats might propose to close the shortfall with $2 trillion in revenue increases and $1.5 trillion in spending reductions; Obama could make that explicit in his budget submission in February 2012. The Republicans could propose to close the whole gap with spending reductions; indeed all the Republican candidates for president have proposed this already.
Consider the benefits of such an approach. First, since both sides appear to agree that at least $2.5 trillion in spending-growth reduction is needed, they should be able to approve that first tranche and an increase in the debt limit by the same amount.
Second, the proposals can be debated openly over the course of a year. No more closed-door meetings followed by media leaks of what was said. Plenty of time to counter claims, such as the one made last week by Obama that "the debt ceiling should not be something that is used as a gun against the heads of the American people to extract tax breaks for corporate-jet owners."
Third, $2.5 trillion is no small deal. It represents a significant reduction over the first Obama budget proposal. If a good chunk is front-loaded, the deal would be a credible game-changer and the economy could begin reaping the benefits of a return to sound fiscal policy.
Fourth, the first $2.5 trillion tranche matches the size of the debt-limit increase needed to get through 2012, and thus meets the important principle of matching spending cuts with debt-limit increases.
In a matter of days, the House and Senate could vote and the president could sign the needed legislation.
(John B. Taylor, a contributor to the Echoes blog, is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution.)
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