Bear Left!

Déjà Voodoo
Tim Francis-Wright

2 September 2001

The Bush administration now projects that the federal government will run a $2 billion surplus, excluding the social security surplus, for the fiscal year that ends this month. The latest figures from the Congressional Budget Office project not a surplus, but a $9 billion deficit. The CBO projection had led to widespread criticism that the Bush Administration is fiscally irresponsible. The Bush Administration is fiscally irresponsible, but not because of $9 billion deficit. It is irresponsible because of the tax cuts that start next year and extend far into the future.

During the 1980 Republican primaries, George H. W. Bush, the father of the current President, ridiculed Ronald Reagan's plans to cut taxes and increase military spending as "voodoo economics." Reagan's advisors, however, knew exactly what they were doing. They knew that their beloved tax cuts would create large annual deficits that would cause the federal government to borrow heavily. The resulting debt would hamstring the government's ability to create social programs for years. Now we are faced with an administration that plans to duplicate the same cynical mind set, and a Democratic opposition that has yet to grasp what is going on.

The Social Security system runs an annual surplus because of a tax increase passed in 1983. The government collects 6.2% from the paychecks of almost all employees not on government payrolls, and it collects a like amount from their respective employers. However, the 6.2% tax applies only to the first $80,400 of a taxpayer's salary. The immediate start to the tax and the limit on the tax mean two things. Not only do low-wage workers pay more in Social Security taxes that an they do in income taxes, but the affluent class pays a smaller fraction of its collective salary in social security taxes than do the working classes.

In 1983, Congress intended that the surpluses in the Social Security account would constitute down payments on the system's obligation to pay retirement benefits to the baby boom generation. In reality, until the end of the Clinton Administration, the federal government spent the surpluses on other things. In essence, the hallmarks of the Reagan administration—a military build-up and tax cuts for the rich—were paid, in part, with higher taxes on the working classes.

Deficit spending is not bad policy per se. The federal government has always borrowed money to pay for current operations in dire times. Historically, wars have created conditions sufficiently dire for deficit spending. In the twentieth century, economic recession has also been sufficient. Republicans have traditionally advocated tax cuts to stimulate a moribund economy. Democrats have traditionally advocated social programs, sometimes in conjunction with tax cuts (as Kennedy did), and sometimes not (as Roosevelt did).

The past few years have seen the national Democratic party trying to be the party of fiscal responsibility. But fiscal responsibility does not need to equal fiscal austerity. For example, the tax rebate this year, some $40 billion, is of reasonable size. Democrats should be criticizing its target, not its size. It misses the poorest Americans, who do not pay income taxes, while it hits the richest Americans, who do not need the stimulus. In 1975, by contrast, the Ford administration gave half as much money to the richer half of American taxpayers as it did to the poorer half. To boot, the Ford tax cut also refunded money to Social Security recipients. Real fiscal responsibility means sharply criticizing a 10-year boondoggle to give most of $1.35 trillion to the rich. Real fiscal responsibility means making tax policy based on sober economic projections, not assumptions from cloud-cuckoo-land. Real fiscal responsibility means learning from past mistakes.

The Democrats should, however, avoid the trap of criticizing small deficits at a time when the overall economy is in poor shape. Doing so plays into the Republicans' hands, and Democrats have seen this deal before. When the economy is doing poorly, the government should do what it can to help the economy get moving.

The recent announcements that the government surplus is essentially nonexistent are products of lowered receipts from corporate income taxes and capital gains taxes. Of course, by the time that the Bush administration gained approval this year for its tax cuts, corporations were already reporting disappointing earnings, the Federal Reserve was already frantically cutting interest rates to shore up the economy, and the stock market was broadly drifting downward.

There are two potential problems with running large deficits. First, if deficits get large enough, the government will not be able to borrow enough money to pay them. In such a situation, bondholders can effectively control governmental policy. Fortunately, the deficits that the federal government ran in the 1980s and early 1990s were no where large enough to call for austerity measures in the name of reform from the IMF or from large creditors.

Second, and more pertinent to the instant case, the interest payments on the bonds that fund large deficits can get large enough to crowd out most other government spending. Once finished with government service, David Stockman, the director of the Office of Management and Budget during the Reagan years, admitted that the goal of the Reagan administration was to get the United States into exactly that position. The Clinton administration obsessed about the deficit in a successful attempt to lower interest rates and reduce the amount of the federal budget required to make payments to bondholders.

As a result, the federal government is now out of many businesses in which it could and should have starring roles. The Department of Housing and Urban Development does very little nowadays to spur housing for America's poor. The Departments of Commerce and Labor are doing little to encourage manufacturing jobs in America. The Department of Energy is doing next to nothing to support wind and solar energy projects that could produce clean energy in the future. All of these are programs that would not be cheap, and would be impossible if the deficits of the 1980s were to start all over again.

Now the Bush administration already has a tax cut plan of over $1 trillion, aimed mostly at the affluent. The administration already has plans to ask for a significant increase in the military budget, even though Secretary Rumsfeld has yet to complete his review of the operations of his department. Next on the docket are a number of plans to cut capital gains taxes, which by their nature disproportionately affect the affluent. The Bush administration will certainly claim, as the Reagan administration did, that its projections show surpluses as far as the eye can see. President Bush will certainly prepare to blame Congress, as President Reagan did, for overspending, if and when those deficits appear. But ultimately, the Bush administration knows, as the Reagan administration knew, that its numbers do not add up. A future generation will pay for those tax cuts, as we currently pay down the national debt caused by Reagan's tax cuts. And, as a bonus, future Democratic administrations will be hamstrung by interest payments, as the Clinton administration was.

Despite the obvious lessons of the Reagan tax cut, some Democrats in Congress still voted for the Bush tax plan. Bush will tempt them further with cuts in capital gains taxes. They would do well to listen to the President's father and start thinking about reversing their earlier decisions.