The Debt Deal's Failure

Congress proved incapable of solving our nation's money problems. The result is that we've lost the world's trust

By Fareed Zakaria Monday, Aug. 15, 2011
    • Illustration by James Victore for TIME

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    But what he did not do was cut spending consistently. Spending under Reagan averaged 22.4% of GDP, well above the 1971 — 2009 average of 20.6%. Yes, much of this was for defense, but almost everything went up during his Administration. Farm subsidies, for example, rose 140%. If you lower taxes and don't trim expenses, there is only one way to make up the difference: by borrowing. The national debt tripled, from $712 billion in 1980 to $2 trillion in 1988.

    Reagan reflected the American public's basic preferences. We want big government but low taxes. The only way to make this work, short of magic, is debt. And government at every level — state, city and local — followed this pattern and took on ever increasing amounts of debt. In fact, because of weak accounting requirements, politicians at the state level have even resorted to a kind of budgetary magic to satisfy key constituencies. When public-sector employees want pay raises, politicians provide just modest step-ups in salary but huge increases in pension and retirement health care benefits. That way, the (fraudulent) budget numbers don't look that bad until years later, when the politicians who did the damage have safely retired.

    Over the past three decades, this pattern has persisted, with a few exceptions at the federal level. Tax hikes and spending restraint under George H.W. Bush and even more so under Bill Clinton brought the problem under control and in the late Clinton years even produced a budget surplus. Then came the George W. Bush tax cuts, expanded health care benefits and two wars — all unpaid for — without any tax increases. The result: the surplus disappeared, and by 2008, the debt had ballooned to $10 trillion. The final blow was the financial crisis and recession, which meant that federal tax revenues collapsed, followed by more tax cuts and stimulus spending. The debt rose to its current $14.3 trillion.

    We couldn't be grappling with this at a worse time. Many economists believe that the economy is fragile and that it would be better not to cut spending or raise taxes at this point. It's true. The sensible economic policy would be more stimulus now and major deficit reduction in a few years. But that kind of smart, sequenced public policy is simply beyond the reach of the American system today.

    So far, the national debate has been built around the fantasy that we do not have to choose between big government and low taxes — that we can get both by cutting waste, fraud and abuse. But the money is in the big middle-class items, from Medicare to the mortgage-interest deduction. With federal taxes at 15% of GDP, a historic low, and spending at 24% of GDP, there is really no conceivable way to close the gap without increasing taxes — either raising rates or eliminating deductions and loopholes. And Republicans might find to their dismay that when forced to choose, Americans will decide that they like their government programs after all. Polls show that the public would rather raise taxes than, for example, cut Medicare. (In fact, we would have to do both.) The public may hate government in theory, but it has warm feelings about most individual government programs, from the space shuttle to Head Start to Pell Grants. This may be why Obama might be happy to have this debate in 2012 and urge a mix of cuts and increased revenues.

    Whatever the outcome of the ideological debate, that outcome has to then be translated into public policy. For that to happen, we need a government that works. What the debt crisis has highlighted is that Congress — the heart of day-to-day government — is utterly and completely broken.

    Can one measure this breakdown? Yes. Congress is more polarized than ever before. A National Journal study shows that, for the first time since the publication began tracking the divide 30 years ago, the most left-wing Republican is more conservative than the most right-wing Democrat. There is no overlapping set of moderates, who used to engineer congressional compromises. This polarization has resulted in paralysis. More than two years into the Obama Administration, hundreds of key positions in government remain vacant for lack of Senate confirmation. The Treasury Department had to handle the global financial crisis, recession, bank stress tests and automaker bailouts, as well as its usual duties, with about a dozen of its senior positions — almost its entire top management — vacant. Senate rules have been used, abused and twisted to allow constant delay and blockage. The filibuster, historically employed about once a decade, is now a routine procedure that allows the minority to thwart the will of the majority. In 2009, Senate Republicans filibustered a stunning 80% of major legislation. Given how the chamber is composed — two Senators per state, no matter how thinly populated — people representing just 10% of the country can block all legislation. Is that how a democracy should function?

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