I am the leader, the insider-revolutionary in this country. . . . If you’re writing the history of modern conservatism, I’m at least in one of the chapters.
—House minority whip Newt Gingrich, 19921
“The federal budget is structurally unbalanced. This imbalance will do increasing damage to the economy in the future and is unsustainable in the long term. . . . Failure to reverse these trends in fiscal policy and the composition of federal spending will doom future generations to a stagnating standard of living, damage U.S. competitiveness and influence in the world, and hamper our ability to address pressing national needs.”2 Within three decades, the annual budget deficit will rise to 20 percent of GNP.3 Because the political system is incapable of solving the deficit problem, “the United States could suddenly find itself a second-class citizen in the world economy, subject to the same strictures as Nigeria.”4 Unless we take decisive steps, the debt will continue to escalate, until the world’s greatest superpower becomes a “fiscal Brazil.”5 The year is 1992.
The 1990s began with our first modern deficit crisis. The massive 1981 tax cut did not, as some advocates predicted, increase tax revenues.6 Instead, it contributed to the record peacetime deficits of the 1980s. Even repeated tax increases and the economic expansion of the 1980s could not keep pace with federal spending, and by the early 1990s it seemed as if large deficits were here to stay. The 1991–1993 deficits all exceeded $250 billion, which was a lot of money back then—almost 5 percent of GDP in 1992, a level exceeded in peacetime only in the mid-1980s. Entitlement spending was on the march, promising to consume a growing share of the budget. The Gramm-Rudman-Hollings Balanced Budget Act had proven no match for Congress’s ability to game the system with phony projections and technical gimmicks. The decline of America was a major theme among commentators, with one group claiming that large deficits were the cause of our economic and geopolitical deterioration.7
Yet the 1990s ended with the largest federal budget surpluses in half a century. In the 2000 presidential election, George W. Bush and Al Gore fought over what to do with trillions of dollars of projected surpluses. Political attitudes inside the White House changed by 180 degrees, with Vice President Dick Cheney famously saying, “Reagan proved deficits don’t matter.”8 A decade later, of course, and we are back where we started, with Washington panicked about deficits and the optimism of the new millennium replaced by a resurgence of the theme of America in decline.
The 1990s seemed to show that our political system could bring deficits under control, at least in good economic times. But in the story of American fiscal policy, the 1990s were a crucial turning point that saw the final breakdown of the fragile political consensus that fiscal responsibility mattered. Just as the Democratic Party came under the leadership of a moderate president who put balanced budgets ahead of increased spending on social programs, a conservative revolution that had been brewing for decades finally took control of the Republican Party. Bitter opposition to President Clinton united and strengthened conservatives inside and outside Washington, giving the antigovernment, antitax movement a populist image that today we call the Tea Party. The growing strength of this modern tax revolt meant that when Republicans recaptured control of Washington in 2001, they restored business as usual—large and seemingly permanent deficits—through massive tax cuts that were never matched by spending reductions. When deficits climbed even higher in the wake of the financial crisis of 2007–2009, Republican politicians—backed by a resurgence in conservative antipathy toward Washington—insisted on shrinking the government and cutting taxes further. At the same time, the retirement of the leading edge of the baby boom generation now means that spending promises made under Democratic presidents decades ago are finally coming due. With the federal government’s popular legitimacy increasingly under attack and Congress incapable of raising taxes to pay for its past crises and future spending commitments, the fiscal foundation of the United States is beginning to crumble, making the country a little less like eighteenth-century Great Britain and a little more like eighteenth-century France.
Conservatism is a storied political philosophy, its modern form dating back to Edmund Burke, the great Irish critic of the French Revolution. The French Revolution attempted to remake all of society and mankind at the same time. Like many other revolutions, it spawned chaos, bloodshed, and autocracy. For Burke, individual liberty and good government were rooted in the institutions that each generation inherited from its forefathers; overthrowing those institutions in the hope of creating a better future from abstract principles was both foolish and dangerous. But from the beginning, conservatism did not merely seek to preserve the status quo. Burke and his successors have always been activists and counterrevolutionaries, developing new ideas and rallying cries to beat back reform movements and reimpose traditional hierarchies in a modern form.9
In the seemingly stable America that developed after World War II, conservatism was a relatively weak political force. Although conservatives today may want to roll back the accomplishments of the Franklin D. Roosevelt administration and even the Progressive reformers of the early twentieth century, the postwar Republican Party was largely reconciled to the New Deal; many corporate executives accepted Social Security as a permanent fixture—in part because it helped offset the costs of their own pension plans.10 As Republican president Dwight Eisenhower wrote in 1954,
Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. . . . Their number is negligible and they are stupid.11
There were business leaders who sought to build a conservative movement that could one day topple the liberal welfare state, but they had relatively little influence in the party, except for Barry Goldwater’s nomination for president in 1964—which ended in a crushing defeat to President Lyndon Johnson.12 The apogee of the regulatory state arrived under Republican president Richard Nixon, who oversaw (though perhaps reluctantly) the creation of the Environmental Protection Agency and the Occupational Safety and Health Administration, among other liberal initiatives.
At the same time, however, powerful forces, including the civil rights movement, the 1960s counterculture, women’s liberation, and the expansion of government welfare and regulatory programs, were provoking a backlash on the right. Faced with a seemingly omnipresent enemy, the free market conservatism nurtured by some members of the business community in the postwar period reemerged as the most important ideology and the major storyline in American politics over the past forty years. From the Reagan Revolution to the Tea Party, the new conservatives have portrayed themselves as an embattled revolutionary vanguard, fighting against a dominant liberal elite that threatens their basic freedoms.13 In 1964, Ronald Reagan said, “Our natural, unalienable rights are now considered to be a dispensation of government, and freedom has never been so fragile, so close to slipping from our grasp as it is at this moment.” In 1971, soon-to-be Supreme Court justice Lewis Powell wrote, “What now concerns us is quite new in the history of America. We are not dealing with sporadic or isolated attacks from a relatively few extremists. . . . The assault on the enterprise system is broadly based and consistently pursued.”14 The modern conservative movement was born out of the struggle against this apparent menace.
Contemporary American conservatism has many important themes: the “traditional values” often associated with evangelical Christianity; economic and philosophical libertarianism; a pro-business antipathy toward government regulation; a generally hawkish position on national security issues; and an anticrime, “law and order” ethos. But the strand with the greatest impact on fiscal policy and the national debt has been a tax revolt that has been growing for over thirty years, since the days when taxes really were high: in the 1970s, the top federal income tax rate was 70 percent, and that was already down from 91 percent in most of the 1950s.15 The modern antitax movement is often traced back to the 1978 passage of Proposition 13 in California, which cut property taxes in half overnight. Proposition 13 has been widely seen as the product of a populist, grassroots protest movement (although it received major support from associations of real estate agents and apartment owners).16 But at the same time that local activists were pushing for lower taxes on the state level, the editorial page of The Wall Street Journal was popularizing what came to be known as supply-side economics, often associated with economist Arthur Laffer: the theory that cutting taxes would motivate people to work, save, and invest more, leading to higher economic growth and even higher tax revenues. The idea that tax cuts could cure all of our nation’s economic woes—and social problems such as drug abuse and divorce, according to Wall Street Journal writer Jude Wanniski—won the attention of Republican representative (and presidential hopeful) Jack Kemp and was endorsed by the Republican National Committee in 1978.17
Ronald Reagan brought together the two major strands of the anti-tax movement and pushed them to the top of the national agenda. Back in 1973, as governor of California, he had backed Proposition 1, which (unsuccessfully) aimed to reduce state income taxes, limit the state’s total income tax revenues, and require two-thirds votes in the legislature to increase taxes.18 And during the 1980 presidential campaign, Reagan signed on to Kemp’s version of supply-side economics, which was the foundation of the 1981 tax cut.19 Tax cuts were a natural part of the new president’s overall worldview. The enemy was government (in his first inaugural address he said, “In this present crisis, government is not the solution to the problem; government is the problem”),20 and the weapon to bring government under control was tax cuts. In theory, the plan was to cut taxes, cut spending, and balance the federal budget at a much lower level. In practice, things did not work out that neatly—which is why Reagan, despite his symbolic importance to the conservative antitax movement, was ultimately only a transitional figure.
The main architect of Reagan’s plan to reshape the federal government was David Stockman, his first head of the Office of Management and Budget. Stockman entered the administration believing that it was possible to cut taxes and slash spending enough to balance the budget—and that the economy would take off as a result.21 Tax cuts, by reducing the flow of money to Washington, would “put a tightening noose around the size of government,” forcing Congress to cut spending drastically.22 At the same time, by increasing the incentives to work and to invest, they would stimulate economic growth. As a tax cutter, however, Stockman had one major weakness: he actually thought the budget should be balanced, as opposed to more extreme supply-siders who said that deficits didn’t matter.23 When deficit projections skyrocketed through 1981 and political realities showed how hard it was to cut spending, he argued for undoing at least part of Reagan’s signature tax cut.24 (Martin Feldstein, who became chair of Reagan’s Council of Economic Advisers in 1982, also argued that higher taxes would be necessary to reduce deficits.)25 Although Stockman lost the battle within the White House, enough Democrats and moderate Republicans in Congress thought that deficits mattered to raise taxes modestly in 1982, 1983, 1984, 1986, and 1987 (though nowhere near enough to make up for the 1981 tax cut), with the consent of the avowedly antitax president.26 Reagan and congressional leaders also agreed on the Tax Reform Act of 1986, which reduced the top income tax rate from 50 percent to 28 percent, yet eliminated enough loopholes to slightly increase tax revenues. Although the antitax movement was gaining strength, the Republican Party’s center of gravity still lay with moderates like Senate majority leader Bob Dole, who believed in fiscal responsibility.27
The experience of the Reagan years showed that a conservative president alone could not roll back the federal government to its pre–New Deal size. It seemed impossible to get Congress to agree to large spending cuts—which was not surprising, since many spending programs were extremely popular—and a lingering sense of fiscal responsibility stood in the way of continued tax cuts. The result, as Stockman wrote in 1986, was “a fiscal and political disorder that was probably beyond correction.”28 When it came to cutting taxes, however, the next generation of Republican leaders was made of sterner stuff.
The central battle within the party was over deficits and taxes, between moderates like Dole who thought balanced budgets were more important than cutting taxes and radicals who put slashing taxes and spending before all else.29 The radicals were led by Newt Gingrich, perhaps the central figure in the transformation of conservatism from an ideology into a dominant political force. Gingrich was elected to the House of Representatives in 1978, but instead of currying favor with the moderate Republican leadership, he assembled a group of combative, hard-line conservatives who set out to discredit the Democratic majority and push the Republican minority into increasingly confrontational positions. Gingrich personally led a successful campaign against Democratic House speaker Jim Wright, who eventually resigned amid evidence of ethics violations. Gingrich’s allies cultivated controversies that embarrassed both Democrats and Republicans, such as a scandal over the House bank;30 discrediting Congress as a whole could only help the conservative revolutionaries aiming to take it over.
While Gingrich was upsetting the congressional balance of power, he was also building up a new generation of conservative legislators who could seize power for themselves. His political organization, GOPAC, harvested money from rich donors and used it to recruit and train conservative candidates. (Current House speaker John Boehner decided to run for Congress after listening to audiotapes that GOPAC sent to potential recruits.)31 Gingrich found that hard-line stances were good for business: beginning in the mid-1980s, while just the leader of a minority within a minority, Gingrich was able to raise more money than Bob Michel, the Republican minority leader.32 Gingrich fought against any proposals to raise taxes, bringing him into direct conflict with Dole and traditional party leaders.33 But his instinct was that rigid orthodoxy, not accommodation, would ultimately bring the conservatives to power, and the first Bush presidency proved him right.
George H. W. Bush campaigned in 1988 as the heir to the legacy of Ronald Reagan. He promised to come up with a plan to balance the budget while also promising not to raise taxes, famously vowing to the Republican National Convention, “The Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’ ”34 In 1990, however, facing increasing deficits, rising costs to rescue the banking system from the savings and loan crisis, and a weakening economy, Bush agreed with Democratic negotiators on a deal that included one dollar in tax increases for every two dollars in spending cuts.35 Gingrich refused to go along, taking a stand for low taxes against “those with the traditional view that reducing the deficit is more important,” and successfully turned a majority of House Republicans against the compromise, helping ensure its defeat.36 This forced the president to reopen negotiations and ultimately pass a new deal with mainly Democratic votes—meaning that the final bill shifted even further toward Democratic priorities.37 But victory over the president burnished the House conservatives’ antitax credentials and showed how difficult they could make life for moderates.
The final Omnibus Budget Reconciliation Act of 1990 reduced deficits by a projected $500 billion over five years, mainly by placing caps on discretionary spendinga but partly by raising taxes on the wealthy.38 In addition, the 1990 agreement created the pay-as-you-go (PAYGO) rule, which required that spending increases or tax reductions in one part of the budget had to be offset with lower spending or higher taxes in another part of the budget.39 The tax increase, PAYGO rule, and spending caps helped reduce deficits later in the decade.40 By then, however, George H. W. Bush was gone, the casualty of a sluggish economy and his decision to renege on his most famous campaign pledge, which cost him the loyalty of the conservative base.41 The 1990 battle showed that the balance of power within his party had shifted away from the fiscally responsible moderates and toward the antitax radicals led by Gingrich—a lesson that was not lost on Bush’s heir, George W. Bush.
If George H. W. Bush was good for the Gingrich radicals, the election of Bill Clinton was even better—because it gave conservatives someone to rally against. While it was fine to criticize government social programs, it was harder to demonize the entire federal government so long as it was led by a Republican. But any scruples vanished when the Democrats swept the 1992 elections, unleashing a tidal wave of antigovernment sentiment eagerly cheered on by Republican leaders. As Republican National Committee official Don Fierce said, “Washington is financially and morally bankrupt and because of that it is the glue that binds economic and social conservatives. These are people that love their country but hate their federal government. Where is the evil empire? The evil empire is in Washington.”42 The antigovernment coalition that emerged in the first years of the Clinton presidency united diverse interest groups, ranging from the National Rifle Association to the National Federation of Independent Business to the Christian Coalition, behind a platform of limited government and low taxes, with tactics and rhetoric that would be familiar to Tea Party activists today. That coalition was fertilized and tended by Gingrich, party organizations like the Republican National Committee, and inside-the-Beltway allies like Grover Norquist and his organization, Americans for Tax Reform.43
President Clinton’s budget and tax policies only provided more fodder for antitax conservatives. During the presidential campaign—in which Ross Perot won 19 percent of the popular vote, in part by vowing to balance the budget—Clinton promised to reduce the deficit while expanding domestic spending.44 After winning the election, however, he had to face the reality of still rising deficits coupled with a sluggish economy.45 On January 7, 1993, Clinton assembled his economic team in Little Rock, Arkansas.46 His advisers argued that persistent deficits were hurting the economy. According to their analysis, bond investors, skeptical that Washington could bring the deficit under control and afraid that the government would eventually resort to printing money, were demanding high interest rates on Treasury bonds.47 High interest rates were making it harder for households and businesses to borrow money, constraining consumption and investment and hurting economic growth.b Several of Clinton’s advisers argued that reducing the deficit would increase investors’ confidence, lowering interest rates for everyone and stimulating the economy.48 According to legend, Clinton’s response was: “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?”49 But he sided with the “deficit hawks,” deciding that the highest priority was to satisfy bond investors. The new president proposed to reduce the deficit through a combination of spending cuts and tax increases, abandoning most of his domestic spending priorities. Republicans eagerly attacked the tax increases, hoping to defeat the president and brand the Democrats as the party of high taxes, and Clinton was forced to pass his plan entirely with Democratic votes.50
The Omnibus Budget Reconciliation Act of 1993 reduced projected deficits by $433 billion over five years, roughly half through higher taxes that fell mainly on the wealthy, with the top income tax rate rising to 39.6 percent.51 In the medium term, Clinton’s bet on deficit reduction paid off, as higher taxes and lower spending helped balance the budget later in the decade without hurting (and possibly helping) the economic boom of the 1990s.52 That lower spending was made possible by the end of the Cold War, which allowed defense expenditures to fall from 6.2 percent of GDP in 1986 to 3.0 percent in 1999.53 But in the short term, the 1993 tax increases, along with the failure of health care reform in 1994, only strengthened Gingrich’s hand by underlining the difference between Democrats and the new, resolutely antitax Republicans.
Republican victory in the 1994 elections proved Gingrich right: radical conservatism was the key to control of Congress. As the new speaker of the House, he had an apparent mandate to take on the president. His stated goal was to lower taxes and balance the budget by dramatically rolling back domestic spending, and he was backed by a large class of Republican freshmen that largely shared his views.54 The result was the 1995 budget war and the United States’ first brush with potential default in recent history. In early November, the Republican majorities passed two bills that would keep the government functioning and allow it to borrow more money, but also cut spending on social programs and require a balanced budget by 2002. President Clinton vetoed both bills, prompting a government shutdown until the parties came to a temporary compromise.55 Later that month, the Republicans passed a budget combining major spending cuts, largely in entitlement programs, with tax cuts for the wealthy.56 Clinton vetoed that bill, too, and the government shut down again in December. With polls showing that the public largely blamed Republicans for the impasse, Dole (then Senate majority leader) and Gingrich finally agreed to reopen the government, and the eventual budget was little changed from previous years. Although the 1995 confrontation ended in a Democratic victory, it was a sign of things to come: a battle where Republicans used deficits to press for both spending cuts and tax cuts—and were willing to play chicken with a government default.
Although Gingrich lost the battle against Clinton, what mattered in the long run was his overwhelming victory within the Republican Party. He upended the seniority system, reserving prized committee chairs and assignments for members who backed the conservative agenda—and who were willing to raise the most money for the party. He and his allies, including Majority Leader Dick Armey and Majority Whip Tom DeLay, used their personal control over large streams of money to ensure loyalty and bolster their own power. This system helped uncompromising conservatives with connections to major donors win and hold leadership positions in Congress.57 DeLay, along with Grover Norquist, launched the K Street Project, which pressured lobbying firms to donate to Republicans and hire only Republicans as lobbyists, increasing the conservatives’ access to cash and strengthening their relationships with big business.58 Political scientist Thomas Ferguson has argued that these organizational changes created a machine in which hard-line stances paid off in campaign donations and personal influence, heightening polarization within Congress and ensuring that the Republican Party would not slide back toward moderation.59 The Democrats were quick to copy Gingrich’s new system and even set specific fundraising requirements for committee and subcommittee chairs and for members of “power committees.”60
This was the final victory of Gingrich over onetime moderates like Bob Dole and even earlier revolutionaries like David Stockman, who had balked at the prospect of huge deficits. The new leadership embraced the idea of balanced budgets, but what they really cared about was cutting taxes and slashing the federal government; deficits only mattered as a tool to help cut spending. As Armey said, “Balancing the budget in my mind is the attention-getting device that enables me to reduce the size of government. . . . If you’re anxious about the deficit, then let me use your anxiety to cut the size of the government.”61 This “starve the beast” strategy dates back at least to the late 1970s, when conservative icons Milton Friedman and Irving Kristol argued that cutting taxes now was the only way to create enough pressure—through higher deficits—to cut spending in the future. Reagan endorsed the strategy, adopting the homey metaphor of cutting off Congress’s allowance in order to break its spending habit, but he lacked either the votes or the will to prevent multiple tax increases.62 It was up to Gingrich and his allies to supply the votes and the discipline necessary to make the Republicans an unwavering force against tax increases.
This anti-Washington, antitax strategy was headed out of Washington, of all places. Besides the Republican House leadership, Grover Norquist, head of Americans for Tax Reform (ATR), also provided organizational discipline.63 Norquist has been consistently candid about his objectives, most famously saying, “My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub.”64 He is equally open about the fact that he cares only about reducing government spending, not the deficit. In 2011, as Congress debated raising the debt ceiling, he said, “Anyone who says we have a deficit problem is either a Democrat who wants to raise taxes or a Republican who’s dimwitted and doesn’t understand what he’s talking about.”65 And his plan to cut spending in the long term was not to propose bills that actually cut spending, which would be unpopular, but instead to cut taxes at every opportunity.
In 1986, Norquist hit upon the idea of the Taxpayer Protection Pledge: a promise by politicians that they would not vote to raise taxes.66 In the beginning, some traditional moderate Republicans ignored the pledge—including Dole, whose refusal to sign may have cost him the 1988 presidential nomination.67 Still, Norquist was able to sign up 110 House representatives within the first year.68 As Gingrich’s organizational tactics shifted his party to the right, signing the pledge became a mandatory step for any Republican seeking election to Congress for the first time.69 (Even Dole signed it in 1995, as he was preparing to run for president again.)70 By 2001, when George W. Bush took office, the pledge itself had become a major factor in budgetary politics, with the signatures of 210 members of the House of Representatives (a near majority).71 In the current (2011–2012) Congress, the pledge has been signed by 238 representatives—an absolute majority of the House of Representatives—and 41 senators.72
The pledge matters in part because of the power wielded by Norquist, one of the movement’s consummate power brokers. In 1993, he began organizing his now legendary Wednesday morning meetings, bringing together conservative leaders and strategists to oppose the Clinton administration and drive the Democrats from power. Norquist connected his loose network of right-wing operatives and activists with Gingrich’s band of insiders, helping the Republicans take control of Congress in 1994. After the Republican victory, the Wednesday meetings became a central forum for the conservative establishment, where politicians, party operatives, lobbyists, and organizers shared information, built networks, and plotted strategy.73 Norquist later helped convince conservative leaders and activists to rally behind George W. Bush in the lead‑up to the 2000 Republican primaries, and the new president sent representatives to the Wednesday meetings after his election.74 Today, with no Republican in the White House to serve as the party’s leader, Norquist is if anything even more powerful: “I don’t know of anyone outside of government who has had this kind of influence on politics before,” wrote historian Alan Brinkley.75
Republican politicians listen to what Norquist has to say—and they don’t break the pledge. After the 1994 victory, when moderate Republicans protested the size of the tax cuts proposed by the House leadership, Norquist launched a direct mail attack on one of the group’s leaders in his home district, forcing the moderates to back down;76 during the 2011 debt ceiling crisis, even his definition of what constituted a “tax increase” became a major factor in negotiations.77 And Norquist is only one of the conservative leaders who enforce the contemporary antitax orthodoxy. As political scientists Jacob Hacker and Paul Pierson have described, conservatives have been able to maintain control of the Republican agenda because of the ability of a small group of power brokers to reward loyalty and punish opposition—most dramatically by supporting primary challenges against Republicans they deem insufficiently conservative.78 For example, Senator Arlen Specter barely survived a primary challenge from Pat Toomey in 2004; rather than run against Toomey (who had spent the intervening years as president of the antitax Club for Growth) in 2010, he switched to the Democratic Party. (Toomey won the Republican nomination and the Senate seat.) By building alliances across key conservative constituencies, the power brokers have been able to enforce strict party discipline on a number of important issues, including the antitax pledge.
Effective inside-the-Beltway organization is one reason why the conservative tax revolt has been successful. The other is that Norquist’s call for smaller government and lower taxes resonates among the grass roots of the conservative movement—at least when a Democrat is president. By 2010, only 11 percent of self-identified conservative Republicans (and only 7 percent of Tea Party supporters) said that they could trust the government most of the time.79 At the same time, 59 percent of conservative Republicans said they were frustrated with the federal government, and another 32 percent said they were angry (along with 43 percent of Tea Party supporters); 47 percent thought that the federal government posed a major threat to their personal rights and freedoms (57 percent for Tea Party supporters).80 To some extent, partisan disaffection with the federal government reflects who is in the White House. But the long-term trend is one of increasing resentment of Washington among conservatives. For example, only 28 percent of conservative Republicans considered the federal government a major threat to their personal rights in 1995, two years into the Clinton administration and one year after the battle over health care reform; by 2010, this group had grown to 47 percent.81
It’s not as if millions of people woke up in the morning and independently decided that they didn’t like the federal government. Nor, in fact, has the country become more conservative overall during the past forty years, as shown by opinion surveys that ask the same questions over long periods of time. The proportion of people identifying as liberal, moderate, or conservative has remained remarkably stable since the 1970s, although there has been a modest uptick in the number of conservatives since 2008.82 More specific questions, such as whether the government should increase or decrease both services and spending, also yield no visible trends.83 Instead, increasing antipathy toward Washington among existing conservatives was largely fostered by conservative strategists, organizers, and consultants in a multimedia campaign stretching over four decades.
In 1965, Richard Viguerie founded American Target Advertising, the first modern political direct mail firm.84 Viguerie pioneered the use of direct mail in politics, building up huge mailing lists of conservative households and using antiliberal, antigovernment mailings to mine those lists for money for conservative groups. The purpose of political direct mail is not just to raise money, but also to communicate with and expand one’s base of sympathizers, and conservative operatives and consultants became experts at the form.85 Direct mail gave conservative organizations an alternative channel to the mainstream Republican Party, and they used it to spread the gospel of smaller government and lower taxes directly to tens of millions of households.
In the 1980s and 1990s, talk radio and then cable news gave the conservative vanguard an even more powerful medium for broadcasting its message.86 Rush Limbaugh has been the top-rated talk radio host for the past two decades;87 in 2011, seven of the top eight talk radio shows featured conservative hosts.88 Fox News has been the dominant cable news channel since 2002.89 House Republican leaders were quick to realize the potential of talk radio and pioneered the use of “blast faxes” to spread their key messages to talk show hosts around the country.90 Like direct mail, conservative radio and television have consistently reminded their audiences that the federal government is too big, too wasteful, and a threat to their personal freedoms—whether those are the freedom to own guns, the freedom to worship in the manner they choose, or the freedom to run their businesses the way they want to.
This is not to say that there is some vast conspiracy behind the modern conservative media. The rise of direct mail and talk radio was a simple market phenomenon: political and media entrepreneurs finding and catering to an audience that had been underserved by traditional media and the traditional political establishment. Nor do conservative leaders and media figures always talk from the same script. There are major ideological and policy differences within the movement, such as the split between libertarians and traditional “family values” conservatives over gay rights. And the conservative positions being blasted through the mail and over the airwaves have certainly rung true to millions of ordinary people. Many Americans have legitimately developed their own grudges toward the federal government—whether small business owners struggling to comply with regulations, retired people caught in an argument with the Social Security Administration over benefits, or homeowners watching the government bail out major banks while allowing those same banks to foreclose on their houses. Liberal groups have also launched their own media outlets, although with decidedly less success.
For forty years, however, the conservative media have broadcast and amplified the message that the federal government is the enemy. The National Rifle Association sees the government as out to take people’s guns away: in 1995, a direct mail letter signed by NRA executive vice president Wayne LaPierre referred to agents of the Bureau of Alcohol, Tobacco, and Firearms as “jackbooted Government thugs” and claimed that federal agents “harass, intimidate, even murder law-abiding citizens.”91 Business groups see the government as a jealous, meddling bureaucracy that imposes costly regulations for no good reason: in the wake of the financial crisis, the U.S. Chamber of Commerce ran issue ads warning that the proposed Consumer Financial Protection Agency would affect “even the local butcher,”92 and in 2010 the Chamber spent over $50 million on political advertisements overwhelmingly supporting Republican candidates.93 Christian conservatives see an activist, liberal federal judiciary as a threat to traditional values, most importantly because of the 1973 Supreme Court decision in Roe v. Wade legalizing abortion.94 The common denominator of these messages is not that we need better government, but that we need less government. And all conservative groups can agree that the federal government should have less money to carry out its sordid affairs—which conveniently means lower taxes.
These overlapping media campaigns further damage popular impressions of the federal government, ultimately reducing its legitimacy. People are less willing to pay taxes to a government they do not believe in, which strengthens antitax groups and increases the pressure on politicians to hold the line against higher taxes. The strategy of reducing taxes whenever possible and never raising taxes makes it harder for the government to balance its budget. When deficits go up, as they do in any economic slowdown, they just become more evidence of government waste and incompetence: in 2011, the Republican-led House Budget Committee blamed both government deficits and the recent financial crisis on “mismanagement and overspending,” overlooking both the major tax cuts of the second Bush administration and the culpability of the financial sector.95 The conservative base, seeing deficits (and the inability to do anything about them) as further evidence of incompetence in Washington, hardens its stance against taxes and further tilts the Republican Party toward its right wing.
The impressive successes of the conservative movement in general, and the tax revolt in particular, can create the impression that America as a whole is becoming more conservative and more opposed to taxes. But, as mentioned above, Americans’ positions on broad ideological issues have remained relatively stable over the past forty years—even as Congress and political elites have become increasingly polarized.96 The achievement of the tax revolt has not been convincing all Americans that taxes are too high; for the past decade, a majority of Americans have consistently said that their income taxes are fair.97 Rather, its achievement has been strengthening that belief among conservatives and developing the organizations, tools, and funding sources to enforce antitax positions among Republican politicians. In the 1980s, conservatives had one of their own in the White House, but no way to enforce the antitax agenda within the Republican Party, let alone Congress as a whole. By 1995, cutting taxes and shrinking the federal government were orthodoxy among the Republican majorities in Congress. All they needed, they thought, was control of the White House.
The deficits of the 1990s evaporated before they could be used to slash government spending. Economic growth, along with the 1990 and 1993 deficit reduction bills, settled the issue. By 1997, the deficit had fallen for four consecutive years, eliminating the argument that major sacrifices were necessary. This allowed President Clinton and Republican leaders to negotiate a plan in 1997 that balanced the budget by 2002 while cutting taxes modestly.98 The long boom of the 1990s did the rest of the job, balancing the budget in 1998 (four years early) and creating a $236 billion surplus in 2000. George H. W. Bush and Bill Clinton showed that it was still barely possible to pass bills that raised taxes, cut spending, and reduced the national debt. The deficit dragon, it seemed, had been slain, making way for a debate about what to do with projected budget surpluses. At the 2000 Republican National Convention, George W. Bush said,
Today, our high taxes fund a surplus. Some say that growing federal surplus means Washington has more money to spend. But they’ve got it backwards. The surplus is not the government’s money: the surplus is the people’s money. . . . Now is the time to reform the tax code and share some of the surplus with the people who pay the bills.99
At the Democratic National Convention, by contrast, Al Gore said, “We will balance the budget every year and dedicate the budget surplus first to saving Social Security,” promising to put “both Social Security and Medicare in an iron-clad lockbox where the politicians can’t touch them.”100 The world, it seemed, had been turned upside down.
Victory over the deficit—and a spreading belief that America had entered a new era of prosperity, thanks to the miracle of technology—also removed the political pressure to do anything about the long-term growth of entitlement spending. That spending was growing nonetheless, driven by the brute force of population. In 1946, as the United States demobilized in the wake of World War II, the annual birthrate jumped from 20 to 24 per 1,000 people. It stayed above 24 through 1959 and above 21 through 1964, the conventional end of the baby boom.101 In 1992, when Bill Clinton became the first baby boomer to be elected president, the oldest members of his generation were forty-six; today, they are beginning to collect Social Security and Medicare benefits. At the same time, people are living longer: life expectancy at age 65 has increased by more than three years since 1970.102 It was never any secret what an aging population would do to the federal budget. In 1992, the annual report of the Social Security trust funds projected that they would be exhausted in 2036c —a forecast that remains remarkably accurate today.103 At the same time, the Congressional Budget Office (CBO) warned about a “boom in health care spending,” which was growing three times as fast as the overall economy. Only 7 percent of the federal budget in 1970, health care was over 13 percent of the budget in 1990 and projected to grow to 28 percent by 2002.104
The combined impact of an aging population and rising health care costs was clear for anyone to see. In 1996, with deficits declining for their fourth consecutive year, the CBO warned, “The shortfalls projected for future years are so large that they could put an end to the upward trend in living standards that the nation has long enjoyed.”105 Even in 2000, with surpluses expected for the next decade, growing entitlement spending was projected to cause the national debt to skyrocket sometime between 2030 and 2060, depending on how the surpluses would be used.106
The fact is that most of the surplus was created by the same demographic trends that would produce future deficits. In 2000, the baby boom generation was entering its peak earnings years, so payroll tax revenues were high, but had not started retiring, so benefit payments were low. As a result, Social Security ran an aggregate surplus of $312 billion in 1998 through 2001—more than half of the government’s total surplus of $559 billion in the same period.107 The forces that created these surpluses would just as surely create much larger deficits once the baby boomers started to retire. In that light, the government in the 1998–2001 period was like a person who can balance her budget but knows she isn’t putting aside enough for retirement. But the political system fixated on the word “surplus”—Democrats because they could claim it as an achievement, Republicans because it was a justification for tax cuts. The effect was that people, for the most part, stopped worrying about the long-term budgetary picture.108
Even including the trust funds, the surpluses were the product of a short-term perspective. A budget shows a surplus if revenues exceed spending in a given year, regardless of what will happen in the future. Businesses also use annual results (income statements) to measure their profitability. But for their retirement plans, they have to calculate their future obligations to their employees and make sure their pension funds will have enough money to keep those promises.109 Like a business, the federal government has ongoing operations, such as national defense, but it also runs some huge insurance plans called Social Security and Medicare. Evaluated over the long term, those plans were already deeply in the red. In early 2000, at the peak of the budget surpluses, the Social Security trust funds faced a long-term deficit worth about $3 trillion at the time.110 Although Medicare’s long-term financial condition is much harder to estimate because of uncertainty about health care costs, by 2000 no one could doubt that it was worse off than Social Security.111
In short, the federal government’s long-term unfunded obligations already loomed over the 1998–2001 surpluses. This is not to say that the deficit reduction of the 1990s was meaningless. The federal government ended the decade in a position where it could have closed Social Security’s funding gap without major sacrifices and might even have been able to tackle the larger problem presented by Medicare. But that was not to be—because of the political shifts of the 1990s. On the Democratic side, President Clinton’s decision to focus on deficit reduction and ultimately balance the budget marked a major shift in party priorities away from domestic spending programs. As he said in 1995, “If I’m going to get heard on anything else, I first have to show a balanced budget. Once I do that, I can talk about progressive programs. But if I don’t show a balanced budget, they’ll never listen to me about progressive programs.”112 (Liberals objected that he never got around to the progressive programs.) But while the New Democrats were promising to put fiscal responsibility first, Gingrich, Armey, DeLay, and especially Norquist were locking the Republicans into the position that only tax cuts mattered and deficits could always be dealt with later.
The election of George W. Bush gave the conservatives their chance, with control of the White House and both branches of Congress.113 Deficits were off the agenda. Instead, as the new president was inaugurated in January 2001, the CBO was projecting trillions of dollars in surpluses over the next decade, including a 2010 surplus of $796 billion.114 The actual 2010 deficit was almost $1.3 trillion—a difference of over $2 trillion.
True to his campaign pledges to the conservative base, the first major item on President Bush’s agenda was large income tax cuts. Originally justified as a way of returning budget surpluses to the people, the tax cuts were repositioned as a way to stimulate a weakening economy—an example of touting tax cuts as the appropriate response to any situation. Politically, the challenge was that the public did not particularly want the Bush tax cuts: while tax cuts in the abstract garnered weak majority support, large majorities favored higher domestic spending over tax cuts and also preferred focusing tax cuts on “middle income Americans.”115 And with only fifty Republican senators, the administration had little margin for error. But here the antitax network came into play. Norquist in particular helped rally interest groups ranging from Christian conservatives to business organizations behind Bush’s tax cut plan, putting pressure on moderates in both parties.116 Ultimately, the strategy worked, and the 2001 tax cut passed with a decent majority of 58 votes in the Senate.117
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was the third-largest tax cut in modern history.118 It lowered tax rates for nearly everyone who paid income tax (with the top rate falling from 39.6 percent to 35 percent), increased deductions and exemptions for high-income households, made it easier to shield retirement savings from taxes, increased family tax credits, and eventually repealed the estate tax.119 The advertised impact of the tax cuts was $1.3 trillion over ten years, but their true size was significantly greater. In order to avoid the threat of a filibuster in the Senate, the tax cuts were passed through the budget reconciliation process,d which meant that they could not permanently increase deficits, and so all of the tax cuts were scheduled to expire by the end of 2010.120 In order to reduce the total ten-year cost of the tax cuts—to make them easier to pass—several of them were deferred, with over 70 percent of the total tax reduction coming after 2006.121 By 2010, when most of the tax cuts would be in effect, they were officially expected to cost $176 billion (1.1 percent of GDP), not counting the additional interest payments they would require.122 But the real impact of the 2001 tax cuts would be even bigger, because they increased the number of households exposed to the alternative minimum tax (AMT); since Congress can be counted on to “patch” the AMT to shield middle-class households,e this meant that future patches would have to be even bigger.123
The complicated phase-ins made the impact of the 2001 tax cuts much larger in 2010 than in 2001—and President Bush’s goal was to make them permanent at the 2010 level. The 2010 sunset provision made it possible to argue that allowing the tax cuts to expire would amount to a tax increase. As early as 2004, when Congress began extending provisions of the 2001 tax cuts, Representative Jim McCrery argued, “Anyone voting ‘no’ is voting for a tax increase for the American people, especially the middle class.”124 When 2010 rolled around, Republicans reliably attacked, as a tax increase, any proposal to let any of the tax cuts expire; aided by a financial crisis and a major recession, which created an economic argument against “raising” taxes, the tax cuts were extended through 2012 with the support of a Democratic president and Democratic majorities in Congress. The 2001 tax cuts had became a Trojan horse that threatened to make a permanent, structural change in the tax system.125
By 2003, the surplus was gone, the victim of the 2001 tax cut and an economic slowdown.126 But President Bush repeated the 2001 strategy: large tax cuts justified as an economic stimulus and passed through the reconciliation process, their total size masked by phase-outs, with intense pressure from conservative groups to keep Republican legislators in line. In addition to Americans for Tax Reform, the Club for Growth attacked moderate Republicans who wavered.127 This time, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) lowered the tax rate on capital gains (profits on the sale of investments) and dividends (payments made by corporations to their stockholders) to a maximum of 15 percent; it also accelerated several of the 2001 tax cuts so they kicked in sooner than originally scheduled. The official ten-year cost was $350 billion, but again that figure relied on early phase-outs that few people expected to occur.128 (Not surprisingly, the major 2003 tax cuts were later extended through 2010 by the Tax Increase Prevention and Reconciliation Act of 2005.)129
While most households that paid income taxes saw their taxes go down in 2001 and 2003, the biggest beneficiaries by any measure were the wealthy. When fully phased in, 67 percent of the tax cuts passed during the Bush administration went to the richest 20 percent of households; 15 percent of the benefits went to the richest 0.1 percent of households.130 Households making between $40,000 and $50,000 saw an average 2010 tax reduction of $962, but households making more than $1 million got an average of $168,052.131 And this is not just because the rich pay more taxes to begin with. The richer you are, the larger the percentage increase in your after-tax income (8.2 percent for the wealthiest one-thousandth of all households, but only 2.6 percent for the median family) and the more percentage points shaved off your effective federal tax rate.132
One major reason for the unequal distribution of the tax cuts is that they focused on the income tax, while most people pay more in payroll taxes—the taxes on wages that are dedicated to Social Security and Medicare—which were unaffected by the tax cuts.133 Another is that the 2003 tax cut primarily benefited people who earn taxable income from investments rather than income from labor—that is, the rich.134 It is true that most taxpaying households did see their taxes go down, but those same households have to pay for the tax cuts in the form of reduced government services, lower future benefits, or higher future taxes; seen as a complete package, it’s likely that most households were made worse off.135 The sharp decrease in taxes for the very rich also contributed to increasing income inequality, as the top 1 percent of all households saw their share of the entire population’s income rise steeply from 2002.136
The Bush tax cuts certainly weakened the federal government’s financial situation. Total government revenues fell from 20.6 of GDP in 2000 to 16.1 percent in 2004, the lowest level in more than half a century. (See Figure 3-1.) That decline was due in part to the stock market collapse of 2000 and the brief recession of 2001. A better comparison is that during the 1991–2000 economic expansion (the period between two recessions), revenues averaged 18.9 percent of GDP; during the 2001–2007 expansion, they averaged only 17.3 percent—a difference worth about $200 billion a year.137 Supporters have argued that the tax cuts actually increased tax revenues by stimulating economic growth. In 2007, President Bush claimed, “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.”138 But there are two problems with this claim. One is that real economic growth was not particularly robust, averaging only 2.7 percent per year during the 2001–2007 expansion, as compared to 3.7 percent during the 1990s expansion (when tax rates were higher).139 The other is that multiple economic analyses have shown that the economic growth caused by a tax cut can at best offset a portion of the revenues lost by that tax cut.140 In addition, while a tax cut may increase growth in the short term (because people will have more money to spend), a tax cut that increases deficits tends to reduce economic growth in the long term (because more government borrowing increases interest rates for everyone), according to a study by the congressional Joint Committee on Taxation (issued in 2006, when Republicans controlled both the House and the Senate).141
Figure 3-1: Federal Government Revenues and Spending, 1980–2010
Together, the Bush tax cuts (including the higher interest payments they caused) added about $270 billion to the 2010 deficit.142 Over the past decade, their cumulative effect has been to increase the national debt by close to $3 trillion.143 They are not the primary reason why the national debt is so much bigger today than expected in 2001: tax cuts take second place to economic weakness, in particular the severe recession triggered by the financial crisis.144 But of the conscious policy choices of the current century, the tax cuts (and their extension in December 2010) made the single largest contribution to today’s budget deficits and to the recent growth in the national debt.145
In the conservative playbook, the reason to cut taxes is not just to put more money in people’s pockets, but more importantly to force the government to shrink. If the Bush administration had cut spending to match the tax cuts, then the national debt would be far smaller today. But instead, the administration increased spending, which grew from 18.2 percent of GDP in 2001 to 20.7 percent of GDP in 2008.146 Half of this increase was due to defense spending, largely because of the Afghanistan and Iraq wars, which so far have cost well over $1 trillion.147 Democrats often blame the Iraq War on the Bush administration, which mounted a concerted campaign to build public support for the war. On the other hand, the congressional resolution authorizing the invasion was backed by a majority of Democrats in the Senate and a near majority in the House.148
In any case, what mattered for the federal budget was how we chose to pay for those wars: increased borrowing. President Lyndon Johnson resisted raising taxes to fight the Vietnam War because he was afraid higher taxes would undermine support for his domestic initiatives;149 President Bush resisted raising taxes to fight the Iraq War because tax cuts were his major domestic initiatives. Instead, Bush introduced his 2003 tax cut in January,150 while he was building international support for the invasion, and it was passed in May, two months after the war began. The administration reconciled war with tax cuts in part by downplaying the costs of the war. When Lawrence Lindsey, director of the president’s National Economic Council, estimated that the upper bound on the war’s costs would be $100–200 billion (which, he added, was “nothing”), he was shot down by Mitch Daniels, director of the Office of Management and Budget, and Lindsey soon left the administration.151 Secretary of Defense Donald Rumsfeld claimed the cost would be no more than $50–60 billion.152 Tom DeLay, by then House majority leader, said, “Nothing is more important in the face of a war than cutting taxes”—going even further than the original War Hawks of 1812, who merely declined to find a way to pay for the war they had just declared.153
While many conservatives were happy to spend more on national defense, where they really wanted to cut spending was in the major entitlement programs: Social Security and Medicare. When asked what his ideal policies were, Norquist said,
The first would be personalizing Social Security, privatizing Social Security, instead of having the state take 12 percent of your income and then promising to pay you something if you make it to 65 or 67. Instead, they should let you put that money into a 401(k), and then you would control it.154
Structural Medicare reform had already been one of Gingrich’s major goals in the 1995 budget fight.155 By the Bush years, it was clear that current Social Security and Medicare policies would lead to large long-term deficits. But even here, President Bush’s policies only increased long-term entitlement spending. In 2003, the president and his congressional allies added a new prescription drug program to Medicare—at the request of elderly people struggling with rising drug prices—without finding a way to pay for its benefits in full. The new program was officially estimated to cost $395 billion over ten years;156 Medicare’s chief actuary estimated it would cost $500–600 billion, but was ordered by the program’s administrator, a political appointee, not to provide his estimates in response to congressional requests.157 In any case, the prescription drug benefit has made Medicare’s future funding problems much larger: today, almost one-third of Medicare’s long-term deficit is due to the prescription drug program.158 After the 2004 elections, President Bush also made reforming Social Security a top priority. He proposed allowing people to divert part of their payroll taxes into individual accounts that they would control and keep; but since those accounts would have reduced the amount of money available to pay current benefits, the government would have had to borrow up to $1 trillion over the next ten years, adding to the national debt.159 Because of widespread opposition, Social Security privatization never came close to a vote.
The tax policies of the Bush administration were a lopsided victory for the tax revolt—a victory that produced vast increases in government deficits and the national debt. The 2004 deficit reached $413 billion (3.5 percent of GDP); modest economic growth reduced the deficit to $161 billion in 2007 (1.2 percent), but it would have been significantly larger without a Social Security surplus that could not last once the baby boom generation began retiring.160 Even before the financial crisis, the outlook for 2010 had shifted from the $796 billion surplus projected in 2001 to a $241 billion deficit.161 (See Figure 3-2.) And it was clear that demographic trends would soon turn against the federal government.162
Focusing on the politics of taxes rather than the politics of spending may seem simply a matter of framing. Arguably, if increases in the national debt can be blamed on one side’s insistence on tax cuts, they could as easily be blamed on the other side’s insistence on spending increases. More concretely, Republicans may claim that the growth of the national debt is the fault of higher spending on Social Security and Medicare, not tax cuts. When considering the recent history of deficits and the debt, however, this is a false equivalence. In politics, there is a major difference between action that changes policy and inaction that simply preserves existing policy. The national debt was on a certain course in 2001, and it was the policies of the tax revolt that shifted it to a different course with higher deficits. Republicans invested heavily and successfully in tax cuts that were meant to be permanent. Democrats, by contrast, made no significant efforts to expand spending on the major social insurance or welfare programs: Social Security has gone untouched, and while the Obama health care reform bill of 2010 increased certain types of health care spending, on balance it reduced future deficits rather than increasing them.163 (The only recent entitlement expansion that significantly increased deficits was the Medicare prescription drug bill of 2003.) Insofar as Social Security and Medicare spending has increased since the days of surpluses, it is because of policy choices made decades before and simply left unchanged.
Even then, Social Security and Medicare have been relatively small contributors to the national debt. From 1984 (the year after the last major adjustment to Social Security) through 2007 (the last year before the recent financial crisis and recession), the two programs together ran a cumulative deficit of $270 billion—a small fraction of the $5 trillion national debt at the end of 2007.164 More than one-quarter of that cumulative deficit was due to the Medicare prescription drug benefit added in 2003.165 (Since the beginning of the recession, which triggered sharp declines in payroll taxes and increases in benefit payments, Social Security and Medicare have contributed another $597 billion to the national debt—while the total national debt has grown by $4 trillion.)166 In other words, the deterioration of the federal budget in recent years and the resulting increase in the national debt are not the fault of Social Security and Medicare. Growing spending on these programs is a major factor in the future growth of the national debt (as we discuss in the next chapter), but not in the story of how we got to where we are today.
Despite the tax cuts of the Bush years, few people in 2007 thought that budget deficits amounted to a national emergency. Foreign investors’ growing appetite for Treasury bonds ensured that significant budget deficits could be financed easily. The national debt was only 36 percent of GDP, right around the average for the previous fifty years.167 As of January 2008, the CBO’s baseline projection was for the national debt to fall to 23 percent of GDP by 2018 (assuming that all of the Bush tax cuts would expire on schedule).168 The next president, it seemed, would inherit a significant long-term deficit problem, but not a crisis.
Less than five years later, however, deficits are the order of the day, every day. The political agenda has been rewritten by successive trillion-dollar deficits—deficits generated by the most severe financial crisis the world economy has seen in over seventy years.
The story of the financial crisis of 2007–2009 has been told many times.169 In brief, the end of the twentieth century saw a transformation of the financial services industry and the rapid growth of complex new financial products, from subprime loans with creative payment terms to new investment vehicles built out of highly customized credit derivatives. Major financial institutions shifted their emphasis from traditional, low-margin businesses to riskier, more profitable businesses such as issuing and trading exotic new securities. Pressure from Wall Street and a rising tide of money from the financial sector, coupled with the pro-business agenda of both Republican and Democratic administrations, led to the deregulation of traditional financial markets and the nonregulation of new financial markets, allowing the banks to innovate rapidly and take on more and more risk in pursuit of higher profits. Demand from Wall Street for certain types of loans, such as subprime mortgages and commercial real estate loans, made it too easy for households, businesses, and financial institutions to take on huge amounts of debt—adding to features of the tax code, such as the mortgage interest deduction, that already encouraged borrowing. The result was the largest housing bubble in American history and parallel bubbles in many other types of assets.
In 2006, housing prices started falling; by 2007, it was clear that many of the securities that Wall Street had been churning out were next to worthless; and in 2008, it turned out that most of the world’s largest financial institutions were still holding huge piles of these toxic assets and could go bankrupt quickly. In September 2008, panic froze the world’s financial markets, threatening a collapse of the global economy. Governments and central banks around the world reacted by bailing out their banking systems, preventing a complete meltdown of the financial system, but the economic damage was severe. In the United States, a moderate recession became the worst downturn since the Great Depression, costing almost nine million jobs.170 The unemployment rate, which had averaged around 5 percent over the previous decade, jumped to over 10 percent in 2009 and remains stubbornly high today.171 As of mid-2011, the U.S. economy was producing less than at the end of 2007.172 In one of history’s ironies, the economy was blown up not by the government debt that politicians had inveighed against for decades, but by private sector debt that banks had been manufacturing as fast as they could—and it was the federal government that had to pick up the pieces.
This “Great Recession” caused tax revenues to plummet as households and businesses made less money. Federal government revenues fell from $2.6 trillion in 2007 to $2.1 trillion in 2009, constituting the smallest share of the national economy since 1950.173 At the same time, spending went up under preexisting policies as more people claimed unemployment insurance, qualified for needs-based programs such as Medicaid, or began taking Social Security benefits early. Government responses to the financial crisis and recession also cost money. Although most of the Treasury Department’s investments in financial institutions through the controversial Troubled Asset Relief Program (TARP) were paid back, the bailout of Fannie Mae and Freddie Mac—private entities that the government counted on to support the housing market, but that collapsed along with housing prices—cost over $100 billion by 2011.174
Both the Bush and Obama administrations also pushed through stimulus programs, hoping they would encourage households to spend more and help revive the economy. The Economic Stimulus Act of 2008 cut taxes by $150 billion that year.175 A year later, with the financial crisis at its peak and the economy in much worse shape, President Obama and congressional Democrats passed the American Recovery and Reinvestment Act, which cut taxes by another $288 billion while increasing spending by nearly $500 billion, mainly in 2009 and 2010.176 Passed with zero Republican votes in the House and only three in the Senate, the “Obama stimulus” would become the focus of Republican attacks describing it as wasteful government spending that failed to create jobs. Most private economic analysts, however, found that it helped cushion the impact of the recession and keep unemployment from climbing even higher—which was perhaps the most that could have been hoped for, given the severity of the financial crisis.177
The recession and the stimulus bills passed in response created the largest peacetime deficits in history, well over $1 trillion in 2009 (10 percent of GDP) and 2010 (almost 9 percent of GDP). The recession’s long-term impact on the nation’s finances was even more striking. By the summer of 2009, the idea that the national debt would melt away thanks to economic growth was a distant memory. Instead, large deficits continued as far as the eye could see (long after the stimulus packages would expire), with the CBO now projecting that the debt in 2018 would exceed $13 trillion (67 percent of GDP)178—an increase of $8 trillion over the pre-crisis, January 2003 forecast (see Figure 3-3). The financial crisis increased the projected national debt by 44 percent of GDP—something that only a major war had been able to do in the past. Yet the interest rates on government debt only went down (from 4.6 percent on ten-year Treasuries in 2007 to 3.2 percent in 2009) as investors looked for safe harbor in a global financial storm.179
Conservatives seized on these large deficits, charging that excessive government spending, symbolized by the Obama stimulus bill, and onerous government regulation were the cause of continuing economic weakness. With unemployment remaining well above 9 percent throughout 2010, Republicans claimed that the stimulus had failed (some Democrats, by contrast, countered that the stimulus had not been big enough) and that it was time instead to shrink government further. Arguing that more spending would only increase deficits, Republicans made it impossible for Democrats to pass a second stimulus bill. But both parties agreed to extend the Bush tax cuts (arguably making them now the Bush-Obama tax cuts) on the grounds that this would help the economy—even though it would increase deficits.
Figure 3-3: Increase in National Debt Due to Financial Crisis
More profoundly, the financial crisis and the recession strengthened resentment toward the federal government, which was seen—with at least some justice—as having bailed out wealthy, politically connected bankers while failing to help ordinary Americans, particularly homeowners facing foreclosure in the wake of the housing bust. Increasing economic insecurity mixed with widespread suspicion among conservatives that President Obama favored a larger, more intrusive government (symbolized by his health care reform plan, often labeled “Obamacare”), adding to the antigovernment sentiment that had been stoked for decades. The resulting backlash against Washington was a major contributor to the emergence of the Tea Party movement, which demanded lower taxes, lower spending, and strict limits on the federal government—the same list of demands as in 1994. Although the Tea Party is more a movement than a political party, one of its central principles is opposition to taxes. Its name refers to the 1773 Boston Tea Party, a protest by American colonists against taxation without representation, and one of its first nationwide events was a series of demonstrations on “Tax Day,” April 15, 2009. In contrast to insider antitax groups like Americans for Tax Reform and the Club for Growth, which had small memberships but strong connections and large amounts of money, the Tea Party seemed to give the tax revolt a popular base of support.
The prominence of the Tea Party is due not only to grassroots mobilization but also to financial and organizational support provided by traditional Republican power brokers like Dick Armey, conservative billionaires with an antigovernment, antitax agenda, and established media outlets, especially Fox News.180 Detailed research into the Tea Party by political scientists David Campbell and Robert Putnam also shows that its members are not new entrants to politics hurt by the economic downturn or radicalized by recent events, but largely the white, Christian, socially conservative activists who have been the backbone of the conservative movement for decades.181 In other words, the Tea Party is to a significant degree the public face and the conscious product of the same antigovernment movement that Newt Gingrich led to power in the 1990s. But whatever its provenance, the Tea Party has succeeded in making overt hostility toward government and taxes a powerful force in Washington.
In the country as a whole, unfavorable opinions of the Tea Party outnumber favorable ones.182 But this matters less than the fact that Republicans, and especially the conservatives who are highly represented in primary elections, generally support Tea Party positions by large margins.183 This has pushed Republican politicians even further to the right on taxes and spending for fear of being attacked by Tea Party candidates in primary campaigns. In 2010, candidates affiliated with the Tea Party defeated Republican incumbents or establishment candidates in Senate primaries in Alaska, Delaware, Florida, Kentucky, Nevada, and Utah. In the general elections, the Tea Party helped Republicans win a majority in the House of Representatives, and it ensured that the new Republican members were more conservative than the incumbents.184
Since the Republicans won the 2010 elections, with the aid of the Tea Party, Washington has been preoccupied with spending cuts. On the surface, the debate is about deficits and the national debt. But the success of the tax revolt and the power of Grover Norquist’s antitax pledge mean that the Republicans who control the House of Representatives refuse to consider tax increases.185 The power of the antitax coalition makes it almost impossible for congressional Republicans to concede to any tax increases; and because it is almost impossible for them to compromise, they have the upper hand in any negotiation.
This political dynamic has been clearly visible since the 2010 elections. First there was the matter of the Bush tax cuts, which were scheduled to expire at the end of the year. President Obama favored extending only the tax cuts for the “middle class”—households making up to $250,000 per year—on the grounds that higher taxes would make the economic slowdown worse. Republican leaders demanded the extension of all of the Bush tax cuts on the same grounds. Ultimately the only thing the parties could agree on was tax cuts, so they compromised by giving each side the tax cuts it wanted, with the Bush tax cuts extended through 2012 and a new payroll tax cut for 2011, at a total cost of $860 billion over just two years.186
Then there was the debt ceiling showdown of 2011. The debt ceiling is an archaic historical artifact (enacted in 1917 to avoid the need for congressional approval every time the Treasury has to borrow money) and a contemporary absurdity: a limit on total government borrowing set by Congress, even though Congress’s tax and spending bills determine how much borrowing is needed.187 Yet with the Treasury Department about to run out of cash, many of the same politicians who had just months before added $860 billion to the national debt refused to increase the debt ceiling without a deficit reduction agreement. Republicans insisted on reducing the deficit solely through spending cuts, while Democrats insisted on including tax increases. Negotiations over a deal that could have reduced deficits by over $4 trillion over ten years collapsed when House Speaker Boehner walked out over President Obama’s insistence on “raising taxes.”188 Another plan put forward by the “Gang of Six,” a bipartisan group of senators, which would have reduced deficits by $3.7 trillion, was shot down in the House because it included increases in tax revenues (even though it would have reduced income tax rates for both households and corporations).189
At the eleventh hour, all sides agreed on the Budget Control Act of 2011, a complicated deal that cut spending by $900 billion over ten years and promised to reduce deficits by at least another $1.2 trillion later—either through a deficit reduction plan hammered out by a bipartisan committee and approved by Congress or through automatic spending cuts. On November 21, 2011, however, the “supercommittee” reported that it could not come to an agreement. Anticipating that failure, some congressmen had already started planning to undo the automatic spending cuts.190 Even with the automatic cuts, $2.1 trillion would take only a modest bite out of the next decade’s deficits, which at the time of the agreement were expected to total anywhere from $6.7 trillion (if the Bush tax cuts were allowed to expire) to $11.5 trillion (if all tax cuts were extended).191 A larger agreement was impossible because the two sides could find little to agree on—no tax increases, no significant entitlement cuts, and no economic stimulus.192
The House Republicans did not break any rules, and they did not play the game of politics unfairly. They wanted lower spending; the debt ceiling gave them political leverage, and they used it. There’s no rule of negotiation that says you have to meet your opponent halfway. As Norman Ornstein of the American Enterprise Institute, a conservative think tank, said, “If you hold one-half of one-third of the reins of power in Washington, and are willing to use and maintain that kind of discipline even if you will bring the entire temple down around your own head, there is a pretty good chance that you are going to get your way.”193 The fact that keeping taxes and spending low was more important to House Republicans than actually reducing the deficit was a policy choice that they were entitled to make—and one that their electoral base largely supported. The debt ceiling standoff does show, however, how far the tax revolt has come since the days of Ronald Reagan. And it shows how difficult it will be to solve our long-term deficit problems in our current political environment.
a Discretionary spending is spending that is subject to annual appropriations bills passed by Congress. Mandatory spending, by contrast, is required by law and does not require annual congressional action.
b Since households and businesses are riskier bets than the U.S. government, they generally pay higher interest rates.
c When Social Security payroll taxes exceed benefit payments, the surplus is deposited in the Social Security trust funds (which invest the money in interest-bearing Treasury bonds). When benefit payments exceed payroll taxes, money from the trust funds (including interest on those bonds) is used to make up the difference. When the trust funds are exhausted, benefit payments will be limited to incoming payroll taxes under current law.
d By Senate rules, most measures require sixty votes in order to end debate and move to a vote; a filibuster allows forty-one senators to prevent a vote. The budget reconciliation process, originally created by the Congressional Budget and Impoundment Control Act of 1974 to expedite budgetary legislation, provides an exception to this rule for bills that change revenue and mandatory spending laws. Allen Schick, The Federal Budget: Politics, Policy, Process, 3rd. ed. (Brookings Institution Press, 2007), pp. 142–47.
e The AMT is an alternative tax system originally designed to ensure that the very wealthy paid at least some tax; it does this by disallowing many common tax deductions for high-income taxpayers. Because the AMT is not indexed for inflation, it would affect a growing number of middle-class households as time passes. Therefore, Congress regularly “patches” the AMT (raising the thresholds to account for inflation), but only for a few years at a time.
