Permanent Crises, Bitter Politics and Weak Policy – The New Reality of US Budgets

When President Barack Obama came into office in 2009, it was under a wave of optimism and hope for a more conciliatory, robust and bipartisan policymaking process between Democrats and Republicans. The country was in crisis at the time of Obama’s election, and there was the expectation that out of such a situation would come genuine compromise on both sides of the political aisle for the long-term national interest. What we observe in mid-2013 however is a policymaking process frozen from gridlock across many dimensions, none more reflective of this new confrontational reality than the development of fiscal policy.

Before we consider the current parlous state of affairs in the United States, we will chart the course of this evolution from the bipartisan days of budget policymaking to today when, at times, their national credit solvency is put on the line for concessions and tradeoffs. From there, we will consider the short-term and long-term effects of this new reality and place it in the context of Obama’s Presidency and politics in America going forward.

Looking back on the supposed ‘golden era’ of bipartisan budget policymaking during Bill Clinton’s Presidency or even the intermittent moments of genuine compromise between Republicans and Democrats during George W. Bush’s Presidency, we observe a period where, thanks to a growing economy, reasonably simple reforms could be made that would appeal to both sides. During Clinton’s Presidency, dozens of spending measures appealed to liberals but had small price tags, whilst welfare reform was enacted and the country’s fiscal health was a top priority, achieved primarily through engagement with Congressional Republicans. Even at such fractious periods as that when Clinton faced impeachment hearings driven by Congressional Republicans, there were still negotiations between Republicans and Democrats that ultimately lead to a bipartisan, balanced-budget bill becoming law in 1998, the first since 1969. However, as Baker and Husain explain, credit really should go to a rapidly growing economy for outstripping expectations and leading to lower government spending and higher tax revenue generated.

Perhaps we should consider the role of a strongly performing economy more heavily in enabling bipartisanship, especially as we observe that the key compromises between Republicans and Democrats during President Bush’s time, such as the passing of the 2001 and 2003 Tax Cuts, occurred when the economy was performing soundly on trend. Undoubtedly though, negotiations related to fiscal policy became more terse as Bush’s Presidency wore on, particularly crystallised around Bush’s failed proposal to drastically reform Social Security into a system of private accounts. It is into this environment of increasingly bitter engagements between Republicans and Democrats across a host of issues that Barack Obama steps into when he wins the Presidency in 2008 on a promise to bring the two sides together for the interest of all Americans.

What’s clear after four and a half years in office, is that President Obama has failed to right this worrying trend of confrontational policymaking and has overseen it reach lower and lower depths. While Obama and his team have lived by the nickname ‘No-Drama Obama’, it’s apparent that at key points in his Presidency, his relationship with Congressional Republicans has become so toxic that it has lead to periods where the credibility of the United States as a global power has been put on the line.

This poisoned well is no more clearly demonstrated than with the Debt Limit debate of 2011 and the Fiscal Cliff-Sequester debates of 2012-13, both occasions where minimal common ground was forged between President Obama and Congressional Republicans, if at all. With year-on-year fiscal deficits breaching $1 trillion and the national debt surging from around $10 trillion at the start of Obama’s tenure in office to approximately $16.8 trillion today, and a sluggishly performing economy, growing at sub-trend levels, the time for action was never more immediate.

The United States’ first Treasury Secretary and Founding Father, Alexander Hamilton, said of public credit in the newly formed nation “that the creation of debt should always be accompanied with the means of extinguishment.” And yet, during the debate of 2011, the full faith and credit of the United States was put on the line during negotiations between President Obama and Congressional Republicans, as the country approached the legislatively-mandated Debt Ceiling. As the newly ascendant House majority lead by Speaker John Boehner sought deep cuts to discretionary spending, and no tax hikes in exchange for any increase in the Debt Ceiling, faith in the United States as a policymaking institution at a time of crisis sunk to new lows and only through a last-minute bill was a full-scale default averted. The most significant aspect of this crisis was the effect it had on President Obama, making him more combative to Congressional Republicans in future entanglements, shedding any perception that negotiations around the budget could be more constructive and conciliatory.

What’s more, the policies implemented during 2011 only set up future crises to emanate around budget negotiations, such as those that occurred late last year and early this year related to the Fiscal Cliff and the Sequester. The Fiscal Cliff, which was to hit at the end of 2012, involved a series of large and oft-popular tax cuts expiring, and sweeping cuts to discretionary spending and unemployment benefits, this second element is more commonly known as the Sequester. As the debate raged on and a last-minute fix was achieved through negotiations between Vice President Joe Biden, and Senate Republican Leader Mitch McConnell, it was clear that yet again, American policymakers had failed to address their most significant challenges on the national debt and the budget deficit, despite the continued use of commitment devices such as the scheduled expiration of the Bush Tax Cuts at the end of 2012.

But what is a commitment device and how does it to apply to policymaking? Dr Mike Pottenger, a lecturer at the University of Melbourne explains:

“In policy terms, an effective commitment device is something that should give policymakers the right incentives to deal with the real problem and make tough decisions. Postponing a decision and hoping people will do the right thing later when it’s really serious isn’t going to do this.”

But as we’ve seen repeatedly from Congress, when it comes to battles over the budget, the most common fix is to simply prolong the schedule of expiration; to proverbially ‘kick the can down the road.’ In the final deal that passed in the early hours of New Year’s Day, there were many elements of the Fiscal Cliff that were simply delayed, including The Sequester. Ultimately, The Sequester would become implemented law, as Congressional Republicans showed no appetite for compromise with the President, viewing the across-the-board cuts in government services and employees (including those in the military) as the most effective way forward to achieve deficit reduction.

Clearly, such an atmosphere for rolling crises and instability is not optimal policymaking for the world’s largest economy; despite its emergence as the new normal for the United States. Put simply, this new era of policymaking has significant downside effects on the short-term fluctuations in the economy, particularly as it is still in recovery mode. Most immediately, the budget wrangling has impeded consumer and business confidence to the point where the economy has slowed appreciably, due solely to the nature of fiscal policy as the IMF suggested. Additionally, as each potential Debt Ceiling showdown emerges, investment and private-sector activity grinds to a halt, fearful of what may arise from the latest round of negotiations between Obama and Congressional Republicans, despite Obama’s pledge not to negotiate on the Debt Ceiling.

Thinking more long-term, such a parlous state of politics in America around the ever-critical budget will only foster negative outcomes. Already, there is a wave of retirements of moderate members of both parties, fed up with the bitter nature of debate, resulting in a loss of vast experience and lost bonds between Senators and Representatives that often transcended ideology. Recently-retired Senator Olympia Snowe suggested she could achieve more out of office, a damning indictment on the once so-called World’s Greatest Deliberative Body. Concurrently, there has been a never-ending wave of polls showing that  public approval for the legislative body at record lows.

What’s clear from one’s perspective, is that it is through the tactics of Congressional Republicans, and their unwillingness to engage with President Obama on reasonable policy to get the United States’ fiscal house in order, that has gotten them to this point; a never more divided politics. However, the President must bear responsibility for not more effectively using his office to motivate the American people to demand something better from their elected representatives.

For ultimately, without a redoubled effort to get America’s fiscal situation on a path to long-term sustainability and reinvigorate the spirit of bipartisanship between Democrats and Republicans, this era of crisis-driven policymaking, last-minute deals and kicking the can down the road, will continue long after 2016 and befall Presidents and Congresses to come, irrespective of their political persuasions.

In the end, the credibility of the United States is on the line, in an unstable world looking for sound leadership. If the evolution of fiscal policy is anything to go by, then that leadership is as elusive as ever.