If the federal government takes spending reductions seriously, the first wave of austerity would hit the states and public employees. An infusion of cash from last year's stimulus package temporarily masked the unsustainable fiscal condition of many states. But there will be no more stimulus packages. Some of the largest states -- California, New York -- are on the verge of default. And they will only achieve major spending reductions by cutting their pension and public employee compensation systems. This would set up a serious battle between state governments and the labor movement, since a majority of union workers today are public employees. Democratic governors, elected with union support, would be in for a particularly interesting time.
In austerity politics, another group of likely losers is middle-class Americans currently in their 40s. There can be no serious reduction in federal spending without entitlement reform. Social Security and Medicare eventually will need to be transformed from middle-class entitlements given because of age to entitlements given to those with lower incomes. In any entitlement reform, Americans at or near retirement will probably be exempt. Young people will have decades to prepare for a new entitlement structure. Middle-aged, middle-class people may be caught, well, in the middle.
And the biggest losers may be responsible politicians who take these realities seriously. Necessary changes will not resemble the relatively painless deficit reduction deals of 1990 or 1993. This round may require not only the means testing of Social Security and Medicare but the reduction or elimination of middle-class entitlements such as the mortgage interest deduction and the employer health care exclusion. Some politicians may be asked to sacrifice their careers for an important cause.
Because of the difficulties, it is possible that the federal government will not be serious about spending cuts. Public employees and the middle-class elderly, after all, are powerful voting groups. The alternative is to attempt deficit reduction primarily through tax increases -- perhaps an additional consumption or value-added tax. But this approach would involve a massive shift of resources from the private sector to the public sector, making many people poorer for the benefit of favored political constituencies. To sustain expansive public commitments, Americans would be asked to accept lower economic growth and weaker job creation. And middle-class voters may not like higher taxes any more than reduced benefits.
An austerity era is a miserable, thankless time to serve in politics -- but also an important one.