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The Budget: The Brookings Institution

William Gale
The Brookings Institution
Sunday, February 8, 2004; 2:00 PM

President Bush delivered a proposed $2.57 trillion budget to Congress on Monday. The budget includes significant cuts in some domestic programs as well as an increase in military spending and international development aid.

William Gale, senior fellow of economic studies at the Brookings Institution, discussed President Bush's propsed 2006 budget.


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The transcript follows.

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William Gale: Thanks for joining us this afternoon. President Bush's budget raises a lot of interesting issues. Rather than making any long opening statement, I'll turn directly to questions.

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Rancho Palos Verdes, Calif.: Mr. Gale,

Is there any way to compare what this budget looks like as opposed to how the administration was projecting this year's budget would appear when they entered office in 2000?

Also, do you have any say in who is chosen to be research assistants in the economics studies program? If so, I am about to submit my application and would be eternally grateful if you put in a good word!

Thanks!

William Gale: Thanks for your question. I won't get into employment issues here, just the budget!

In 2000, everyone projected very large surpluses as of 2005. Since then, the surplus has fallen/deficit has increased by about 5.4 percent of GDP (that is, the 2005 deficit compared to the 2000 surplus). Most of the decline is due to lower revenues, some due to higher spending. But in any case, the deficit is far worse currently than was expected, even with the President's policies, in 2001.

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Georgia: What is the actual prospect that the $4.7 trillion Community Development Block Grant program will be eliminated and replaced with a Dept. of Commerce program? I understand this program is loved by most in congress as every state receives this money.

William Gale: The budget proposes to shift authority for the program to Commerce and to reduce overall funding for the program by about 1/3. I would be mildly surprised if the former happens and very surprised if the latter happens.

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Reston, Va.: I am not sure what all of the uproar is about. The budget reflects what the Bush Cheney campaign said they would do during the election. The American public gave them a majority of the vote and returned solid majorities to the House and Senate, presumably to do this--so why is anyone surprised? After reviewing the transfers of wealth that take place because of the programs that are slated to be cut or eliminated, people in the North, Midwest and West should be happy--they don't get any of this money anyway.

William Gale: If you are right, then Congressional Republicans should be joyous at this budget, but they are not. To put it differently, it is not just those who opposed the President who find problems with the budget. For example, did the President campaign on offering dishonest budget figures? His budget leaves out the cost of fixing the AMT, it leaves out the costs of the war in Iraq, even though the Army projects we will have 120,000 troops over there, it leaves out the monumental costs of his SS program, it suggests a freeze on spending that would reduce real per-person spending on discretionary programs by about 20 percent over the next decade. Remember in 2000 Bush said it was wrong to balance the budget on the backs of the poor. That is exactly what he is trying to do right now, though, except he is coming nowhere close to balancing the budget, just hurting low-income families. So, you raise an interesting point--if the President is doing what he said he would and people object to it, what does that tell you about the election?

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Galveston, Texas: Bush's budget excludes spending for the Iraq War, financing for Social Security reform, and other hefty price tags. If Bush's cuts are passed, by 2009 the deficit should be halved, but only if these price tags are excluded from the figure. Is Bush still pushing for extending his tax cuts, and won't taxes need to be raised at some time in the future to finance all this government spending? Is there an alternative to raising taxes? Even if Bush's tax cuts were rolled back, wouldn't taxes need to be raised more than that to finance our national debt? Will the promises of the 2008 Presidential race be constrained by our national debt?

William Gale: Lots of good questions. he is most definitely pushing to extend the tax cuts. The two budget "omissions" you mention are just the tip of the iceberg. There are other items that are left out, like fixing the AMT, There are revenue items that are included that seem very optimistic, like those relating to pension premia and revenues from drilling in Alaska. There are a wide variety of spending cuts that are not specified and hence unlikely to occur in future years. A telltale sign is that the deficit for this year is worse than was predicted last year. This has been a common pattern the last several years--improvement is always just around the corner. We just never seem to be able to get there.

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Alexandria, Va.: How likely is it the Congress will do even a quarter of the things the President is asking for?

William Gale: I think a quarter might be about right. It seems very unlikely to me that the spending cuts proposed will be enacted or that most of the tax cuts proposed will be enacted.

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Virginia: Anything surprise you in the budget?

William Gale: At this stage, little surprises me with this Administration, but let me take a stab at a few things:

--I was surprised by a 12 percent cut in the budget for Center for Disease Prevention and Control. This is a group that among other things works on responses to bio-terrorism. So this seems like a very odd cut to me.

--The budget proposes that the tax cuts should be able to be made permanent (a revenue loss of 2 percent of GDP going forward, 3 times the long-term cost of fixing Social Security) WITHOUT HAVING TO REPORT A COST IN THE BUDGET. That is truly outrageous and completely irresponsible (But alas, not surprising, since they proposed it last year.)


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California: Thank you for taking our questions today. I wonder if you could give some perspective on whether war expenses have historically been included in deficit figures. I can understand why these numbers aren't included in the budget. However, I'm not quite sure why the 300 billion + (is that correct?) from Iraq/Afghanistan/war on terrorism is not included in the deficit figures today. It just doesn't make sense.

Again, thank you for your time.

William Gale: Yes, war expenses are traditionally included in the budget. Especially when, as now, the Army is working on the presumption that we will have over 100,000 trooops in Iraq for the next year.

The Administration is being completely two-faced on this issue. On the one hand, they want to include costs for fixing Social Security over an infinite horizon. On the other hand, they won't put in a single penny of costs for war in Iraq for the next year. I would guess that the latter expenditure is alot more certain than social security expenses 300 years from now.

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Winthrop, Mass.: Why don't Reporters bring up the real budget deficit more often? The real deficit is the amount of spending and debt payments the general revenues (taxes) fail to cover. They always let the White House and the Congress get away with pretending that the trust fund payments Soc Sec, Medicare, Highway etc are part of general revenue. In fact the budget deficit is about twice as large as often stated, and could top 1 trillion dollars this year. Isn't that important enough for it to be one of, if not the majority of questions asked each federal offical in every interview. Now if we include the intra-structure repairs not being done, that will have to be done, you can add several hundred more Billion to the yearly total. The USA is going bankrupt, and its not being covered by the press.

William Gale: I and many others have been pushing for better accounting and reporting of the government's fiscal status for years. but accounting is boring, as they say. Politicians tend to want to focus on a single number, and right now that number is the unified deficit. The problem with moving to a different number is that everyone has their own idea of what is the best number to look at (mine would remove the trust funds for SS, Medicare, and government employee pensions). Other people, for whom I have great respect, think that would be a dumb thing to do. So, the compromise that has emerged is to continue reporting the basic unified deficit and try to get people to also think about what the "Real" deficit is. Not perfect, but better than either ignoring the real deficit or making it so complicated that no one can follow.

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Washington, D.C.: Since the President and the GOP Congress appear to be in a funding reduction mode, what's the chance of them getting rid of the current boondogle of a pension plan they have.

William Gale: Probably zero. Although the White House is taking a budget cut this year under the President's budget.

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Anonymous: What parts of Bush's budget do you think stand a chance of actually making out of the Congress alive?

William Gale: I think of the budget more as a "first offer" for negotiation more than a blueprint for action. I imagine he will get some of the spending cuts, but nowhere near all. (He is not up for re-election again, but his congressional allies will be soon.) I imagine they will find some new tax cut to pass. I would be surprised if they made the tax cuts permanent, though. He will certainly get the defense and homeland security and (I think) the foreign aid proposals.

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Alexandria, Va.: Thank you for taking questions. How much of a problem is the current debt? When is debt "okay"?

William Gale: when is debt ok is a good question: think about it in the context of the family. A mortgage to buy a house is a good debt if the mortgage payments are an affordable share of the family's income and the house is not a dog. A credit-card financed vacation for an unemployed family is bad debt. Basically, in the former case the family has the means to repay the debt and the debt is financing productive investment. In the latter case, the family is just living beyond its means and is going to have to pay the price in the future. Same with the country: right now, we are borrowing like mad (not JUST the federal government, the whole country) from overseas. This borrowing is basically financing consumption and it is growing at an unsustainable rate. So something has to give. Not only that--these are the good years! Pretty soon the boomers start retiring and then we face real problems. So we should be accumulating a federal and national nest-egg right now, not borrowing like there is no tomorrow.

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Washington, D.C.: Have Democrats come up with a comprehensive budget proposal for this year that would balance the budget (including costs of the war, etc.)? If so, where would I find that document?

William Gale: A fair question. Apparently, neither party has come up with anything close to that. But just as important as balancing the budget is the structure of the policies being proposed. The President is proposing massive tax cuts for the highest income households, in the face of existing deficits, and spending cuts that will mainly affect low and moderate income families. I don't see a justification for that combination of policies, even holding the level of the deficit constant.

You may also be interested to know that last year, the Brookings Institution (my employer) published a volume edited by Isabel Sawhill and Alice Rivlin that DID offer three ways of getting back to a balanced budget by 2014, with different combination of spending cuts and tax increases. That is where I would suggest you look for an answer. A new volume will be coming out this year but will
focus on long-term fiscal issues.

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Washington, D.C.: To be honest, very few of us commoners truly understand the nature of the budgeting process (the old standby about having dueling economists comes to mind). Absent a month or two to analyze the budget, who should we believe regarding the value and workability of the budget? In other words, doesn't the budget issue, like so many other political issues, come down to a matter of trust? That is, do you trust the President or do you trust his opponents?

William Gale: Interesting question. I can understand why it would nice to be comfortable with trusting the President or his opponents, but I believe the appropriate response is that vigilance is the price of liberty. In fact, altough I won't go into detail here, the Administration has been enormously misleading over the last few years--the word Orwellian comes to mind--in explaining its policies. If that's fine with you, then there's no issue. If it isn't, then there is a problem. Somehow, the public "got it" on this issue when the issue became the justification for the war with Iraq, where it was obvious that the justification changed frequently. The same thing has been happening on tax and fiscal issues now, since 2001. So, trust but verify, might also be an appropriate thought here!!

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Pittsburgh, Pa.: What will be the consequences of continued deficits and of course a growing national debt? Why aren't the administration and congress doing something about it?

William Gale: Continued deficits, almost all economists agree (including those in the Bush Administration, will eat away at the capital stock of the country. When the government borrows, it takes funds away from the private sector, and private investment. Some of that is offset by increased private saving but not much. Some of the rest is offset by capital inflows, but even so we have to pay that back. A good rule of thumb, offered by the Bush Administration (Economic Report of the President, 2003) is that a $1 increase in public debt reduces the capital stock by about 60 cents. Applied to projected deficits over the next decade, it means that the deficits created by Administration policies will reduce national income by well over $1,000 per family.

These are real costs and they will persist or get worse over time. They are what people have in mind when they talk about deficits as "mortgaging our future."

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Arlington, Va.: I should know this, but I wanted to know if it is a constitutionally assigned function of the President to submit a budget to Congress -- since Congress then basically does whatever it wants -- or is this a political custom that has arisen?

William Gale: I believe it is a constitutional requirement but I also think you are right that Congress can just choose to ignore it and put together its own budget.

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Heartland: Mr Gale: I was delighted to see you'd be here and I try to read all the fine work you an Peter Orszag produce.

Presently, all Social Security taxes are funding current government operations, although not fully. As I see it privatization will essentially divert 4 percent of nearly all earned income into the equities market. That is a lot of new money in the market, and it is not entering or as a result of independent analysis of the investment values of equities. A lot of people think equities are pretty fully priced already. That said, it seems to me that forcing new money into the market could ultimately inflate equity values far beyond their intrinsic economic worth. Do you think that would be the case, and could it go on forever or would it be destined to fail like any other Ponzi scheme?

William Gale: Thanks for your comment.

Privatization raises many issues. I would not expect a huge increase in stock values, but I suppose it is possible. I think it is more likely that the increase in government debt to finance those accounts would push interest rates up, which could serve to depress stock values and offset some or all of the demand shift you mentioned. The main thing is that individual accounts, as proposed by the President, don't do anything to help fix the long-term financial shortfall in SS.




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Saratoga, Calif.: Based on income/wealth quintiles, which elements of the proposed budget would make the biggest distributive changes from existing policies?

Do any of such proposed changes favor the "working poor" or some subgroup?

Of the budget proposal elements that hurt the worst off relative to existing policies which appear to have the greatest chances of passage?

Take your pick. Thanks.

William Gale: Good questions, all. The tax cuts being made permanent would have a significant effect on the distribution of after-tax income,making it far less equal. It would also put pressure on the budget and thus might reduce spending, and as we can see from this year's budget that reduction in spending is likely to hit low and middle income households. The working poor will generally lose out under the President's proposals.

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Pittsburgh, Pa.: Thanks for your reply, but I also asked what will happen. i.e., is there a serous recession in the distant or not so distant future due to the effects the deficit will have? What isn't something being done about it?

William Gale: Sorry, missed that. The effects of deficits can be gradual or abrupt. In the gradual case, the capital stock grows at a slower rate than it otherwise would, so wages grow more slowly, living standards grow more slowly, etc.

The potential for an abrupt change occurs if investors get spooked about the US's ability to repay foreign debt or if they decide they have enough dollars in their portfolio. In that case, a financial crisis or shock is possible.

No one, of course, knows how "it will end" but neither ending is very good. That is, even if we can avoid a financial crisis, the effects of on-going deficits are not good. But I won't predict how it all ends!

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Washington, D.C.: Cato (a conservative think tank) often called President Clinton's budgets full of gimmicks and argued that Congress should ignore them and act on its own (as they did, on occasion). Now Brookings calls President Bush's budget hogwash. Why should we believe either a left or right-leaning organization on budgetary matters?

William Gale: I'd encourage you to look at the budget itself and examine what is being said about it, with the proviso that governments can hide things quite well if they want to.

you certainly don't have to believe anyone, but I don't think it makes sense to reject something just because of who said it, either.

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William Gale: Thanks for lots of good questions. I hope the discussion of the Administration's policies get the attention it deserves as we move forward.



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