It’s a nice problem to have.
So why is there so much name-calling over what to do with the $1.6 trillion surplus the federal government is now predicted to run over the next 10 years?
One reason is that Republicans and Democrats have very different views on what caused this blessed possibility. Or more precisely, what caused the steady economic growth and bullish financial markets that have combined to pour revenue into the U.S. Treasury far faster than the government spends it. Here we are, in just the second year of a supposedly painful five-year forced march to a balanced federal budget, and already the annual tally sheet is some $63 billion in the black. This hasn’t happened since 1969, the year of Woodstock and “Vietnamization.” (Remember Vietnamization?)
Republicans say it was they who, upon seizing Congress in 1994, passed the tax cuts and spending curbs that lit today’s economic fires. Democrats sneer that the present recovery was well underway by the time Newt Gingrich & Co. took over. They credit President Bill Clinton’s progressive influence on international trade (the NAFTA and GATT treaties) and his education and training programs.
More likely it was none of the above. What we are experiencing, say mainstream economists, is the fortuitous confluence of post-Cold War peace dividends (not the least of which has been rapid globalization of markets), the microchip’s impact on worker productivity and, of course, the inflation-fighting influence of Federal Reserve Board Chairman Alan Greenspan.
This question of how we got here has a direct bearing on where we go next.
Convinced their tax and spending cuts caused the budget surplus, Republicans are calling for more of same. For them there’s no such thing as too much of a good thing. They’ve dusted off the Laffer Curve, that loopy 1980s theory that lowering tax rates always stimulates so much economic activity that more taxes are collected.
There is a grain of truth to this, to be sure. Lowering rates can have a positive impact under certain circumstances, such as when a faltering economy needs a boost. And there’s little question that the recent lowering of the capital gains tax rate prompted many investors to sell long-held stocks, which helps explain the recent spike in tax receipts.
But on balance, George Bush had it about right when he once referred to the Laffer school as “voodoo economics.”
Then again, George Bush didn’t get re-elected. Which may be why House Speaker Newt Gingrich, who is eyeing the White House himself, now says the best thing to do with most of that excess $1.6 trillion is not to collect it in the first place. He’s calling for $1 trillion in tax cuts over the next 10 years. That would leave $600 billion, he says, to begin patching the Social Security system, which, everyone agrees, won’t be able to meet its obligations starting in about the year 2020.
President Clinton and Democrats say not so fast. Better to wait and see if those future-year budget surpluses materialize. And even if they do, better to use the money to head off the insolvency not just of Social Security, but of the Medicare health insurance fund, which is in even worse shape.
This seems the more prudent course.
Last week’s stock market correction may not signal the beginning of a bear market, but it’s another sign that the current economic expansion finally is running out of steam, and with it, those pumped-up forecasts from the Congressional Budget Office. Profits have begun flagging at bellwether companies like Boeing, 3M and Amoco. The Asian economic mess just keeps getting worse, and with it the U.S. trade deficit, as China, Japan and yesterday’s Tigers try to export their way out of trouble.
Cheap money has kept the U.S. housing market going strong, but elsewhere in the economy unsold inventories are beginning to stack up. Personal bankruptcies and farm insolvencies are on the increase. The big labor strike at General Motors is starting to have ripple effects.
But let’s assume the CBO forecasters put the right number of economic ups and downs into their predictions.
It still would be foolish to spend the budget surplus on tax cuts without first solving the Social Security and Medicare meltdowns that await us when the Baby Boomers hit retirement age.
As for Social Security, there is an emerging consensus that the best long-term fix would be to let people keep and invest part of the 12.4 percent payroll tax used to finance the program. That’s fine. But since it’s now operating on a pay-as-you-go basis, how will the government meet current obligations to retirees once workers begin diverting a quarter of the tax into private accounts?
This is the problem the pro-privatizers hardly ever talk about, because the answer, until now, has been that the government would have to sell more debt to cover the shortfall. One non-partisan study estimates the Treasury would need to borrow about $1.5 trillion during the transition.
Or would it?
The budget surplus, if it arrives on schedule, would get us there without having to steal from our children.
Unless, that is, we blow it now. . .on tax cuts.
