Tax Cutters Fight Champions of Big Government
February 15, 2000
by Irwin Stelzer
SUNDAY TIMES (LONDON)
February 13, 2000
BUDGETS are a lot more than numbers. They are the financial embodiment of the political philosophy of the governing party. So when Bill Clinton sent his very last budget proposal to the Congress last week, he laid out in unmistakable terms the difference between him and his chosen successor, Al Gore, on the one hand and the Republican opposition on the other.
Both parties start with the assumption that the chore of budget-makers these days is to decide how to divide the mounting surplus among the various claimants.
Never mind that estimates of the excess sums that will flow into the Treasury vary widely and all are likely to be wrong, if for no other reason than that they assume there will be no recession in the next 10 years.
Add to the intrinsically difficult task of forecasting a surplus the fact that all such forecasts are highly political. The president wants to prevent the Republicans from campaigning on the promise of large tax cuts. So he has come up with a projection of the surplus so low as to make George W Bush seem wildly imprudent in proposing tax reductions -- the centrepiece of his campaign, to the extent that his aimless, inchoate campaign can be said to have a centrepiece.
But the president's projection is high enough to accommodate his expansive notion of the role of government in the lives of Americans in the next few years. For years liberal Democrats had to stifle their desire to expand the welfare state because Ronald Reagan had deprived them of the ability to fund their dreams. First, he cut off funds by reducing taxes. Then he directed a larger portion of the money that was available to building up the defence establishment in a successful effort to raise the cold war ante so high that the Russians had to drop out of the game. In the process, he rolled up huge deficits, leaving no room for new social programmes.
Now the economic expansion that began in the Reagan years is paying off handsomely, the promised peace dividend is at hand and the Treasury's coffers are overflowing. Or so it seems - but only if one accepts the strange accounting that passes for reality in Washington and ignores the huge unfunded pension obligations that will sooner or later have to be met and the fact that the healthcare system is a short period away from running out of money.
The government accounting system shows a surplus and the Democrats and the Republicans are determined to get their hands on it, the former to fund new programmes, the latter to fund tax cuts after restoring the military to some semblance of effectiveness.
What is amazing about the president's proposals is the skill with which he has appealed to a variety of constituencies. There is to be money for more and better teachers (members of the teachers' unions account for one-in-four of the delegates to the Democratic convention who may have to choose between Al Gore and insurgent Bill Bradley as their nominee); for more police; for small manufacturers entering the e-commerce era; for poor and rural areas to install broadband technology; for Third World countries to induce them to bring their labour standards in line with America's (a gift to the trade unions); for farmers beset by prices lower than they would like; for the very young (day-care facilities) and the very old (free prescription medicines and subsidised housing); and for environmentalists.
And that is only a small part of the list, which also includes special gifts for New York State, where Hillary Clinton has announced her candidacy for the Senate. The president is apparently unembarrassed to use hundreds of millions of dollars of the taxpayers' money to enable his wife to say to New York voters: "Look at the presents I bring."
The Republicans, of course, have said there is no prospect that the Congress, which they control, will approve the president's plans. They want to give the money back to the people who earned it, the taxpayers - or at least some of them do. Several would prefer to direct a greater portion of the funds produced by America's remarkably durable economic boom to reducing the national debt. And there are many Democrats, outside the liberal wing of the party, who agree that now is the time to pay down the debt.
The president, of course, says that even with his new programmes the debt will be paid off by 2013. But he is referring only to the debt held by the public, which is far lower than the total government debt, which includes the long term obligations of the Treasury to other government agencies, most notably the social security (pension) trust fund.
In fact, buried in the president's budget is a request that Congress increase the statutory debt limit to accommodate the fact that the Treasury will have to do a great deal of borrowing to meet its obligations to retiring baby boomers.
Is this complicated? You bet, and this is what the president is counting on. He is in the comfortable position of having promised the voters a host of new programmes - something for everyone, including even a few pennies for the cash-starved military - while at the same time promising to eliminate the national debt, as he defines it. The Republicans are going to have a hard time in this election year thumbing their noses at the various constituencies the Democrats have invited to feed at the federal trough.
Perhaps we will end up with that best of all political solutions: gridlock. The Republicans will not give the president the new spending he wants, and he will veto their tax cuts. Meanwhile, the economy will roll on, tax receipts will roll in to the Treasury and it will have no choice but to use the money to pay down the debt by retiring more government bonds.
Things could be worse.
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.