The Wall Street Journal
The Congressional Budget Office, in a report released yesterday, says the government will be forced to take $9 billion from the so-called Social Security surplus in fiscal year 2001 to make ends meet. The news undoubtedly will elicit a new round of fancy-dance explanations from the Bush administration for how it plans to avoid dipping into the Social Security surplus next year, and will add more fuel to the Democrats' charge that the president's tax cut has put Social Security in jeopardy. Expect the decible level to grow when Congress returns to Washington and both sides go to battle over the 2002 budget.
No one ever said political rhetoric over economic policy would edify the public, but we have reached a new low. The plain fact is that the economy has slowed faster than anyone predicted, and so tax receipts are shrinking faster than anyone projected. This is the mirror image of what happened when the economy grew faster than anyone imagined, causing receipts to grow faster than anyone projected. Budget projections are based on historic models of how the economy swings between boom to bust, so no one should be surprised if projections are revised and revised again.
The more fundamental oddity is that both parties have grasped so tightly the orthodoxy of fiscal austerity. Republicans who a few months ago proudly proffered the supply-side mantra that the Bush tax cut would spur economic growth over the long term are suddenly squirming over the possibility that their budgets may go into the red in the short term. Democrats who used to celebrate Keynesian deficits as means for stimulating the economy during downturns and simultaneously accomplishing liberal objectives for enhanced public spending are suddenly sounding pious demands that the budget be balanced every year and the Social Security surplus remain untouched.
Welcome to the magic world of fiscal constraint as an end in itself. Both parties have bought into the budget numbers racket -- a zero-sum game that confers enormous power on green-eyeshade actuaries in the Congressional Budget Office, the Office of Management and Budget, the Social Security Administration and even the International Monetary Fund. Their assumptions about productivity growth, population growth, levels and rates of immigration (both legal and illegal), and mortality, whirl and click and then spit out budgets that are either balanced (win!) or unbalanced (lose!) over arbitrary periods of time.
Meanwhile, the American public -- though confused and bored -- nonetheless has come to accept the premises that the Social Security surplus must not be "raided," that a balance in the remainder of the budget is always better than an imbalance, that revenues should always exceed expenses, and that debt is bad. Politicians, either ignorant or fearful of the truth, play along. Much of the financial press accepts the gospel as given. And thus the gap between public understanding and economic reality widens.
Back to basics for a moment. The purpose of fiscal policy is to accomplish two objectives. The first is to complement monetary policy in making full use of the nation's productive capacities. This may mean running deficits when the economy is shrinking and when neither business nor consumer spending is adequate to the task of maintaining adequate aggregate demand.
Granted, this is a tricky thing to pull off. Timing is difficult. By the time Congress enacts a tax cut or additional spending and it is put into effect, the economy may already be on the rebound. Mostly by luck, the 2001 tax rebate checks are arriving at about the perfect time to give families a bit of incentive to keep spending -- not as much incentive as they probably need, but a worthwhile complement to monetary easing.
The Bush administration should state flatly that it doesn't matter if the so-called Social Security surplus erodes this year, or even next. The Social Security surplus is an accounting fiction. It didn't even exist until about 18 months ago, when some Democratic advisors thought such an invention might be a good bulwark against candidate Bush's proposed tax cut. In light of swelling surpluses, merely to "Save Social Security First" wasn't enough of a defense, so Democrats raised the rhetorical bar to "Save the Social Security Surplus First." Republicans were cowed into agreeing that we should put the surplus some place where it couldn't be touched.
This fictional "lock box" was harmless enough when the economy was booming but makes no sense when it's slowing. The White House should be clear with the public: Under current conditions it's perfectly permissible for total government expenses to rise relative to total revenues, including revenues from payroll taxes and current payouts for Social Security. And Democrats should stop their bellyaching about "raids."
The second objective of fiscal policy is to help enlarge the nation's productive capacity over the long term. Conservatives believe the best way to do this is to allow people to keep more of the money they earn rather than pay it in taxes. Liberals believe the best way is to spend more money on improving the quality of the nation's "human capital" and infrastructure -- schools, child health care, mass transit, and so on. Both are "supply side" rationales. There is a legitimate debate to be had about which is more correct, and an even more important one about how and under what circumstances tax cuts can best stimulate investment and innovation, and when additional expenditure on schools or other "public investments" can have the largest positive impact.
If the administration believes its $1.3 trillion tax cut will generate additional growth of a sort that will reduce deficits (and even public debt) over the long term, it should say so explicitly, and set out its expectations in its budget documents. For example, the "crisis" that the administration's Social Security commission expects to occur several decades from now is premised on very conservative growth projections emanating from the office of the chief actuary of the Social Security Trust Fund. If the White House thinks the supply-side consequences of its tax cut will spur growth, it should provide its own more optimistic growth projections. The fact that surpluses of Social Security revenues over Social Security payments might be utilized in the short term to pay for the tax cut, along with other spending, is irrelevant to this more important discussion.
Democrats, likewise, would do well to be clear about their own "supply-side" notions of public investment, and make as compelling a case as they can for why additional dollars put toward human capital and infrastructure will add to the nation's growth. Pious pronouncements about the importance of fiscal rectitude are putting Democrats in the absurd position of saying -- as Richard Gephardt did last week -- that they're willing to cut spending on education, health care, and other programs for the poor and working families in order to avoid dipping into the Social Security surplus. The cynical totem of fiscal orthodoxy has nothing whatever to do with the goals Democrats have fought for for almost a century.
The numbers game also obscures some important distributional issues. From a liberal perspective, the problem with the Bush tax cut is not its fiscal profligacy but its regressivity. Most of the $1.3 trillion will go to people who are already very rich. Arguably this makes little sense in a society becoming ever more divided between have-mores and have-lesses, and it's questionable even on Keynesian grounds. Richer people are far less likely to spend extra money they get from the government than poorer people, for the obvious reason that rich people are already spending what they want to spend. Most poor and middle-income people need to, or would like to, spend more.
Conservatives may want to argue in response that their assumed supply-side growth outcome will do more to help the poor ascend into the middle class than a tax cut whose benefits were more equitably distributed, and that, even on Keynesian grounds, the additional investments by the rich will do more to stimulate the economy than additional spending by the less well-off.
The problem is that we aren't having this debate. We're talking instead about angels on the heads of fiscal pins, fictional Social Security surpluses, and actuarial projections grabbed out of the ether. By making a fetish out of balancing the budget every year and excluding Social Security surpluses, both parties are locking themselves into a rhetorical prison from which there's no easy escape. Worse yet, they're imprisoning the public behind walls that don't exist, making it impossible to understand what's truly at stake.