Debt and Taxes

The long-term insolvency of President George W. Bush's budget strategy is obscured by outrage -- otherwise justified -- over gratuitous and spiteful spending cuts. These cuts are real enough, but they are the battle the Bush administration would prefer to fight. To an important extent, the cuts are targeted at politically vulnerable populations. What the administration would prefer we ignore is the longer-term unsustainability of their policies, which also endanger our largest, most important, and popular entitlement programs.

The fundamental problem is that federal revenues now are below 17 percent of the gross domestic product; since 2003, that proportion has been at its lowest since the 1950s. At the same time, total outlays are over 20 percent of GDP. That gap of three percentage points is sufficient to cause federal debt to rise more rapidly than GDP itself, generating a rising debt burden.

The simple arithmetic: Debt as a share of GDP is now 38 percent. With the Congressional Budget Office's projection of 4.8 percent growth over the next 10 years, an acceptable sized deficit would be 1.8 percent of GDP (less, if you like a little margin of safety). Three percent or even two percent of GDP is too high, unless you're staring a recession in the face. For fiscal year 2005, the projected deficit is 3.5 percent of GDP.

How does the Bush budget respond to this gap? It cuts taxes and increases spending. The budget proposes $1.4 trillion in further tax cuts -- mostly to extend pre-existing cuts that were made temporary to obscure their long-run cost.

On the outlay side, the non-defense cuts noted above are more than offset by spending increases elsewhere in the budget.

On top of the lurch toward heightened insolvency, the budget fails to report well-known costs of explicit commitments made by the administration -- the four largest of which are borrowing to finance the private accounts in the president's Social Security scheme; the military missions in Iraq and Afghanistan; plans to build a missile defense system; and likely cuts in the alternative minimum tax (AMT). The latter is a provision of the individual income tax that currently hits about 3 percent of taxpayers but will vastly expand its reach in coming years and undoubtedly provoke sufficient political outrage to cause some kind of adjustment: yet another tax cut. We also have the news this week that the budget fails to include a major, upward adjustment of the costs of the president's unfunded Medicare prescription drug benefit, now at $1.4 trillion and counting.

When I painted this picture in a phone interview with a Brazilian journalist, she exclaimed in wonderment, “But that's a farce!” Exactly.

What does this mean for Social Security? The program currently takes in more cash than it needs for today's benefits. The excess is credited to the Trust Fund, which lends the cash to the federal government to spend on other functions. According to the trustees for Social Security, cash surplus will begin to dwindle in 2009. At that point, to replace the reduced proceeds of the Trust Fund surplus, the government must raise taxes, cut spending, or borrow more.

Cutting taxes and increasing spending in the face of rapidly rising federal debt is not the way a sane or serious person would prepare to make good on debts to the Trust Fund. But, as with its other policies, the administration proposes to worsen this situation by diverting payroll tax revenue to private accounts. As it happens, they propose to begin in 2009, exacerbating the drag on the rest of the budget.

Enemies of Social Security are trying to characterize the 2009 turn of events as a crisis in the program, even though their privatization remedy would bring it on sooner. To the contrary, the pattern of surpluses in question was engineered in 1983 by the Greenspan Commission, with the blessing of then-President Ronald Reagan. They did not increase payroll taxes for the purpose of generating “worthless IOUs.” Their goal was 75-year “actuarial balance.” Their calculations proved inadequate, but there is no reason why Social Security beneficiaries should pay for that mistake. It's remarkable how the marginal, crackpot idea of defaulting debts to the Trust Fund is edging towards the realm of political possibility. On February 9, no less a person than President George W. Bush said:

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system -- what goes in comes out. And so, starting in 2018, what's going in -- what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem.

This is true, since, the longer we wait, the more the problem worsens with ongoing Bush administration initiatives. Their budget problem is also their policy. They anticipate it getting worse for good reason. A crisis, notwithstanding his own role in provoking it, is the president's best argument for shrinking the size of government.

Max B. Sawicky is an economist at the Economic Policy Institute and the principal author of the weblog MaxSpeak, You Listen!.