Q&A With George Hager
Here is a transcript of today's session:
Bob Levey: On Aug. 3, you reported that the U.S. Treasury has more money than it needs to run the country. Talk about stories I never expected to read.... Why did this happen? Will it ever happen again?
George Hager: Amazing, isn't it? But as long as the federal government continues to run surpluses -- which now looks good for the nxt 5-10 years, assuming no catastrophic economic downturn -- the government will be borrowing steadily less each year as it rolls over less and less of its outstanding debt.
George Hager: 1) Best: Though this gives a lot of people heartburn, most economists I talk to praise the 1990 Bush budget deal and the 1993 Clinton budget deal -- they raised taxes and cut spending and put the budget in position to generate surpluses (yes, with the tailwind from an extraordinary economy). 2) Did having a Princeton degree help? Maybe. I got a good education. But I still had to apply to 132 newspapers (no kidding) before I landed my first job.
Bob Levey: On Friday, you reported that Congress will probably skulk out of town without doing any major surgery on Social Security or Medicare. Hey, who's surprised? But tell me this: Will any progress ever be made on these two fronts before the 2000 elections? If so, what kind?
George Hager: Doubtful that we'll get major action on Social Security and Medicare next year, at least according to conventional wisdom, which says that the best opportunity was this year, before election-year politics overook the process and sent everyone to their opposing trenches. That seems to have happened earlier than expected, which is why the process has ground to a halt his year.
Warrenton, VA: If the federal governmnet were run like a business or even a sensible household, we would make paying down the debt the top priorty. Republicans want tax cuts and frankly I don't trust Democrats to not simply spend it! Why do you think there is not more support for paying off debt?
George Hager: Actually, paying down the debt -- which is what happens when the Social Security surplus is "saved" for future retirees -- has become the reigning imperative of budget politics this year. Both parties have been scrambling to "lock away" the excess Social Security payroll taxes that are earmarked for the Baby Boom retireees. They won't lock them all up -- both parties want to spend some of that money later this year. But the vast bulk will go to debt reduction, assuming gridlock on major tax cuts, which is a good bet.
Bob Levey: The way I figure it, presidential politics is a great, big battle for the middle 10 percent. When that segment went to Reagan, he won. When it went to Clinton, he won. Is this the real reason why Republicans are still pushing a middle-class tax cut? Is it a great big fishing expedition for middle-of-the-road votes?
George Hager: The most compelling answers I get when I ask why Republicans are pushing large tax cuts despite polls that show that most Americans don't care is not that they're after middle-of-the-road voters, but that they want to energize their own base and deprive the government of money it would otherwise spend. House Budget Committee Chairman John Kasich (R-Ohio) memorably said: "If you starve the beast, the beast has to go on a diet." A smart Heritage Foundation analyst also said: "God put Republicans on earth to cut taxes."
Bob Levey: The Federal Reserve is expected to announce a one-quarter percent interest rate increase later today. Will this affect any real flesh-and-blood people? Will it change the political temperature on Capitol Hill?
George Hager: Economists tell me that we won't feel much pain from the quarter-point rate hike, chiefly since the markets have anticipated it for weeks and long ago built it in. Interest rate increases have already pretty much killed the mortgage refinancing boom, so this won't affect that much. And the stock market is so sure that this is the last increase for awhile that it went on a tear yesterday.
Arlington, VA: Why do you and other economic reporters continue to report that a surplus even exists? As an accounting student -and former journalist-, I've read many articles in professional journals which state that if GAAP were applied to the federal government, no "surplus" would exist.
George Hager: Well, you raise an interesting point. Let's just say that federal budget accounting rules have little to do with generally accepted accounting procedures. No matter how you measure it, though, the budget situation has improved remarkably over the last two or three years -- thanks, again, to gritty political work in 1990 and 1993, the effects of the economic boom and the soaring stock market.
McLean Va: On one of the Sunday talk shows, several years ago, I remember that John Kasich had said that he would never see a government surplus in his lifetime. Has he ever admitted the errors of his ways? Is that why he dropped out of the President race?
George Hager: John Kasich is one of the most engaging guys in the budget world on Capitol Hill, but like most good politicians, he's doggedly on message. I don't think I've ever gotten him to admit he's been wrong. When the 1993 Clinton plan produced smaller deficits, Kasich and others still complained, prompting Rep. Barney Frank to say it reminded him of a lifeguard who braves shark-filled waters to save a drowning boy and then falls exhausted on the beach, only to hear the boy's father ask, "Where's his hat?"
Vienna Va: Bob Dole criticized -in 96- Bill Clinton for not growing the economy fast enough. But if the economy grows too fast, then Alan Greenspan will slow down the growth. Should politicians not promise to improve the economy?
George Hager: This is one of the complaints about current tax-cut proposals. Some economists worry that big tax cuts will only spur consumers to spend more, reheating an economy that the Federal Reserve wants to slow and provoking the Fed to raise rates. Republicans counter that their tax cuts phase in so slowly that overheating wouldn't be a problem. Rather than drive the economy higher, most politicians these days seem to be claiming they can preserve the current boom.
Bob Levey: George Hager told us in May that Americans are saving as little as ever--an average of 0.7 percent of their incomes. So why doesn't Congress tinker with the tax code to encourage more saving?
George Hager: This is the holy grail of tax-writing -- figuring out ways to fiddle with the code to get people to save more money, which everyone agrees is a good thing. It's not that easy. A big criticism of tax-favored IRAs was that they simply allowed people to move investments from accounts with no tax advantages to accounts with big tax braks, producing little additional new savings. GOP tax-cutters say broad cuts in income tax rates will spur saving, but critics argue that much of the proceeds will go to consumption.
College Park, MD:
George Hager: Good question. CBO, like all other forecasters, has been way off the mark, even just months from a final surplus or deficit number, let alone 10 years away. Most economists say 10-year budget projections are science fiction. So two answers: 1) You've got to use some benchmark, and CBO's has been fairly cautious over the last several years. 2) Tax-cut critics, chiefly the White House and congressional Democrats, say the fragility of the surplus is a good reason not to devote it to tax cuts, which are harder to undo than spending.
Washington DC: With a major election every 4 years -and campaigning starting earlier and earlier-, soon it seems that every year will be an election year and nothing in congress will ever get done. Why is it that in the year before an election, no one in congress does anything but fluff? Well actually, we all know why - but why do we stand for it? Could you imagine if the private sector decided it didn't want to make tough decisions for one out of every 4 years?
George Hager: Interestingly, one of the most productive years in recent memory was an election year (though admittedly not a presidential election year) In 1996, three months before the elections, the new GOP majority and President Clinton both decided they needed accomplishments more than stalemate and came to terms on welfare reform, a minimum wage hike, a health care portability bill and other measures. If nothing much happens on Capitol Hill this fall, Congress' GOP majority may feel they need to cut some deals with Clinton next year or go to voters with little to show.
Alexandria, VA: I'm 27, and I don't expect to see any Social Security benefits when I retire. How likely is this? It kills me to see several hundred dollars a month go down a black whole like that...
George Hager: I know the polls agree with you -- the ones that say 20-somethings think it's more likely they'll see a UFO than a Social Security check -- but I have to disagree. It's unclear how this will get worked out, but the political backlash against a Congress or a president that allowed Social Security to wither away would be so devastating that I can't imagine it happening. However, I would bet against a fix anytime soon. The last time Congress and the president acted to "save" Social Security was in 1983 -- literally just months before the trust fund could no longer pay full benefits.
Bob Levey: Any hope that the marriage penalty will go away for good?
George Hager: Both parties would like to do something, but it's expensive to fix, and it probably won't happen this year, when chances of a compromise on major tax legislation seem slimmer by th day.
Newark, Delaware: I am quite excited about the potential for nanotechnology. When mastered, it'll allow us to manufacture at the molecular level, and is quite likely to completely change everything, including the need for money. I know it sounds radical, but it is going to happen. Have you done any future-thinking regarding how much or little our economy will resemble itself 10, 20 or 50 years down the road?
George Hager: I agree, nanotechnology is fascinating. But as a guy who once co-wrote a book predicting that Congress and the president would never balance the budget, I have become very wary of predicting the future. Few of us saw the current boom coming, and as recently as three years ago, almost no one thought we'd be seeing budget numbers like today's. Reminds me of the old adage: If you must predict, predict frequently.
Bob Levey: I hate to annoy the evil eye with this question, but..... How in the world are we avoiding an epidemic of inflation? In my college economics classes, we learned that low unemployment and general prosperity produces inflation 100 times out of 100. Has something changed, or is it just too long since I sat in a college econ class?
George Hager: Luck and fundamental changes in the way the world works. Computers have improved productivity, allowing companies to produce things more efficiently and cheaply. Global competition has kept prices down, as have self-reinforcing consumer expectations that prices simply won't rise. For a long time, weakness in Asia and Europe helped keep prices down around the world, though that is changing as those regions rebound.
Thanks to George Hager for a very meaty session. Next Tuesday, at the same time, our guest will be Alan Spoon, President of The Washington Post Company. He is in the forefront of The Post's efforts to become cyber-ubiquitous and cyber-profitable. Don't forget "Levey Live: Speaking Freely," our weekly anything-goes show. It appears Fridays from 1 to 2 p.m. Eastern time.