Getting Past Budget Blab
Our annual budget debates, begun anew with President Bush's proposed $2.77 trillion budget for 2007, have increasingly become exercises in political theater. They certainly aren't intended to bridge the gap between Americans' huge appetite for government services and their fierce distaste for taxes. Someone has to choose -- higher taxes, lower spending or some combination. But American politicians are loath to choose. So we get an outpouring of partisan blab that does little to clarify. Instead, clever politicians of both parties devise self-serving delusions to justify their inaction.
On the one hand we have the Bush Delusion: He says he's promoting lower taxes, but he's actually doing the opposite. Yes, he's cut taxes like mad. In 2005 federal taxes were 17.5 percent of national income (gross domestic product), lower than the 18.2 percent average from 1965 to 2000. Bush wants all his tax cuts made permanent. How can anyone claim his policies favor higher taxes?
Easy. In the long run, tax levels reflect spending levels. There are practical and economic limits on budget deficits. Because Bush has increased government spending, taxes will ultimately have to rise to cover the higher outlays -- not now, but perhaps in five to 10 years. Some of Bush's spending increases (defense, homeland security) were unavoidable. Others were not. By 2016 the new Medicare drug benefit could increase the program's costs by a fifth, the Congressional Budget Office estimates.
Bush has done little to offset these spending increases. Last year he recommended eliminating or substantially cutting 154 small programs for a savings of $15.8 billion; Congress acted on 89 of the proposals for a $6.5 billion savings, which is about three-tenths of 1 percent of total spending. Continual budget deficits further elevate future spending by raising interest payments on the growing federal debt. In 2003 interest costs were $153 billion; by 2010 Bush's budget envisions them at $307 billion. Still, Republicans cling to the illusion that Bush is permanently cutting taxes.
Now switch to the Democrats. They, too, have their delusion. It's the Bill Clinton Delusion: that the Democrats are now the party of "fiscal responsibility," because Clinton engineered the first budget surpluses (1998-2001) since 1969. The reality is that those surpluses stemmed more from good luck than from Clinton's policies. Of course that's not the way it looks. The surpluses were sizable, totaling $559 billion over those four years. In addition, federal spending as a share of GDP dropped from 22.1 percent in 1992 to 18.5 percent in 2001. How can anyone doubt Clinton's achievement?
Easy. He didn't plan or predict those surpluses. They resulted mostly from an unanticipated surge in taxes flowing from the economic boom -- something that Clinton didn't create. As for lower spending, that mainly stemmed from the ending of the Cold War -- something else Clinton didn't cause. From 1992 to 2001 defense outlays dropped from 4.8 percent of GDP to 3 percent. Once budget surpluses occurred, interest payments fell from 3 percent of GDP in 1996 to 2 percent in 2001. Elsewhere in the budget, there was little spending restraint.
Indeed, Clinton didn't originally promise to balance the budget. In his early years, he merely pledged "deficit reduction" -- Bush's present policy. Clinton endorsed a balanced budget only in June 1995, after Republicans, then committed to ending deficits, captured Congress. By 1997 Clinton and congressional Republicans agreed on a balanced budget, with a target of 2002.
The political virtue of a balanced budget is that it compels choices. But choices are precisely what President Bush and congressional Republicans and Democrats dislike. They especially dislike the choices posed by an aging society whose spending commitments threaten to overwhelm the budget. In 2005 Social Security, Medicare and Medicaid (the three major programs serving the elderly) constituted 40 percent of federal spending. By 2010 the Bush projections have that at 46 percent -- even before the first baby boomers reach 65.
It's easier to cling to those self-serving delusions. The Democrats rant about deficits and tax cuts for the super-rich. Actually, in 2005 the tax cuts equaled about 60 percent of the deficit, and about 60 percent of the tax cuts went to those with average incomes of less than $103,000. The Republicans proclaim that the economy depends on the tax cuts. A few years ago, that might have been true. But at this stage of the business cycle (unemployment: 4.7 percent), big deficits risk aggravating inflation. If Bush can't cut spending, he should be raising taxes.
Could we escape this impasse? Maybe. In his State of the Union address, the president mentioned a new commission on entitlement spending -- aka the costs of the retiring baby boomers. This could be a throwaway line. But it could also suggest that the president actually wants to do something and realizes that his early attempts have failed (Social Security personal accounts) or made the problem worse (Medicare Part D).
The needed changes are clear: gradual increases in eligibility ages, benefit cuts for richer retirees and some tax increases. Living longer, Americans should work longer. The difficulty would be convincing the country that these unpopular changes are necessary and just. For that, the commission needs heavyweight bipartisan chairmen. The obvious choices would be ex-presidents Clinton and George H.W. Bush. A plan with their approval -- and George W.'s -- would carry much moral authority. Perhaps three presidents, each trying to improve his place in history, could succeed where none has alone.