The word "liberalism" has become so associated with "big spending" that this year's budget battles may be truly surprising: Liberals and Democrats, in Congress and out, are trying to figure out how cuts in domestic programs could serve liberal ends.

At the heart of the new approach is the idea that some forms of federal spending simply subsidize the wealthy and make the distribution of income less equal than it would be if the government did nothing. And liberals are increasingly distinguishing between forms of spending that simply subsidize consumption and those that increase long-term economic growth.

Robert Greenstein, director of the liberal Center for Budget and Policy Priorities, argues that since the battle over President Bush's new budget will necessarily involve a lot of talk about what should be cut, liberals ought to see how they can turn domestic budget cuts to their advantage.

None of this means that liberals have given up on energetic government and many Democrats view "liberal budget cuts" as a mere holding action pending the availability of more money.

"For liberals to pretend that they have a secret package of cuts that will solve the problem is a hoax," said Rep. George Miller (D-Calif.). "You're playing for chump change. All of it is completely and totally inadequate."

Moreover, many Democrats are wary of Budget Director Richard G. Darman's decision to take a cue from the Democrats' preachings on fairness by curtailing a few subsidies for the wealthy in Bush's new budget.

Democrats argue that Darman is attempting to disguise the real thrust of Bush's priorities.

"They deserve credit for a progressive leitmotif," said Robert J. Shapiro, vice president of the Progressive Policy Institute, a think tank associated with centrist Democrats. "But the main theme is the same old story -- that is, squeezing average-income Americans in order to increase subsidies to the wealthy, notably through cuts in the capital gains tax."

Still, the Democrats' story line on budgetary matters has gone through a slow but substantial rewrite.

The new Democratic thinking was on display this week in a Progressive Policy Institute paper by Shapiro called "Paying for Progress," which was released Monday.

"In contrast to the stimulative effects of the modest deficits of the 1950s and 1960s," Shapiro wrote, "large, permanent deficits do not propel the kind of vigorous economic growth that helps moderate income families and middle-class Americans."

That is true, he said, because the huge cost of servicing the debt shifts "scarce resources from productive investments to interest payments," because the deficit has led "For liberals to pretend that they have a secret package of cuts that will solve the problem is a hoax. You're playing for chump change.


to new taxes on the middle class, and because most of the new debt was run up to subsidize consumption or to increase military spending -- and not for "genuine, economic capital investments."

It makes sense, Shapiro argued, to borrow money to pay for things that have long-term value -- for roads, bridges, schools, medical research, environmental facilities.

So Shapiro suggested that the budget be divided into two: "A Public Consumption Account" budget, on which spending growth would be limited to the growth rate of annual per capita income, and an "Investment Account," which could be supported by taxes and borrowing.

Shapiro contends liberals have to be willing to confront the personnel and administrative costs of government and calls for a 3 percent reduction in them and a further 3 percent cut two years from now.

He also calls for limiting entitlement programs and tax benefits for wealthy Americans.

For example, he would have wealthy retirees pay tax on all their Social Security benefits and the insurance value of their Medicare benefits, and he would cap, at $300,000, the use of home mortgages for income tax deductions.

Greenstein comes at the problem slightly differently, but ends up with Shapiro on a number of essential points.

"For the next three years, there is a fixed amount of money for domestic, 'non-entitlement' programs," he said, referring to the provisions of last year's budget agreement. "You can't increase it by cutting defense and you can't increase it by raising taxes."

As a result, he said, liberals will have to make choices.

Greenstein said he believes that if the choice is between Head Start and child immunization programs on the one side and Amtrak, farm and business subsidies on the other, liberals ought to move against the subsidies.

They also should be prepared to cut some social benefits for the wealthy to increase benefits for the poor.

Echoing language once used by President Ronald Reagan's budget director, David A. Stockman, who tried unsuccessfully in the early 1980s to promote a debate on subsidies to the wealthy, Greenstein said liberals need to question "programs that serve narrow constituencies and have weaker claims."

Some of the new Democratic talk can be traced to an unusual source: Darman.

Since 1989, Darman has been arguing for a new budgetary emphasis on long-term investments and for entitlement cuts.

For months, Darman has been telling conservatives that the spending limits in last year's budget agreement would force even liberals to think about budget cuts.

The fact that some of them are suggests that he had a point.

But Darman will find few Democratic allies for the budget he actually proposed.

Shapiro, for example, said the budget should be stripped of tax benefits for the wealthy and that the Democrats should up the ante on Darman in proposing more cuts in subsidies for the wealthy.

Shapiro would spend some of the savings for new programs -- notably on tax relief for middle-income families with young children.

Moreover, while Democrats are willing to cut subsidies for the rich, they want the broad programs like Social Security and Medicare to maintain what Rep. Thomas J. Downey (D-N.Y.) calls their "universality," meaning that they should serve both the middle class and the poor.

Many Democrats fear that if all government programs were limited to the poor, support for them would crumble -- hurting the middle class and the poor alike.

But Downey said that this fear will not stop Democrats from looking carefully at how to curtail government benefits for the very well-to-do. "We're going to have to consider this," he said, "if for no other reason than to respond to the gauntlet that Darman has thrown down."