The Best Policy

Budget True and False

Sorting out the balanced-budget deal.

You can’t believe everything you hear about the balanced-budget deal. You can’t, because so many of the claims are contradictory. Enemies agree, friends disagree. The Democrat in the White House calls the five-year plan a historic breakthrough. The Republican leaders of Congress agree. But House Democratic Leader Richard Gephardt calls it “a budget of many deficits–a deficit of principle, a deficit of fairness, a deficit of tax justice and, worst of all, a deficit of dollars.” Writing in Newsweek, conservative David Brooks hails it as a triumph for conservative values; a few pages later, conservative George Will condemns it as a betrayal of conservative values. And so on. Who’s right?

A Deficit of Dollars? The overarching purpose of a balanced-budget agreement is, presumably, to balance the budget. Yet the deal rests on various assumptions, and the likelihood that all of them will work out is small.

1) The deal presumes an economic scenario more roseate than any envisaged since the first Reagan administration. Now, unlike then, we have already enjoyed more than six years of uninterrupted growth. Unemployment and inflation together are lower than they’ve been for three decades. Some say this shows the economy has reached a new plateau of long-term prosperity. Others say this suggests the good times can’t last much longer. The deal makers contend that the budget deal itself will promote growth and so create additional savings. But five more years? Over that period, your guess is as good as Alan Greenspan’s.

2) Even if the good times keep on rolling, the promised retreat of red ink depends on Congress and the president devising–and sticking with–a tax-cut package that includes both sides’ favorite giveaways but still costs less than $85 billion over five years. (According to a “side agreement,” it must also cost less than $165 billion in the next five years after that.)

3) On top of this, someone must find more than $300 billion in spending cuts and other deficit reducers, most of them now suggested in only the broadest outlines. More than 80 percent of the cuts in non-defense programs are to come in the last two years. Indeed, total spending cuts are supposed to jump by $50 billion in the last year of the plan–which also happens to be an election year. By contrast, in the next two years–the only two years this particular Congress and president control–the budget deficit will actually increase as a result of the deal.

4) Miscellaneous implausibilities: The Bureau of Labor Statistics is supposed to recalculate the Consumer Price Index to save about $15 billion in inflation adjustments over the last three years of the plan. The forces of nature are supposed to avoid any multibillion-dollar calamities such as the recent Grand Forks, N.D., flood. Doctors and hospitals serving Medicare and Medicaid patients are supposed to absorb $130 billion in payment cuts (without fundamentally altering the system). Someone must be found to pay more than $26 billion for the unused part of the broadcast spectrum. And, of course, lots of fraud, waste, and abuse is to be rooted out on all sides.

A Deficit of Principle or a Principled Conservatism? Liberals charge that President Clinton sold out his core constituency by agreeing to deep cuts in domestic spending. True? This depends on which you think is more important: the spending increases Congress enacts now–or the spending cuts it promises to enact five years from now. By the first measure Clinton did quite well, securing GOP agreement to more than $30 billion over five years in new spending for children, immigrants, and the elderly. (That’s in addition to $35 billion in subsidies for college kids–though Clinton disguises these as “tax cuts.”) Domestic non-entitlement spending over the next five years will be just about what Clinton requested in his January budget–though that budget won him scant applause within his party.

But the deal promises a huge whack at “unprotected” domestic spending in 2001 and 2002–everything from courts, prisons, and parks to highways, housing, and the weather bureau. This is what excites the conservative Brooks. By leaving Medicare, Social Security, and other entitlements unreformed, he argues, when a recession hits, Congress will be forced to all but dismantle the remaining part of government–“all the things liberals love.” Of course, this assumes that Congress won’t just forget about balancing the budget instead.

A Deficit of Tax Justice or a Deficiency of Tax Cuts? Part of the side deal Clinton made with Congress obliges him to sign a bill cutting capital gains and estate taxes “even if it is not the bill I would write.” It is not yet clear how Congress and the president can squeeze all the tax goodies each insists upon into a $135 billion bag (and come up with an honest $50 billion in new revenues to bring the net price down to $85 billion). So there is no way yet to know for sure who wins and loses. But capital-gains and estate-tax cuts of almost any sort will surely favor the well-to-do in the long run. (In the short run, higher-income taxpayers may pay more taxes, not less, if a capgains rate cut leads them to sell more assets than they otherwise would have done.) Clinton’s college breaks will be of primary benefit to middle- and upper-middle class taxpayers. The “per child” credit will be broadly distributed–though not to the poor (who pay no taxes, so can’t use the credit). However it all shakes out, those who benefit most from the tax breaks almost surely will lose least from the spending cuts.

Social conservatives seem fairly content with the tax package, since it includes their cherished $500-per-child credit. But “supply-side” conservatives dismiss the tax cuts as “minuscule.” The net $85 billion cut, they note, is less than 1 percent of the taxes the government expects to collect over the next five years. And, if the inflation-adjustment rules are changed, that will raise taxes as well as trim spending.

A Drain on Defense? Under the budget deal, by 2002, national defense will consume about $273 billion a year compared with $267 billion now. Inflation, however, would turn that into a 9 percent cut in annual purchasing power. This doesn’t seem unreasonable when you consider that our political and military leaders have shown themselves increasingly reluctant to put either our troops or our expensive weaponry at risk. On the other hand, the Pentagon feels it must buy ever more elaborate and costly weapon systems–in part to counter the weapons we sell so freely to others. Hard-line conservatives argue, moreover, that the real measure of lost resolve is to be found in the fact that military spending will fall to less than 3 percent of gross domestic product by 2002. At the peak of the Reagan Cold War buildup in the mid-1980s, defense claimed about 6 percent of GDP.

Of course, the magnitude of the threats faced by the United States bears no fixed relation to the size of our economy. Today, our GDP, adjusted for inflation, is twice as big as it was in 1972. Have the threats to our security doubled since then?

Looked at another way, during the 40 years of the Cold War, Brookings Institution defense experts calculate, the United States spent about $320 billion a year on defense, measured in today’s dollars. Under the budget agreement, it will spend the equivalent of $250 billion a year, or 22 percent less. Meanwhile, the Soviet Union has disintegrated, and its former minions are queuing up to join NATO. That ought to save the Pentagon at least a quarter on the dollar.

The Bottom Line. Is the budget agreement, on balance, more likely to reduce the deficit–or to increase it? The answer depends on which you count as more important: the tax cuts and spending increases Congress is pledged to enact this very year, or the spending cuts it vows it will embrace in years to come. You might want to keep in mind that back in the budget deal of 1993, Congress voted to cap spending through 1998. As part of the so-called balanced-budget deal that passed both houses last week, Congress canceled those caps.