Parties Are Playing With Funny Money
July 11, 1999
by Irwin Stelzer
The Sunday Times (London)
11 July 1999
Life was simple when America's government was running a huge deficit. The Democrats wanted to introduce new social programmes, but couldn't come up with the money. The Republicans wanted to cut government spending, but couldn't marshal public support for massive reductions in any of the programmes making up what they considered to be the bloated welfare state. Result: gridlock.
Then the economy took off, incomes and profits rose, and with them tax receipts. The budget surplus produced by the unexpected riches that have poured into the Treasury's coffers has revived Democrats' ambitions to expand the welfare state, and Republicans' ambitions to cut taxes. Result, at least so far: gridlock.
The White House now estimates that the budget surplus will total almost $6 trillion over the next fifteen years, more than enough to repay completely the $3.7 trillion of publicly held federal debt. Politicians of both parties, eager to please their respective constituencies by creating new entitlements (Democrats) or by cutting taxes (Republicans), see no reason to doubt these projections. They should.
For one thing, the same folks who are now predicting continuing surpluses were in recent memory predicting perpetual deficits. Their new forecasts are based on the assumption that the U.S. economy will continue to grow, and are so volatile that since February the White House has raised its estimate of the 15-year surplus by what columnist Robert Samuelson, writing in Newsweek, calls "an astonishing $1.1 trillion".
But Bill Clinton is nevertheless willing to make firm commitments to spend the money that is not yet at hand, and may never be. Over the next fifteen years he would establish "universal savings accounts" for all Americans, finance the purchase of prescription medicines by old folks (many of them richer than the workers whose taxes would be paying the bills), pour money into the failed education system, and set up a variety of child-care programmes. All of this in addition to paying down the federal debt, and "saving social security", the pension scheme that is now seriously underfunded and due to go into the red in 2034.
The President has several motives for making "long-term commitments with imagined money", to quote Samuelson again. As politicians read the calendar, the November 2000 presidential and congressional elections are right around the corner. Clinton hopes that his something-for-everyone spending plans will be difficult for the Republicans to oppose, and that if they do, Al Gore's election prospects will be improved, as will the Democrats' chances of recapturing the House of Representatives.
But there are deeper and more personal reasons for the President to want to push through this expansion of the welfare state. As things now stand, students of history in years to come will have to look in the index under "scandal", or "Monica" to find out just what Bill Clinton did during his eight years in office. He would like them to have look instead under "benefactor of children, students, the aging and the aged".
Then, too, Clinton is a man deeply troubled by oncoming irrelevance. He is already a lame duck, his vice president is distancing himself from his scandal-ridden boss in an effort to revive a failing campaign, and his wife is garnering all the attention that the press once lavished on him by running for the seat of retiring New York senator Daniel Patrick Moynihan. The president is said to have been annoyed when introduced last week by an ardent supporter as a man "taking his victory lap around the country" -- a lap taken only by those who have completed the race.
So Clinton finds himself in the position of being "hardly worth ignoring", to borrow from Stephen Sondheim. And he doesn't like it. This man, who has been running for office ever since his days at Yale, and is about to become the youngest ex-president in the nation's history, wants to show that he still matters. Hence his last-ditch effort to leave a legacy other than Monica stories and cigar jokes -- fiscal probity be damned.
The Republicans are willing to go along with the President's plan to reserve a portion of the projected surplus for shoring up the social security system. But they are resisting the establishment of new entitlement programmes, which history teaches will grow in cost as more and more claimants appear to claim more and more benefits. Instead, they want to return some of the money that makes up the surplus to its original owners, the taxpayers, and thereby halt the growth of the central government.
Unfortunately for them, the politics of tax cuts are unappealing in an election year. Remember Bob Dole's 1996 campaign for the presidency: his promise of a 15% across-the-board tax cut drew yawns from voters. One reason is that tax cuts inevitably benefit most those who pay the most taxes. And that means the top earners. According to the Internal Revenue Service, the top one percent of individuals, those earning in excess of $227,000 annually, accounted for 16% of all income and paid 32.3% of all taxes. The top 5% of earners, those earning more than $100,000 per year, paid 51% of all the income taxes collected by the Treasury. So, half of any proportioned reduction in taxes would go to 5% of the voters, with the other half shared by the remaining 95%. Tax equity, perhaps, but not good politics. And made worse by the Republican's plans to reserve some of the cuts for those who have made huge capital gains in the stock market, and for those who are lucky enough to inherit substantial sums from generous relatives.
The best guess now is that the President will get some of the new programmes he wants, with the due bills coming after he is gone, and the Republicans will get some small portion of the tax reductions they want. Then both parties will take to the hustings, looking for voter approval for having spent money that isn't yet there.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.