The incredible shrinking surplus is upon us, moving in briskly and proving larger than expected. Even more incredible-though shrinking fast-it is still the second largest surplus in U.S. history, thanks to the end of the cold war and to the fiscal responsibility of the Clinton administration and the last several Congresses. Why is the surplus shrinking?
As many economists predicted, the Bush tax cut, accounting for two-thirds of the decline, has taken a large chunk of federal funds. Declining tax revenues caused by the slowing economy accounts for the other third. But if the surplus is so big, why worry? Because, first, most of the surplus belongs to Social Security and Medicare and, in theory and recent practice, has been kept in the famous "lock-box" by both Democrats and Republicans; and second, President George W. Bush and Congress have spending plans that, if passed, would bring on deficit spending.
The meaning of these volatile trillions and their relation to the budget process and the future of Social Security and Medicare is difficult to grasp. Such large amounts of money (some of it mere projection) and the complexity of the federal budget lead many people to look at the consequences of a revenue shortfall (what will happen?). But some attention needs to be paid to how this happened.
For many Americans those consequences focus on Social Security and Medicare. Will there be enough for baby-boom retirees if the current surpluses in these funds are used to make up the difference between government revenues (now declining) and government expenditures (likely to increase)? Current Medicare recipients want to know if there will be any real money for the prescription-drug benefit in bills now pending before Congress.
Meanwhile, parents of school-aged children want more money for smaller classes, better teacher preparation, and the technology and information that will give their children a real chance at the jobs of the future. And then there are what appear to be somewhat more esoteric concerns. For example, what is to become of stores of weapons-grade plutonium from U.S. and Russian nuclear weapons that were scheduled to be "immobilized" or recycled as nuclear reactor fuel? The Bush administration says the United States cannot now afford the promised cleanup; certainly the Russians cannot. Closer to home, the Welfare Reform Act must be revisited and perhaps revised next year, in the midst of what may be a very, very sluggish economy with its predictably higher welfare rolls. The list goes on.
In light of the shrinking surplus, what are Bush’s concerns? His priorities, he says, are spending on the military and on education. He has asked Congress to make those its priorities too. In fact, the president seemed to take inordinate pleasure in the "straitjacket" that the shrinkage will bring to federal spending-"incredibly positive news," he said. It will curb the propensity he sees in the House and the Senate to waste the taxpayers’ money-not something he plans to do himself, of course. While crowing about coming tax cuts, especially to the most well-off Americans, he is pressing for money to increase the military budget and to begin building the missile shield for which he and Secretary of Defense Donald Rumsfeld are aggressively lobbying. Who would be surprised if education spending (to which the federal government contributes less than 10 percent, in any case) were to be sacrificed to securing the military funds the administration insists it needs to protect the United States from terrorists and rogue nations?
The administration’s real priority is a missile shield, whose component parts show few signs of working and whose construction threatens the stability of U.S.-Russian nuclear-arms-control measures embodied in the ABM Treaty. The nomination of Air Force General Richard Myers, with his experience running the U.S. Space Command Center, to head the Joint Chiefs only confirms this fixation. Hard to believe, but the administration manages to look both penny foolish and pound foolish in stepping back from the plutonium cleanup-nuclear material that could be stolen or bought by terrorists and rogue nations to build bombs-while pouring money into an unproven antimissile system intended to thwart such potential bombs (which, as one pundit remarked, are more likely to be delivered by ship than by air). Vladimir Luken, deputy speaker of the Russian parliament, is right in observing that the missile shield is "the most excessive response to the least probable threat."
As Washington returns to work, Congress will need to steel itself against the administration’s single-mindedness on military spending. It will have to show greater shrewdness and determination than it did last spring in agreeing to the breadth and depth of the Bush tax cuts. Indeed, a good deal more skepticism is in order not only about the administration’s budget numbers (economist Paul Krugman contends they’re lies) but about whether Lawrence B. Lindsey, the president’s chief economic adviser, actually knows what he’s talking about. The economy may benefit from the tax rebates currently arriving in millions of U.S. households as the administration argues, but Congress needs to revisit the cuts in the tax rates, the capital gains tax, and the estate tax if we are to avoid repeating the deficit disaster of the Reagan era.
Remember the phrase, "voodoo economics"? George H.W. Bush, the president’s father, and contender against Ronald Reagan for the 1980 Republican nomination, introduced it in the primary campaign. That prescient slogan captured the magical thinking that underlay Reagan’s supply-side economics and its dedication to drastic tax cuts as a means to end "big government" and to get money into the hands of the investing class. Those cuts combined with large increases in military spending led to enormous deficits that not only threatened government liquidity, but took a serious toll on the economy as well. As Reagan’s vice president Bush learned to live with voodoo economics and suffered the consequences in a one-term presidency. His son should take note. If the president is unwilling to revise the tax cuts of last spring or refuses to cut back on increases in military spending, Congress should offer him the straitjacket he so gleefully bestowed on them.