In 2001, Alan Greenspan, then-chairman of the Federal Reserve, sat before the Senate Budget Committee and warned senators against using budget surpluses to pay off a $5.7 trillion national debt.
Doing so would mean the Fed would have to buy private-sector debt to control interest rates since its main policy lever, U.S. Treasury bonds, would disappear.
Turns out he had nothing to worry about.
The surpluses disappeared in a miasma of tax cuts, war spending and a change in the composition of federal revenue. And now instead of $5.7 trillion, the national debt — the total borrowing caused by annual deficits — has risen to more than $31 trillion.
But House Republicans say that to avoid a debt default, they will only allow an increase in the debt limit if there are big budget changes. One idea is to balance the budget in 10 years. While attractive, the problem with that idea is it’s politically impossible, according to experts across the ideological spectrum.
Unlike when Greenspan testified, or even 10 years ago when there were several attempts at a bipartisan spending cuts-and-tax hikes “grand bargain,” the budget is so far in the red on a structural level that a few spending cuts here or a few tax hikes there won’t do the job. The gap is much bigger now — and would require even more aggressive, and politically difficult, measures.
“The reason it’s so much bigger is the baby boomer generation has retired, not entirely, but it’s getting there. And so those entitlement programs, Social Security and Medicare, are much bigger now, and have to be, and so the problem is much harder,” said Doug Holtz-Eakin, a former Congressional Budget Office director and now president of the conservative American Action Forum.
Of course, whether the pain to balance the budget is worth the benefit is open to debate. The government has managed it only five times in the last 54 years — 2001, 2000, 1999, 1998 and 1969 — and the debt crisis that deficit hawks have warned about has yet to materialize. As long as the U.S. dollar remains a global reserve currency, it could be argued, there may yet be room to run on how much debt the government can rack up.
Still, Holtz-Eakin noted that the built-in structural imbalance — the budget gap regardless of whether the economy is going up or down — is twice as big now as it was in the early 2000s.
And balancing the budget only through spending cuts is even more far-fetched.
“Achieving fiscal balance in 10 years through spending cuts only is, well, impossible. Of course, many of these House Republicans don’t really want to balance the budget. Their true goal is to slash the size of government,” wrote Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, a left-leaning economic policy think tank.
Why Is It Impossible?
What Washington calls mandatory spending — autopilot spending for programs like Social Security, Medicare and Medicaid, as well as smaller programs such as food assistance and farm subsidies — make up close to two-thirds of the government’s spending.
The rest is called discretionary and is doled out by Congress in annual appropriation bills, like the $1.7 trillion omnibus bill that passed in December. Of that $1.7 trillion, about half was set aside for the Pentagon’s defense programs.
And that’s the rub. To try to balance the budget with spending cuts only means either hacking that $800 billion in non-defense spending massively or cutting Social Security and Medicare.
As the bipartisan Committee for a Responsible Federal Budget budget put it: “Unfortunately, due to continued borrowing over the past several years, the desirable fiscal goal of budgetary balance has become much more difficult to reach, and it is highly unlikely it could be achieved in a decade or less, particularly if revenue, defense, and other parts of the budget are excluded from the solution.”
But Surely There Are Some Kind of Options?
In its most recent projections, the Congressional Budget Office estimated the 2032 budget gap will be $1.8 trillion. The 2033 deficit, which the CBO will forecast in February, will likely be even bigger. For the 10 years ending in 2032, the CBO said it expects the annual deficits to total more than $15 trillion.
(That’s also too optimistic because the rules about CBO forecasts make it assume things that won’t happen, like the temporary individual tax cuts in the 2017 tax bill actually expiring.)
So what would need to be done to gradually get the 2032 deficit down to zero from $1.8 trillion? The menu of options isn’t pretty, at least if you want to remain in office.
The CBO, every two years, lists some of the biggest options and its 10-year deficit impact:
- Impose a consumption tax, between $1.930 trillion and $3.050 trillion;
- Eliminate itemized tax deductions, between $541 billion and $2.507 trillion; and
- Impose a new payroll deduction tax, like those for Social Security and Medicare, between $1.136 trillion to $2.253 trillion.
The CBO looked at spending cuts, too, but the biggest savings there were not as big as possible tax hikes. They included:
- Cut the armed forces by about 20% for five years and then let spending grow with inflation afterward, $995 billion;
- Cap the federal contribution to the joint state-federal Medicaid program, between $501 billion and $871 billion; and
- Make Social Security benefits a flat amount, cutting how much goes to high-income earners, between $270 billion and $593 billion.
“The public is not prepared for that kind of a change, and they’re not prepared to see their Social Security and Medicare simply cut.”
– Douglas Holtz-Eakin, president of the American Action Forum
None of those are likely to make many lawmakers’ hearts flutter. But even the most recent budget by the Republican Study Committee, a group of conservative House Republicans, had to take big steps to get to its claimed goal of a budget in balance in seven years.
It would raise the eligibility ages to qualify for Social Security and Medicare, and in Medicare’s case, it would allow participants to use federal dollars to buy Medicare plans outside the traditional program, essentially making it a voucher program. It would also cut the non-defense discretionary spending by about one-fifth over 10 years, or $3.6 trillion.
Tax hikes or spending cuts of that magnitude are just not politically tenable, according to Holtz-Eakin.
“The public is not prepared for that kind of a change, and they’re not prepared to see their Social Security and Medicare simply cut. So the very people who want to have a more responsible fiscal policy are going to endanger the reelection of their colleagues,” Holtz-Eakin said.
“They might be in safe seats, but their colleagues are not. And we’re going to get back a crowd that is even less responsible than the one we have now.”
That’s led many Republicans to be somewhat at a loss to say what they would do or to posit contradictory solutions. Donald Trump took to his Truth Social app to post a video saying: “Under no circumstances should Republicans vote to cut a single penny from Social Security or Medicare.”
House Speaker Kevin McCarthy (R-Calif.) appeared to endorse that stance last week when he told Donald Trump Jr., “We won’t touch Medicare or Social Security.”
Instead, Trump suggested cutting waste, fraud and abuse, perennial targets that no serious budget expert believes can balance the budget.
Rep. Nancy Mace (R-S.C.), appearing Jan. 22 on “Meet the Press,” said “obviously” there should be no cuts to Social Security, Medicare or even Medicaid. “That’s a non-starter for either side.”
But then she praised the so-called Penny Plan, an idea championed by Sen. Rand Paul (R-Ky.) that would cut all federal spending across the board by 6% (or six pennies on the dollar) for five years, including spending on Social Security, Medicare and Medicaid.
If Not Balance, Then What?
With House Republicans hoping to have something to show for taking the debt ceiling hostage, what could they claim as a credible piece of deficit reduction?
One idea is commissions to look at Social Security and Medicare, something championed by Sen. Mitt Romney (R-Utah). Others, like the Committee for a Responsible Federal Budget, suggest less ambitious goals than pure balance, like balancing the budget except for interest payments (a Barack Obama-era idea); stabilizing the debt in proportion to the size of the economy or setting a longer time horizon than 10 years.
Holtz-Eakin said he agreed with trying to stabilize the debt, which would mean running annual deficits smaller than the growth in the economy each year.
“Innumeracy and unrealism do not add up to equal fiscal discipline.”
– Douglas Holtz-Eakin, president of the American Action Forum
“That will require real work. That will require real reforms. And that would also do the trick in the sense of taking off the table any fear of a sovereign debt crisis,” he said.
Politically, convincing voters that stabilizing the ratio of debt to gross domestic product is better than “balance in 10 years” will be difficult. But the alternative may be worse, a political talking point Republicans will be unable to deliver on.
Or, as Holtz-Eakin put it in a recent post, “Innumeracy and unrealism do not add up to equal fiscal discipline.”