It is in this sense that the budget debate is “historic”–and not because the Republican plan to balance the budget would restore an earlier era of smaller government. Even if that budget were adopted in full (and it won’t be), spending in 2002 would exceed 18 percent of the nation’s income (gross domestic product), only slightly less than the 21.7 percent it’s consuming in 1995. In 1929 it was 3 percent. And taxes? They, too, would exceed 18 percent of GDP, roughly the average for the 1980s (chart). The controversial “tax cut” is tiny, amounting through 2002 to only 1 to 2 percent of revenues.
Nor would balancing the budget trigger a burst of economic growth. Some economists believe that lower spending would initially hurt the economy; others think that lower deficits would help by easing interest rates. Either way, the early effects would be small. The longer-run benefits could be larger. Lower federal spending and borrowing could mean higher investment and incomes. But these gains–though they might ultimately total hundreds of billions of dollars-would occur gradually and would be, in a $7 trillion economy, hard to attribute to balanced budgets.
The real reason balancing the budget matters is that it compels choices about spending and taxes that, sooner or later, will have to be made-and the sooner they’re faced, the less wrenching they’ll be. Spending for the elderly (dominated by social security and Medicare) now exceeds a third of all outlays and will explode as the baby boomers age. Projections show that, without changes, today’s budget deficit of about 2.5 percent of GDP could double to 5 percent in 2010-and then double again, to 10 percent, by 2020. These deficits would mean huge tax increases or government borrowing that would be politically unacceptable and economically self-defeating.
With Washington consumed by its own political games, it’s easy to lose sight of these key issues. At times, both the White House and Congress edge toward compromise. But mostly they engage in poisonous name-calling. Democrats portray Republicans as social sadists bent on hurting the poor and the old. And Republicans depict Democrats as decadent overspenders. That each stereotype contains a trace of truth obscures the larger point that the two sides are not so far apart. Each would cut Medicare and Medicaid (health insurance for the old and the poor) and many other programs.
Of course, genuine differences do exist. The Republican budget is skewed against the poor. Welfare, food stamps and subsidized housing are all curbed. The working poor get little tax relief, bemuse a tax provision benefiting them (the earned-income tax credit) is being scaled back. Taken together, these policies might lower the incomes of about 42 percent of the poorest fifth of families, according to a new study by the Urban Institute. Perhaps 7 percent of the 27 million Americans on food stamps might ultimately become ineligible, as would a quarter of those on welfare.
But the Urban Institute survey also shows these criticisms can be overdone. Despite the losses, the poorest fifth’s average income would be depressed by only 4 percent. The social safety net, though weakened, isn’t shredded. What determines the well-being of most people, including those at the bottom, is the economy’s health and family structure. (About 20 percent of the poorest fifth of families are headed by single parents.) Still, the cuts highlight the Republicans’ harsh anti-poverty philosophy: that the poor must lift themselves up and that generous benefits may discourage them from doing so. The GOP budget would make other profound changes, too:
The Medicare plan would ensure the ascendancy of “managed care” (HMOs and networks of doctors). It already dominates the under-65 population, but about 90 percent of Medicare recipients still see doctors on a fee-for-service basis. To save money, the budget would liberalize Medicare’s managed-care rules. More beneficiaries would join, bemuse such plans typically pay some costs (such as drags) not covered by Medicare.
There would be a huge shift of power to states through the transformation of Medicaid and welfare into block grants. States would get a fixed amount of money (lower than present funding) and greater freedom to set benefits and eligibility. About 40 to 50 percent of these programs’ costs are now paid by states, but Washington sets most of the rules. States want more power to control spending-and substance.
The budget would seek to deter immigration by stripping most legal immigrants of most benefits. (Illegal are already ineligible.) Most legal immigrants couldn’t receive food stamps or Supplemental Security Income (a program used by older immigrants who don’t qualify for social security). Perhaps 500,000 immigrants would lose SSI coverage.
All of these changes are controversial. Critics complain that stingy Medicaid grants might force millions of people out of the program, which now covers $6 million. But everything is still open to compromise. The shifts involve spending levels and program details, not basic principles.
Unfortunately, the White House isn’t yet truly bargaining. President Clinton has endorsed a balanced budget but done little to achieve one. Instead, he has flagrantly misrepresented the GOP budget. He says it would “destroy” Medicare. This is an absurd description of a program whose spending would grow 62 percent by 2002. He says that “deep” education cuts would “undermine” schools. But the budget barely touches the largest education pro-gram–guaranteed college loans–and all federal aid to public schools provides only 7 percent of their spending.
In truth, it’s hard to exempt the old and poor from spending cuts when the budget is increasingly devoted to spending on the old and poor. In 1987 defense outlays represented 28 percent of the federal budget. Twenty years earlier they were 45 percent. In 1995 they are only 18 percent. Since the end of the cold war the number of army divisions has fallen from 18 to 12 and the number of air force fighter squadrons from 76 to 53. There’s been a huge peace dividend. Military spending, if maintained at its 1987 budget share, would be $150 billion a year higher than it is now.
As a result, lower defense spending can no longer serve-as it has since the 1950s-as an invisible means to finance huge increases in social spending. This transforms budgetary politics. Consider the arithmetic. If present federal programs are left unchanged, the Congressional Budget Office reckons total spending in 2002 would be $2.28 trillion. Congress aims to hold that to $1.86 trillion-about $70 billion less. In 2002 defense spending is projected to be $271 billion. So even eliminating the Pentagon entirely wouldn’t cover the deficit. Increasingly, budget politics must focus on popular domestic pro-grams-or on higher taxes.
The fate of the present budget depends on whether political theater triumphs over reason. Despite the rhetoric, the outlines of a compromise are visible. The White House would raise its Medicare and Medicaid cuts; the Republicans would lowed: theirs. The Republicans would trim their tax cut; Clinton would accept deeper spending reductions. Both sides might trim the inflation adjustment for benefits (including social security) and taxes, agreeing that the consumer price index overstates inflation.
The political dilemma is that balancing the budget inflicts identifiable present pain for abstract future gain. Lowering today’s deficit reduces the debt burden for future taxpayers. But these benefits, and any improvement of incomes from higher investment, would be enjoyed only in the 21st century. Politicians have denied the dilemma by contending that deficit reduction instantly helps the economy. In fact, Clinton attributes the economy’s current vitality to his 1998 deficit-reduction plan. This is dubious. The expansion is part of the business cycle and owes its strength mainly to less inflation and higher profits.
But exaggeration is bipartisan. Republicans now claim a credible balanced-budget package would quickly reduce interest rates by a full percentage point or more, leading to huge savings for middle-class borrowers. A family with a $75,000 mortgage, a $15,000 car loan and an $11,000 student loan could save $1,800 a year in lower interest payments, says the Congressional Joint Economic Committee. This, too, is dubious,because interest rates, though influenced by deficits, are more affected by inflation. Suppose the budget were balanced but inflation doubled from its present 2.5 percent to 5 percent. Interest rates would rise. Lenders expect to be compensated for their money’s loss of value.
There is irony in the misuse of economics to make the politics of budget-balancing more palatable, for it was the misuse of economics in the 1960s that opened this era of deficits. Until then, Americans worshiped balanced budgets, except in wars and depressions. They were seen as a check on unwise government. Legislators . . would weigh the benefits of extra spending against the unpopularity of higher taxes. In the 1960s the folk wisdom was abandoned on the (since discredited) theory that the strategic use of deficits could end recessions. Thus liberated, presidents and Congresses embarked on decades of over-spending and/or undertaxing.
In hindsight, the old folk wisdom was sensible. The ultimate significance of the present debate is whether we will revert to this discipline-the philosophy that government services worth having need to be legitimized through visible taxes. For whatever happens this year, the important choices won’t fade away. .
Left unchanged, spending would hit $2.28 trillion in 2002. Congress would cut that by $872 billion to balance the budget.
Legend for Chart: A - 1995 (IN BILLION) B - UNCHANGED POLICY 2002 C - GOP BUDGET 2002 D - DIFFERENCE % CHANGE A B C D Spending $1,518 $2,229 $1,857 -17% Social security 333 483 483 0% Medicare 178 345 289 -16% Medicaid 89 178 127 -29% Other entitlements 140 237 193 -19% Defense spending 269 305 271 -11% Nondefense 277 331 244 -26% Interest on Debt 238 350 249 -29% Revenues (taxes) 1,357 1,880 1,861 -1% Budget balance -161 -549 +4 –
NUMBERS MAY NOT ADD DUE TO ROUNDING. SOURCE: CONGRESSIONAL BUDGET OFFICE
For all the current Washington fury, even the undiluted GOP budget wouldn’t severely lower federal spending’s share of the national income - a share that’s been fairly steady since the end of the World War II.
FDR fought both the Depression and World War II, driving spending to historic levels.
Restraining defense while preserving the New Deal, Ike pushed hard to balance the budget
LBJ preside over the rising costs of the Great Society and Vietnam
Under Reagan, social spending continued to rise while the 80’s defense expansion sent deficits soaring
Clinton and the GOP Congress are trying to scale back costs, but not drastically
Source: Office of Management and Budget, Congressional Budget Office
