“This one is as clear as a bell,” Erskine Bowles, co-chairman of President Obama’s fiscal commission, told the National Governors Association on Sunday in describing the nation’s looming deficit and debt problem.
Bowles was differentiating the fiscal challenge, which is plain for all to see, from the recent economic crisis of collapsing financial markets and a deep recession, which seemed to take virtually everyone by surprise.
What Bowles also did, consciously or otherwise, was raise an age-old question about fiscal policy, one with particular resonance for the current period and the challenge that it presents: will policymakers work together in order to prevent a crisis, or will they merely act in the aftermath of one?
As Richard Darman, budget director to President George H.W. Bush, liked to say (and as many others have attested over the years), “there are two theories about how things happen in Washington: consensus or crisis.”
Under the former, policymakers of both parties agree to compromise their core principles – for Republicans, opposition to tax increases; for Democrats, opposition to entitlement cuts – for the greater good of deficit reduction. Under the latter, policymakers are forced to take action in response to a steep rise in interest rates, a sharp drop in the dollar, or another crisis that is induced by our fiscal profligacy.
We have witnessed both theories in action.
On the consensus front, the major deficit-reduction legislation of recent decades – including the budget deals of 1990 and 1993 and the tax increase of 1982 that was designed to recoup much of the lost revenue from President Reagan’s tax cut of a year earlier – was crafted in an atmosphere largely devoid of crisis (indeed, specifically to avoid a crisis that policymakers feared could well occur if they did not act).
On the crisis front, policymakers rescued Social Security in 1983 when the system was just months from bankruptcy, and they crafted a modest deficit-reduction package in the aftermath of a stock market crash in late 1987.
But if consensus has outweighed crisis as the precipitating factor in deficit reduction over the last three decades, policymakers have often sought to invent crises as a way to generate urgency and force action. Indeed, any connection between budget deficits and the 1987 stock market crash was tenuous at best, but that didn’t stop budget “hawks” were using the crash as an excuse to push for deficit reduction.