Editor’s note: A version of this article first appeared at Forbes.com.
As soon as the elections were over, a wave of commentaries extolling the virtues of compromise appeared in the press. The common theme is that it is time for Democrats and Republicans alike to end partisan gridlock—to make compromises that will shrink federal deficits without driving us off “the fiscal cliff.”
That said, gridlock has its defenders. They fondly remember “the good old days” in the ’90s when divided government (Democratic White House, GOP Congress) produced a gridlock that kept spending increases relatively modest and eliminated budget deficits.
Gridlock today, however, is not as benign as it was then. Also, the ’90s constituted a very special case that cannot be replicated today.
In the ’90s, gridlock kept the spigot of federal spending stuck at a relatively slow growth rate. Today’s gridlock between the Boehner-led House and Team Obama has stuck the federal spigot in the wide-open position of perennial trillion-dollar deficits.
The ’90s are an inapt comparison for another reason: That decade featured a fiscal “perfect storm” to wash away red ink: The end of the Cold War led to defense spending cuts; the welfare reform of 1996 slashed welfare expenditures and increased the number of taxpaying workers; the Roth IRA legislation of 1997 induced millions of Americans to pay taxes on their private retirement funds up front; the “Greenspan put”-fueled stock-market bubble gave Uncle Sam a windfall of capital-gains revenue. In short, the propitious confluence of events that stanched the flow of red ink in the late ’90s was a one-off phenomenon.
So, we need compromise rather than gridlock, right? But what if compromise is not a viable option either? Compromise may be what fair, reasonable, mature, and enlightened people do; it may be the democratic way, but the problem is that there are limits to compromise, dictated by the immovable truths of economic realities.
We see this at the local level in school district contract negotiations with teachers’ unions. The union asks for 10 percent annual pay increases; the school board offers 2 percent; they compromise at 6 percent. That may work for decades, but what happens when the local taxpayers go through a prolonged economic slowdown and the tax base in the district stagnates? There comes a breaking point where teacher compensation can’t rise as much as it used to, if at all, and maybe even retirement benefits have to be cut back because taxpayers simply can’t afford additional tax increases.
A similar dynamic plays out with the federal budget. The big spenders propose a large increase in spending (an increase above an assumed projected increase, i.e., the infamous “base line”); the opposition proposes a smaller increase; they compromise and spending continues on a relentless upward trajectory. There is a ratchet effect whereby total spending can only move in one direction: higher. But “trees don’t grow to the sky,” and eventually government spending produces so much accumulated debt that there isn’t enough wealth to tax or borrow to finance spending, so the central bank steps in with “quantitative easing” and financial manipulations. Eventually, the debt burden and the inflation of the monetary unit proceed to the point where they threaten the financial viability of not only the government but the entire economy—the net result of a succession of well-meaning, “fair”-minded compromises.
The pickle we are in today is excruciating. In the first place, the big spenders clearly won’t make any more than token compromises. President Obama came out of the election suddenly asking for tax hikes twice as large as he had requested earlier. Senate Majority Leader Harry Reid declared that Social Security was off the table. Since Reid has blown up Congress’ constitutional budget-making process for several years already, we know he isn’t bluffing. They are willing to drive off the fiscal cliff if necessary, because chaos and crisis provide them with the pretext for more government intervention and control, which is their ultimate goal.
If there is to be any meaningful compromise, the Republicans will be the ones who make it. Yet, if the GOP compromises by agreeing to raise taxes while not curbing runaway spending, the result will be slower economic growth and probably lower federal revenues. Nothing positive will have been accomplished and the government will continue careening toward an eventual financial crackup. We are told that reasonable people compromise, but if compromise leads to disaster, can it be a virtue?
Gridlock or compromise: Heads, Big Government wins; tails, “we, the people,” lose.
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