Deficit reduction: Why it may not be dead despite the costly tax cut deal

With President Obama's signing of a historic tax-cut agreement Friday, deficit hawks may be in mourning. The deal costs $858 billion, and it’s all paid for with borrowed money. The nation’s unsustainable fiscal path has just gotten even more treacherous.

It was just two weeks ago that the president’s bipartisan fiscal commission failed to garner enough votes to send a tough package of debt reduction measures to Congress. Members expressed hope that their stronger-than-expected showing – 11 of the 18 members voted to approve the chairmen’s report – would nevertheless spur action. But there is no requirement to act.

Still, deficit hawks are expressing some optimism that Washington policymakers won’t just make like ostriches and stick their heads in the sand over record deficits. The signs:

• A bipartisan group of more than 20 senators has been meeting since July to try to push for fiscal discipline. The senators’ effort to require the Senate to address comprehensively the deficit, spending cuts, and tax reform in 2011 failed to make it into the two-year tax-cut legislation signed Friday, but they will keep pushing for action.

• The fact that the extension of Bush-era tax cuts was not made permanent means the issue – and its impact on deficits – will not disappear. The down side of the extension is that its time frame coincides with the electoral cycle. Some deficit hawks worry that, just as this time, political pressures will make it impossible to address in a fiscally responsible way. But two years from now, much will depend on where the economy and the longer-term fiscal picture stand.

• Senate majority leader Harry Reid’s forced retreat on an omnibus spending bill over earmarks – pet projects inserted by senators of both parties – shows that a new day has dawned on spending. True, the $8 billion in earmarks represented less than 1 percent of the $1.1 trillion bill, and the Republicans had already signed off long ago on that overall $1.1 trillion figure. Democrats argue that spending cuts could hamper the economic recovery. But, deficit hawks argue, the time for belt-tightening is long overdue.

“You have to try to hold out some optimism, otherwise what’s the point?” says Robert Bixby, executive director of the anti-deficit Concord Coalition. “I worry a little bit about self-fulfilling expectations. If we stop holding politicians accountable because we assume they’re going to do the wrong thing, then why would they ever do the right thing?”

In the best-case scenario, Friday’s bill signing may represent one final gasp of an old way of doing things – one where bipartisanship means each party gets some of what it wants, and none of it is paid for.

Mr. Bixby says he understands the desire not to allow the Bush tax cuts to expire, causing an effective tax increase that could harm the economic recovery, and the need to do something about unemployment compensation. The bill extends unemployment benefits through 2011, at a cost of $57 billion, and the two-year tax-cut extension costs $801 billion.

“One positive aspect of this bill is its size, in an odd sort of way, in that it seems to have given people sticker shock,” Bixby says. “My reaction is, duh, everybody knew that extending the tax cuts would cost this much. So why are you pretending you just discovered that this will add a lot to the deficit? But the fact that it’s over $800 billion may make it more difficult to keep extending it well into the future. “

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, also says she’s holding on to “slight optimism” over the fiscal situation.

Ms. MacGuineas points to the bipartisan Senate group, led by Sens. Mark Warner (D) of Virginia and Saxby Chambliss (R) of Georgia, as a welcome sign that the efforts of the president’s fiscal commission won’t go to waste. MacGuineas has advised the senators.

“It seems the remarkably good work of the fiscal commission could have died a slow and quiet death if not for this bipartisan group of champions,” she says. “I don’t know that anyone was expecting this, but there appears to be a very serious effort under way in the Senate to keep the momentum of this work alive.”

Many of the senators from the group spoke from the Senate floor before the tax-cut bill passed, urging deficit reduction measures next year.

“It is time for us in the Senate – and excuse the language – to put up or shut up,” said Senator Warner.