In a presidential election campaign allegedly focusing on meaty debates over public policy, the king of all policy questions is how to use the $4.6 trillion in projected government budget surpluses. Despite the daunting complexity the media like to attribute to fiscal issues, the budget question basically comes down to three choices: Expected surplus tax revenue can either be reduced by cutting taxes, spent on government programs, or used to retire outstanding bonds to pay down government debt.
Ever since the big tax cuts of the early '80s led to ballooning budget deficits, corporate America has tended to prefer "fiscal discipline"--reducing the deficit or paying down debt--to either tax cuts or extra spending. Wall Street's penchant for budget discipline is particularly strong this election year, with many wealthy financial figures viewing George W. Bush's tax cut plan with skepticism, even though it disproportionately benefits the rich (New York Times, 8/13/00). A Merrill Lynch poll of 33 major investment managers found that almost three-quarters believed this to be a "bad time" for either a tax cut or spending hike (L.A. Times, 8/26/00).
Federal Reserve chairman Alan Greenspan echoed this view last August, saying through a spokesperson that his "preference is for high or rising surpluses," though "if growing surpluses become politically infeasible to defend, he would prefer that they be allocated to tax cuts rather than to spending initiatives."
Largely due to this Wall Street/Fed consensus, the media have developed an almost obsessive fixation with fiscal discipline, a passion that pervades almost everything that is written about the government's finances. Elite journalists' standard formula for reporting the budget debate is to depict both conservatives who call for tax cuts and liberals who urge new spending programs as partisans or ideologues defending the selfish interests of their constituents.
Meanwhile, standing above the fray are the virtuous crusaders for fiscal discipline: pundits like the Urban Institute's Robert Reischauer and the budget hawks at the Concord Coalition, a Washington advocacy group backed by Wall Street mogul Pete Peterson. These individuals are portrayed as sober-minded "watchdogs" for the national interest, with the courage to tell politicians what they don't want to hear. Their message of budget discipline is depicted by the media less as a particular point of view and more as a religious imperative beyond all reasonable debate.
Less sugar, more medicine
When projections of a higher surplus came out last summer, Newsweek economics columnist Robert Samuelson wrote scornfully (7/10/00) that the "politicians have reacted predictably: Let me at the loot." A deal proposed between President Clinton and Republicans in Congress in which the GOP would support a Medicare drug benefit if the White House acquiesced to a tax cut earned only disdain from Samuelson: "Any compromise," he opined, "would serve these competing ambitions more than the national interest." The "best policy," he wrote, would be "devoting most of the surpluses to paying down the federal debt."
Ronald Brownstein, chief political correspondent for the L.A. Times, agreed (7/3/00), complaining that the White House/GOP compromise plan "offered two spoons full of sugar without any medicine; many Senate Republicans (and centrist Democrats) understandably believe that any prescription drug benefit should be added to Medicare only in the context of broader reforms to control the program's cost."
A Washington Post editorial (9/9/00) greeted the release of Gore's budget blueprint, which lavishes about 70 percent of the projected surpluses on debt paydown, with mixed emotions. On the one hand, "the Gore team avoids the first error of fiscal policy, which is to spend more than the government can afford." The Post commended the vice president for recognizing that "it makes sense for the government to continue to pay down the government debt."
On the other hand, the plan "makes no mention in its 191 pages of spending programs that might be cut....Unless Mr. Gore offers a list of cuts before the election, he will be open to the charge that he knows how to expand government but not how to discipline it."
USA Today editorialized (7/10/00) that "the euphoria of unexpected surpluses is no excuse for writing promissory notes now--for either tax cuts or major new spending." "Nearly every politician in both parties" is "spending money at hyperspeed," the paper wrote, which can only result in "an irresponsible turn to deficit spending and the drag of massive federal borrowing on the economy."
Pain--not much gain
Since 1998, the government has been running surpluses, which have been used to pay down debt accumulated from previous borrowing. According to the projections of the Congressional Budget Office, whose numbers are accepted by both major presidential campaigns, the government will run annual surpluses totaling $4.6 trillion over the next ten years, assuming no changes in tax or spending policy. Hence, the proponents of fiscal discipline say that the next logical step is to use as much of the projected surpluses as possible to pay down the debt.
The media's preoccupation with fiscal discipline is based on an economic argument that government borrowing soaks up savings that would otherwise be used for private investment by businesses and consumers. This reduction in national saving, according to this argument, raises interest rates, discouraging investment and slowing economic growth. Paying down government debt would have the opposite effect--increasing saving, lowering interest rates and raising economic growth. This argument is presented as fact again and again.
"Reducing the publicly held debt," the New York Times reported (10/25/99), "would put pressure on interest rates to go down and free up capital for private enterprise to use in building factories or developing technologies." "Most economists" view the policy as "very positive for the economy over the long run."
But how much will paying down the debt actually help the economy grow? According to the standard macroeconomic model used by the Congressional Budget Office (CBO)--and accepted by most of the mainstream economists who support debt-paydown--the effect of fiscal discipline on economic growth is actually miniscule.
In its 1997 budget report, the CBO estimated the economic impact of balancing the budget--which was then in deficit--over 10 years. Based on those figures, economist Dean Baker of the Center for Economic and Policy Research has calculated that paying off the entire federal debt between now and 2010 would raise the level of GDP in the year 2010 by approximately 0.7 percent.
To see how small that effect is, think of America's yearly per capita income, which now stands at about $36,100. By 2010, it is projected to grow to $42,400, an increase of about 17 percent. But if the federal government were to pay off its entire outstanding debt by 2010, per capita income by then would be about $42,700. This extra $300, phased in over the course of 10 years, would be barely noticeable. Yet that is the size of the expected payoff from eliminating the national debt--a move that would require foregoing trillions of dollars in potentially valuable spending programs or tax cuts.
A surplus to the surplus
Nevertheless, enthralled with the concept of easing the government's debt load, the Democratic and Republican leaderships in Congress, along with each party's presidential nominee, have all agreed on a rather disingenuous budget formula called the Social Security "lockbox."
Under this plan, all of the surpluses from the Social Security trust fund (and, in some versions, the Medicare trust fund) would be "preserved" in a "lockbox" where they could not be used for either tax cuts or additional spending. The real meaning of the lockbox is that it ensures that $2.4 trillion of the $4.6 trillion surpluses—52 percent—will be used to pay down government debt.
Washington's "lockbox" crusade has had paradoxical consequences for the media's budget coverage. Because $2.4 trillion of the projected surplus has been taken "off the table," the media have simply ignored it. As a result, the surplus has been magically reduced to $2.2 trillion, the size of the non-Social Security surplus. To make matters worse, some analysts have alleged that the size of the non-Social Security surpluses have been exaggerated by the CBO.
Thus, fiscal hawks are raising the awful specter that the tax cuts and new spending currently being proposed will consume the entire "surplus"--a warning that only makes sense by simply ignoring $2.4 trillion that have been safely locked away in Congress's debt-reduction safe. Thus, pundits are now suggesting that Washington--already committed to running $2.4 trillion in surpluses through 2010--legislate a surplus to the surplus.
A Washington Post news analysis by reporter Glen Kessler warned in its headline that the "Real Surplus May Be in Promises" (7/19/00): "The next time Al Gore or George W. Bush proposes paying for a new program or a big tax cut out of trillions of dollars in anticipated budget surpluses, consider the fine print," Kessler wrote. "Much of the surplus money has already been spent or will be spent on current programs, leaving relatively little for other initiatives." But Kessler then casually admits that this is true only if you don't count the enormous "surpluses generated by Social Security that both parties say are off limits."
Some news outlets try to portray the Social Security surplus as somehow not "real." Time (9/4/00) claimed that since the Social Security surplus is "off limits," Gore and Bush are basically "playing with funny money."
Likewise, a New York Times editorial (7/9/00) warned in its headline that the $4.6 trillion surplus is "Less Money Than Meets the Eye." The reason? "About $2.3 trillion of the $4.2 trillion comes from Social Security," plus another $400 billion from Medicare. Since "politicians are nearly unanimous that this money should be used to pay off the federal debt," the money should not be counted, the Times insisted--even though the editorial admits this "does not have any practical effect on the solvency of either program." Thus, the only reason this money is "unavailable" for Congress to spend is that Congress has chosen not to spend the money. Why, then, does the Times need to print such an urgent warning that "voters cannot become intoxicated by the numbers" coming out of Washington?
"There is an unbelievable amount of arrogance in a political system that gives policymakers the right to commit every bit of a projected surplus for the next 10 years," fumed Robert Reichauer in the L.A. Times (8/26/00)--forgetting that there's a $2.4 trillion portion of the surplus that politicians have gone out of their way to keep off limits. "Where's it written that politicians have to come up with plans that spend every last cent?" (Reischauer, a fiscal super-hawk, is without doubt one of the most sought-after pundits in Washington. Over the past five years, he has been cited in the New York Times an average of more than twice a month.)
The irony is that in one important sense, the media's budget alarmists are right: It is highly unlikely that the projected $4.6 trillion in surpluses will ever materialize in full. That's because the projections assume that the economy will continue to expand for another 10 years, with economic growth averaging more than 2.7 percent a year from now through 2010. In other words, the current economic expansion, which began in 1991 and is already the longest in U.S. history, would have to last a total of 19 years. By contrast, the average expansion since 1945 has lasted less than 5 years, or 57 months. The odds of a 19-year stretch without recession are remote, to say the least.
Yet it is precisely because of the likelihood of a downturn that the media's obsession with budget austerity is so misplaced. When pundits unanimously insist that politicians will be mortgaging our nation's future unless they can make absolutely certain that huge government surpluses will be guaranteed year after year through 2010, they are pushing political opinion dangerously close to the pre-Keynesian consensus that contributed to the economic disasters of the 1930s.
Almost totally forgotten in this year's surplus hysteria is that budget deficits are an essential tool for promoting recovery during an economic downturn. That is especially true today. Cambridge economist Wynne Godley--one of the world's most respected economic forecasters--has recently warned (London Review of Books, 7/6/00) that U.S. households and businesses are so highly indebted that without large budget deficits to pump income into the private sector, a financial panic, like a stock market crash or an outflow of capital overseas, would lead to a collapse in spending and a profound recession.
Yet politicians seem to be taking their advice from the pundits instead--as when Al Gore was asked by the Wall Street Journal (1/17/00) what he would do in the event of a recession:
Mr. Gore largely rules out deficit spending, saying the government "should stay with options that keep the budget balanced or in surplus." Instead, he proposes cutting spending if the economy slows, "just as a corporation has to cut expenses if revenues fall off, and that sometimes turns out for the long-term benefit of a company."
As pundits urgently advise politicians to adopt the economic policies of Herbert Hoover, they should be careful of what they wish for: They just might get it.