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Commentary By Steven Malanga

Government Distrust Impedes Fiscal Reform

Economics, Economics Tax & Budget

Back in early 2007 when the country first started debating the latest effort at immigration reform, I wrote a column about all of the compromises included in the McCain-Kennedy legislation and observed naively that I thought they were a good starting point for debate on a bill.

I was wrong. What I heard back in e-mails and phone calls was that people weren’t in the mood for compromise because that’s exactly the way previous immigration reform bills had been sold to them, that is, as full of compromises that never actually made it into federal immigration policy. The word that I heard most often from readers was that they felt ‘betrayed’ by the actual direction of policy once legislation had been pitched to voters as a series of trade-offs or compromises.

I can’t help thinking of the impasse over immigration policy as I contemplate the coming debate about how to deal with our steep national debt. It’s clear from polls and calls to members of Congress that even average voters are now worried about the enormous federal deficit we are ringing up. Not only has such concern limited the size of a new proposed federal stimulus package, but it means the White House may have to take seriously the work of its own deficit reduction commission.

But I don’t envy the folks on that commission having to come up with a politically workable solution to the deficit in the face of voter skepticism. Although the common wisdom is that the only realistic way to deal with the deficit is with a combination of serious entitlement cuts and new revenues, voters aren’t in the mood to concede either because they feel, rightfully perhaps, that government has reneged on past deals to solve our long-term fiscal problems. As a former governor of one of our biggest states recently told me, “People think that if you raise taxes or save money by giving up certain benefits, politicians will just spend the money on new programs instead of reducing the deficit.”

He may be right. After all, just look at how Washington has treated reforms to Social Security over the years. Back in 1983, for instance, Congress agreed to a whole set of measures to “save” Social Security and bolster it for the time when baby boomers retired, including passing a handful of new taxes and raising existing ones (for the first time taxing some benefits, for instance), and also agreeing to some reductions in benefits.

By the early 1990s, Congress began eyeing the surplus building up in the Social Security Trust Fund as a result of reforms. To assure voters that the money from payroll taxes wouldn’t be squandered on new spending, Congress and the Clinton administration eventually agreed to a balanced-budget deal in 1997 with strict spending limits. But as a Congressional Budget Office report later outlined, Washington failed to adhere to its own spending guidelines and took tens of billions of dollars from the Social Security surplus to fund the government’s day-to-day operations. That led to a popular revolt and calls for a so-called ‘lock-box’ to protect Social Security. At one point in 1999, polls showed nearly 90 percent of Americans favored some sort of scheme to keep Congress’ hands off the trust fund, but to no avail.

The intervening years haven’t helped build voter confidence. After the attacks on 9-11, Americans showed a new willingness to spend tax money to build up defense and homeland security. But voters also quickly found out that the War on Terror was just the beginning of a new age of Washington prerogative, or as New York Congressman Anthony Weiner told me at the time, “The era of small government is over.” He was right, as spending for homeland security and the overseas wars was followed by the Medicare prescription bill, TARP, the auto companies’ bailout, state and local stimulus, and of course the health reform bill.

Notably, Washington alone isn’t the problem. There are plenty of egregious budget practices at the state and local levels that contribute to voter cynicism. Local officials, for instance, regularly raid their own trust funds financed with dedicated taxes and use them for other purposes.

New Jersey’s businesses, to take an example, face hundreds of millions of dollars in new taxes because the state’s legislators took surplus funds from unemployment taxes when joblessness was low and used them to finance general state spending, thereby ensuring the fund couldn’t withstand an economic downturn. No wonder businesses across the country rate Jersey one of the worst places to do business.

It’s clear what voters think of such actions. When the California legislature tried to seize taxes in a fund dedicated to mental health care spending, legislators had to get approval for the maneuver from voters who had originally established the fund via a referendum. Given the chance to vote on whether the money should be used to help deal with the state’s deficit, Californians overwhelmingly told the state legislature to go take a walk.

How do you reform government when voters don’t trust you to follow through on your proposals? The Bush administration tabled immigration reform and pledged to make more of an effort to police the border to persuade voters that Washington was serious about the issue. Three years later, of course, Arizona has passed controversial new legislation because its residents say little has changed. This hardly inspires confidence in Washington’s commitments.

Washington politicians will have to figure out how to persuade Americans they are serious about the deficit and intend to follow through on any plans to lower it. It will be a tough task, given how cynical voters have become about Washington’s political promises.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets