America's Fiscal Constitution (52 page)

Public frustration with the ballooning federal debt played a critical role in the 1992 election. Two candidates for the Democratic presidential nomination—Paul Tsongas and Bob Kerrey—called for a return to traditional budget discipline. Another candidate, Bill Clinton, had balanced budgets as governor of Arkansas and chaired the centrist Democratic Leadership Council. The young governor’s six-page “Plan for America” endorsed more spending for medical insurance, education, and infrastructure—all financed with higher taxes for Americans with incomes over $200,000—and middle-class tax relief.
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Tsongas was not impressed with Clinton’s approach, and accused him of running for “Santa Claus.” By March 1992, Clinton’s superior organization and tenacity had produced an insurmountable lead in the race for the nomination.

A remarkable new political force then burst onto the national stage and highlighted the power of the American Fiscal Tradition. Texas businessman H. Ross Perot was not even an official candidate for the presidency when he began to ride a tidal wave of support. With the demeanor of a
no-nonsense businessman, Perot evoked the fundamental values underlying a balanced budget. Because all mainstream politicians agreed with the ideal of a balanced budget, they appeared incompetent when they failed to obtain one. On March 6, when pressed by talk show host Larry King about his presidential ambitions, Perot said he would run if volunteer organizations qualified him for the ballots in all fifty states. More than a million volunteers responded. By May Perot, who just two months earlier had been largely unknown to a majority of Americans, led both Clinton and President Bush in the polls.
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Perot used memorable language to remind Americans of how routine borrowing compromised the future, diverted savings from investment, and made the United States more dependent on foreign creditors. No major presidential candidate in recent history had so unequivocally defended the American Fiscal Tradition.

Perot promised to use his business experience to balance the budget “without breaking a sweat.”
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When challenged to provide more details, he committed to do so “in 60 days.”
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Since balancing the budget would require hard choices, Perot cautioned Americans that “if you want Lawrence Welk music, I’m not your man.”
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Perot’s support began to falter in June and early July, when he stumbled on other issues and had trouble managing tensions between campaign professionals and his army of volunteers.

Clinton’s campaign scrambled to release a new budget plan ahead of Perot. Clinton’s plan retained the spending limits imposed by the Omnibus Budget Reconciliation Act of 1990 and pledged to expand federal medical insurance by finding savings in Medicare. It also assumed faster economic growth than other forecasts and endorsed an undefined new tax on the profits of foreign corporations. The Clinton campaign claimed its plan would cut the deficit in half within four years.

As the incumbent, President Bush would have to be more specific than Clinton when responding to Perot’s budget challenge. He had little room to maneuver, however, since the 1990 budget agreement had already set limits on federal funds spending apart from formula-based programs such as Medicare. Budget Director Darman noted that Medicare costs could be lowered by tighter ceilings on reimbursements and higher premiums and copayments for beneficiaries; President Bush characterized those ideas as being simply options when pressed on the issue.
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Clinton surged past Bush after Perot bowed out of the contest on July 16, at the end of the Democratic National Convention. Clinton’s
candidacy received a boost when Perot attributed his departure from the race in part to a “revitalized Democratic Party.”
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The restless Perot found it difficult to remain on the sidelines. Weeks after his July withdrawal, he challenged Bush and Clinton to adopt the forthright budget policies outlined in his best-selling book,
United We Stand
. Perot’s proposal extended the 1990 ceilings on growth of federal funds spending, imposed higher income tax rates and payroll taxes on the wealthiest Americans, limited tax deductions, raised premiums for Medicare Part B, increased fuel taxes, and cut planned spending for defense and agricultural programs. Many of those ideas would be enacted in the following years.

Perot reentered the race on October 1. Though polls showed that the Texan’s popularity had plummeted following his abrupt summer withdrawal, his communication skill and quirky candor commanded public attention. Perot’s thirty-minute televised budget briefings—“infomercials”—attracted large prime-time audiences. A plurality of Americans thought Perot “won” three presidential debates in which he reminded citizens of the need to end routine federal borrowing. According to Perot, “for 45 years we were preoccupied with the Red Army,” and “now our number one preoccupation is red ink.”
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His closing statement in the final debate, which he replayed as his last television ad, urged Americans to vote for the candidate they would trust “to take care of your children if something happened to you.”
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Many Americans agreed with Perot’s approach to the budget even as they voted for Bush or Clinton.

Clinton won the election with only 43 percent of the vote and did not forget the economic appeal of Perot’s candidacy.
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Before Clinton’s inauguration he convened an economic summit at which participants emphasized the priority of lower deficits. Federal Reserve Chairman Alan Greenspan counseled the president-elect that fiscal discipline would lead to lower interest rates and greater long-term job growth. According to Greenspan, any debt-financed stimulus would backfire by raising interest rates, since financial markets feared that continued borrowing would lead to inflationary monetary expansion. Greenspan predicted a severe financial crisis in the late 1990s unless the federal government reduced routine borrowing.

Greenspan later wrote that although he “hadn’t put it in so many words, the hard truth was that Reagan had borrowed from Clinton, and Clinton was having to pay it back.”
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When Clinton took office, budget
experts projected that business-as-usual unified budgets would produce deficits rising to $360 billion in 1997 and $500 billion in 2000.
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Federal funds borrowing would rise by even more.

Clinton’s two senior budget advisors, Secretary of the Treasury Lloyd Bentsen and Budget Director Leon Panetta, helped set the new administration’s fiscal tone. They knew budget politics as well as anyone in Washington. Bentsen, a fiscally conservative Democrat, had been a successful businessman before serving for two decades in the Senate, including six years as chairman of the Senate Finance Committee. The tall, thin, and reserved Texan provided a physical contrast to the squat and amiable Panetta, who had worked to limit deficits while serving as a California congressman. In early 1993 Panetta and Democratic House leaders warned the president that unless he took the initiative in cutting planned future federal spending, Congress would do so on its own terms. Many new House Democrats had been elected from districts where Perot had strong support.

Panetta and Bentsen crafted a plan to cut the projected deficit in the unified budget by $140 billion—about 40 percent—within four years.
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That plan included a controversial new tax on energy use. Members of Clinton’s political staff were disappointed that the draft budget made little progress on the campaign’s pledges of greater access to medical insurance and federal investments in economic growth. Clinton responded that the White House could not “lie about the deficit.”
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He personally reviewed the budget in an attempt to find savings to offset the new costs of the spending proposed during his campaign. Once, in frustration, he complained that budget realities forced him to govern like an Eisenhower Republican.

Financial markets responded positively to the emphasis on fiscal discipline in the president’s first budget address. Clinton’s budget itself, however, included new spending for “stimulus” and “investments” that exceeded the annual ceiling on domestic spending imposed by the 1990 budget agreement. Senate Majority Leader Robert Byrd tried to maneuver around that ceiling, but was blocked in the spring of 1993 by Senate Minority Leader Bob Dole’s filibuster.

In August 1993, by a one-vote margin in both the House and the Senate, Congress approved a budget that confined spending to the 1990 ceiling and raised revenues with a higher top income tax rate and a modest
increase in the tax on motor fuels. That budget legislation also secured funding for Medicare Part A by eliminating the ceiling on income subject to its payroll tax.

Some Republican leaders incorrectly predicted that the tax increases would trigger a recession. The financial markets responded positively; the interest rate on ten-year federal bonds fell from 7 percent to less than 5.5 percent during the ten months between Clinton’s election and the budget vote.

President Clinton then sought to expand medical coverage with a plan that required most employers to provide insurance through managed care plans and offered a subsidy to pay for a portion of that cost. Clinton and his talented wife, Hillary, hoped to reduce the net price of the program to the federal government by combining the purchasing power of the federal government, states, and private insurers to stem rising prices for medical services.

There was nothing radical about the notion of trying to restrain medical costs that continued to rise—for both federal programs and private insurance—at a faster rate than national income. By 1993 a broad-based coalition of large business employers sought to require more employees to obtain insurance as a means of reducing the average level of premiums. Many Republicans embraced that employee mandate as an alternative to Clinton’s plan.

Clinton’s insurance plan was never able to muster the support of a majority in the House or Senate. Some blamed its legislative failure on the insurance industry’s attack ads and lobbying. In fact, budget realities played a critical role in the outcome. The Congressional Budget Office calculated that the plan’s insurance subsidies would cost more than the estimated savings in Medicare and new taxes. As a result, the plan would push federal spending above the multiyear budget ceilings established in 1990.

Later medical services legislation showed how economics rather than ideology imposed the greatest barrier to the future expansion of medical services. A central feature of the Clinton program—federal premium subsidies to managed care plans—became the lynchpin of various conservative plans to reform Medicare. The Republican alternative to the Clinton plan for expanding coverage—a mandate for uninsured individuals to buy insurance—was eventually used as the basis for both Governor Mitt Romney’s reforms in Massachusetts and Obama’s 2010 Affordable Care Act.

G
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In 1994 Republicans won a House majority for the first time since 1952. Their thirty-two-seat gain accelerated a decade-long trend of Republican progress in the South. Polls showed that Republican congressional candidates attracted votes from many former Perot supporters. Perot himself applauded the House Republican campaign platform, the “Contract with America.”
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Its author, Newt Gingrich, became the Speaker of the House in January 1995.

Gingrich’s rise enhanced the influence of his allies, a coalition of Washington-based political strategists and lobbyists. Grover Norquist presided over a weekly Wednesday morning strategy meeting of conservative organizations ranging from the National Rifle Association to various groups with religious affiliations. Norquist had begun his career as a political operative by mobilizing support for a constitutional amendment to balance the budget. Then, in 1985, conservative activist Peter Ferrara recruited him to run the nonprofit Americans for Tax Reform, which backed the Reagan administration’s initiative to lower personal income tax rates largely by raising taxes on investment income. After the passage of the Tax Reform Act of 1986, Norquist transformed Americans for Tax Reform into a vehicle for opposing tax increases for any purpose and at any time. He publicized this goal by challenging political candidates to pledge their opposition to all tax increases. Initially 110 state and federal candidates signed the pledge. As that number steadily grew, the pledge played an increasingly important role in Republican primaries.

Norquist acknowledged that spending rather than taxes ultimately determined the size and scope of government, but he asked: “Just how could one create a pledge on spending[?] ‘I promise to oppose too much spending.’ How much is too much? The power of the taxpayer protection pledge comes from its clear and binary nature. A politician votes for or against a tax hike. Yes or no. Hero or bum.”
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Norquist’s “Taxpayer Protection Pledge” inspired Gingrich’s Contract with America, which 185 Republican congressional candidates signed in a ceremony in front of the Capitol on September 27, 1994. The Contract with America backed a constitutional amendment to balance the budget. Gingrich, a former history professor, explained that there was “a deep historic commitment to balancing the budget,” which was “a goal that gives people a hard yardstick against which to measure their behavior.”
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Though relatively few voters knew the details of the Contract with America, Gingrich emerged from the election as the televised face of his party. Speaker Gingrich also set the agenda for the House of Representatives. He supplemented that power with a network of national organizations invested in his success. Rivals of Gingrich for national party leadership in early 1995 fell in line. Senate Majority Leader Dole, who had sparred with Gingrich and Norquist for years, agreed to sign the pledge against new taxes.