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Budget standoff nothing new but demographics could make it worse

The standoff between President Barack Obama and congressional Republicans over taxes and spending isn’t entirely unprecedented, but the underlying dynamics shaping federal spending, particularly entitlement programs for the aging Baby Boom generation, could make it harder for Washington’s leaders to resolve.

They and their predecessors have been in something like this predicament before: unable to agree on a mix of spending reductions or changes in entitlement programs, and carrying the disagreement to the point of a government shutdown. It happened in 1995 when House Speaker Newt Gingrich took on President Bill Clinton.

Then, as now, one of the underlying causes of the dispute was the attempt by Republicans to bring market principles to the Medicare program.

Speaker of the House John Boehner, R-Ohio, speaks to reporters following a meeting with President Barack Obama on March 1, 2013 in Washington, DC.
Speaker of the House John Boehner, R-Ohio, speaks to reporters following a meeting with President Barack Obama on March 1, 2013 in Washington, DC.Jewel Samad / AFP - Getty Images

The 1995 standoff ended with a Clinton victory, but once he’d won re-election in 1996 and was still faced with a Republican-controlled House, Clinton came to terms with Republicans on a deal to try to control Medicare’s spending growth.

That 1997 accord came at a time when the economy was robust — with the unemployment rate dipping under 5 percent by the summer of 1997 — and federal revenues were growing faster the economy itself.

By 2000, the $236 billion federal budget surplus — yes, surplus — was creating political pressure to cut income taxes – prominent Democrats such as Sens. Max Baucus of Montana and Dianne Feinstein of California supported the idea and voted for it in 2001.

“I strongly believe that when the government is in position to be able to return money to the American taxpayers, we should,” Feinstein said then.

That 2001 tax cut — accelerated in 2003 due to the post-Sept. 11 economic downturn — became an entrenched part of the government’s finances. Many Democrats complained about it, especially after the costs of the Afghanistan and Iraq wars mounted, but they couldn’t undo it.

And the tax law that Obama signed on Jan. 2 preserves much of that 2001-03 income tax structure. Middle-income earners go largely unscathed.

The tax accord Obama signed into law will produce revenues smaller than he and congressional Democrats had hoped for. That’s one reason Obama is again urging Republicans to agree to another round of tax increases.

Much has changed since 2001 and 2003 — and fiscally it has changed for the worse. The federal government’s debt burden today and over the next 10 years “is very high by historical standards” and greater than at any time since just after World War II, the Congressional Budget Office said in its annual budget outlook in January.

Even though that debt burden is high, the interest rate at which the government is borrowing money is extraordinarily low, due to Federal Reserve policy. Hanging over the budget standoff is the risk that interest rates will at some point in the next few years revert to their 30-year norm and drive up the government’s borrowing costs.

Clinton himself warned last year, “If interest rates were the same today as they were when I was president, the payment on the debt, that is, what the taxpayers have to pay every year, the financial debt (payments) would go from $250 billion to $650 billion a year.”

Unlike in 1997 when Clinton and Gingrich reached their deal, the demographic cost crunch produced by the Baby Boom is no longer in the distant future. It’s happening now.

The peak of the Baby Boom came in 1947 (the year Hillary Clinton was born and the year after her husband was born): 26.6 births per 1,000 people.

Compare that to 14.6 births per 1,000 people in 1975 and you see why, in fiscal terms, there are too few workers and too many beneficiaries.

Many of the cuddly newborns of 1947 are now wrinkled retirees collecting the Social Security and Medicare benefits that were promised to them.

The budget standoff is partly the result of those Baby Boom and Baby Bust demographics and of Democrats’ belief in expansive government – best symbolized by President Lyndon Johnson’s creation of Medicare in 1965.

The Affordable Care Act is Obama’s signature domestic accomplishment, just as Medicare was Johnson’s. “Obamacare” – which includes efforts to curb the growth of Medicare outlays – is still in its earliest stages, a massive and unproven experiment in trying to control costs of the already insured while simultaneously expanding benefits to the uninsured.

The backlash against “Obamacare” led to the Republican takeover of the House in 2010. That tenacious Republican House majority is what stymies Obama today.

Politically, the best-case scenario for Democrats is that Obama leads them to victory in the 2014 midterm elections and turns the clock back to 2009, when Democrats enjoyed a majority in the House and a supermajority in the Senate – which allowed them to enact the Affordable Care Act.  If that happened, there’d be no need for Obama to haggle with GOP congressional leaders.

But White House spokesman Jay Carney denied Monday that Obama was primarily focused on 2014 and on using Republican blocking of his agenda as a theme for the midterms.

“It goes without saying that a president wants those in his party to do well, but it is not a focus of his, particularly at this point,” Carney said.

Even with Obama campaigning for them in 2014, it will hard for Democrats to recover some of the districts they lost in 2010 — resilient incumbents such as Rep. Ike Skelton in Missouri and Rep. Rick Boucher in Virginia were swept out by the 2010 wave and their old districts seem unlikely to revert to Democratic control.

Redistricting plays a role, too, in Obama’s predicament.

Republicans were better prepared than Democrats for the 2010 state legislature races that determined which party controlled the drawing of new lines for House districts in most states.

“Republicans enjoy a 33-seat margin in the U.S. House having endured Democratic successes atop the ticket and over one million more votes cast for Democratic House candidates than (for) Republicans,” noted a memo in January from the Republican State Leadership Committee, which organized the $30 million Redistricting Majority Project in 2010.

Obama may have exaggerated when he complained in January that “the House Republican majority is made up mostly of members who are in sharply gerrymandered districts,” but he can’t get a do-over for what happened in 2010. And it is 2010’s outcome that is driving 2013’s bargaining.