Michael Strain ponders whether the normal democratic process can lead to a reduction in federal deficits.
In Washington, analysts and politicians alike seem increasingly resigned to the idea that the only way the government will engage in fiscal consolidation is in the aftermath of a bond market crisis. But I am more optimistic that the normal democratic process could yet lead to deficit reduction.
Many discount this possibility because the last truly successful effort to reduce the deficit occurred as long ago as 1993, when the political environment was much more amenable to productive compromise. Commentators contrast this success with the failure of the $4tn “grand bargain” deficit-reduction effort in 2011, led by President Barack Obama and Republican House Speaker John Boehner. They argue that the rise of more adversarial and performative politics is to blame.
Why am I optimistic? … My basic view is pretty well summarized [here]:
In the six months prior to President Bush signing the 1990 deficit reduction act (that lead him to break his “read my lips: no new taxes” pledge), mortgage interest rates were around 10 percent. In the six months prior to President Clinton signing the 1993 deficit reduction act, mortgage rates were 7.4 percent. In the six months prior to the unraveling of the “grand bargain” between President Obama and Speaker Boehner, mortgage rates were 4.7 percent. Mortgage rates are currently back up to 6.5 percent — and could keep rising.
When enough voters feel more pain from deficit increases than from deficit reduction, more politicians — in an effort to win elections — will try to stop the deficit from increasing.
Here’s one green shoot. We learned this week that inflation hit a three-year high in May. Check out Governor DeSantis’s reaction:
“Incomes not keeping pace with inflation has been the persistent economic issue for tens of millions of Americans for quite some time. When Congress borrows trillions and runs massive deficits, it is still an effective tax increase — it just comes in the form of higher prices.”
