This week, the Clinton administration will fall into a political trap that it set for itself by going along with overly conservative assumptions about the budget and the economy. The Congressional Budget Office will shortly release revised budget projections that will show a much larger surplus than previously expected.
The first broad reason for the larger surplus is the new economy. Economists had assumed that the economy was only capable of sustained growth of at most 2.5 percent per year.
But recent growth has been around 4 percent, and many economists now believe the economy can grow at 3 percent or better over the long term, as it did during the postwar boom. The result: a bigger budget surplus.
Why is this good economic news bad political news for the Clinton administration? Because the administration has taken the position that a Republican-sponsored tax cut is ill-advised -- that the surplus should be reserved mainly for Social Security and Medicare.
But if the 15-year surplus is a trillion dollars more than previously projected, then it's open season for tax cuts. This past week, as the revised projections leaked out, Republicans were popping the champagne and anxious Democrats were huddling in strategy meetings.
Yesterday, the administration's Office of Management and Budget jumped the gun with its own surplus projections and somber warnings not to rely on rosy estimates. But this dour strategy plays right into Republican hands. The president, who has better political instincts than his budget advisers, quickly unveiled a new $156 billion "children's and education trust fund" initiative, as well as an additional $543 billion for Social Security.
If anything, even the CBO estimates are too gloomy. Despite accumulating evidence that the new economy really is capable of higher sustained growth, the CBO projections are based on the same sluggish real growth rates of 2 to 2.5 percent.
In an obscure table, previously released CBO documents concede that with higher growth assumptions, the annual surplus will be astronomical -- $330 billion in the year 2004, $460 billion in 2006, and an astounding $640 billion in 2009.
Besides higher-than-expected economic growth, there is a second reason for these whopping surpluses. In the 1997 Balanced Budget Act, both parties agreed to stringent budget "caps" to ratchet down public spending.
Over the next decade, the cuts mean that all of the government's "discretionary" spending (everything but social insurance and interest on the debt) will be $726 billion lower than 1999 spending levels. According to the Center on Budget and Policy Priorities, the proposed Republican budget would extract even deeper spending cuts, totaling about 28 percent by 2009.
Economic times have changed. Budget surplus is no longer the premier public issue. Why should Democrats, of all people, keep playing this outdated budget game? If Clinton and his New Democrat pals won't fight to lift the caps, some real Democrats should step up to the plate.
There are pressing public needs that we can now afford to meet, thanks to better economic times, and they are not limited to Social Security. These include, for starters, full prescription drug coverage for Medicare, smaller public school classes, budget relief for nursing homes and hospitals, more comprehensive child care outlays, affordable housing programs, and a restoration of public infrastructure investment.
Outside the Washington echo chamber, where both parties seem to be stuck in the late 1980s, these public outlays are highly popular. It's only green-eyeshade types who think that endless surpluses are the sole badge of government virtue. Polls show that defensible public outlays are far more popular than tax cuts, most of which would go to the affluent anyway.
The fact is that public investment is now at its lowest level relative to GDP since before the Vietnam War. Economist Dean Baker, in a study for the Economic Policy Institute using OMB and General Accounting Office data, calculates that public investment is already down to about 1.4 percent of GDP, from an average of 2.4 percent two decades ago. It is projected to drop to one percent a decade from now.
The new economy needs private entrepreneurship, but it also depends on public outlay to educate and train the workers on which the new economy depends and to give taxpayers decent health care and security in old age. Instead of adopting the Scrooge posture and letting the Republicans champion good times and tax cuts, Democrats ought to remember why they are the party of the mixed economy. That's not just good economics; it's smarter politics.
Robert Kuttner is co-editor of the American Prospect.