Reforms Should Come First Then Balance The Budget

The high hopes with which the Republican Congress began 1995 have not been realized. Disunity between House and Senate Republicans contributed to the loss of momentum, but blame also lies with the GOP strategy itself.

The Republicans undertook sensitive political tasks, such as reforming Medicare and welfare, in the name of a balanced budget. The public was given little explanation for these reforms except that they were needed to balance the budget. This made it difficult for the Republicans to justify their tax proposals and easy for President Clinton to criticize the plan for callousness toward the needy and vulnerable.

The Republicans' strategy also suffers from promising a balanced budget three Congresses and two Presidencies in the future without a means of enforcing an agreement that extends beyond the term of the current Congress. Neither can the Republicans guarantee the uninterrupted seven-year economic expansion that their plan assumes. In the end, the GOP's promise of a balanced budget was less believable than Clinton's claim that people would be hurt.

SHIFT THE SPOTLIGHT. The budget stalemate provides an opportunity to gather our wits and to think about a more promising approach that would permit a balanced budget to emerge from a successful resolution of other problems.

The first point to grasp is that Clinton and Congress are fighting not over how much to cut spending and taxes but over how much to increase them. Even the Republicans' plan pumps out $339 billion more in spending by 2002 and pulls in $503 billion more in tax revenues. This strategy "cuts" taxes and spending only in the sense that it doesn't raise and spend as many additional tax revenues as Clinton prefers.

Clearing the air of budget hype would help Clinton and Congress turn their attention to necessary and unavoidable reforms. There is a bipartisan consensus that Medicare is in trouble, and Clinton himself once declared the intention to "end welfare as we know it."

The problem with Medicare is that expenditures are rising faster than the program's payroll tax base. Either we raise the payroll tax rate and accept the consequences--less employment and take-home pay--or we restrict Medicare to major medical coverage that protects against catastrophic illness. The Republicans' plan tries to achieve savings by fixing the prices of medical services, an approach that has never worked.

GROWTH AGENDA. Medicare reformed for its own sake would remove the pressure of an exploding entitlement and make it easier for a future Congress to achieve a balanced budget. Similarly for welfare: The system is widely perceived as a flop, and maintaining an open-ended entitlement that produces perverse results makes no sense regardless of the budgetary effects. Turning welfare over to the states would encourage experimentation and restraint without abandoning people in need. The case for reform should be made independently of the case for a balanced budget.

The same holds for changes in tax policy. The Republicans' conviction that tax cuts must be paid for with spending cuts is self-defeating. It not only exposes them to class-warfare rhetoric but also forecloses policy changes that would raise the economic growth rate. As former Delaware Governor Pete DuPont recently pointed out, a higher growth rate expands the tax base and is an easy way to balance the budget. An additional 0.8% in annual gross domestic product growth for five years would mean $520 billion more in government revenues.

To get these revenues, Republicans would have to build a growth agenda around their (largely abandoned) tax proposals. However, there is no sign of a growth agenda in the Republican budget, which assumes a paltry 2.3% annual growth in GDP. Among the Republican Presidential candidates, only Steve Forbes sees economic growth as a priority, and he has made it his central issue in his campaign.

The Republicans lost their growth agenda when they conceded the "fairness" issue to their opponents. If fairness is defined as using the tax system to mitigate success, then an improvement in incentives that motivates success is unfair. Thus Republicans have come up with a "fair" tax cut for taxpayers with children that is expensive and does nothing to reduce the cost of labor or capital.

It is possible that good economics might be beyond the capabilities of the political process, but the attempt to roll all reforms into a balanced-budget plan has not succeeded. It is now clear that Republicans will have to fight their policy battles one at a time.

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