The federal budget is running a record surplus. Well, sort of. Without the billions of dollars being paid in interest on the national debt, most of it inherited from the '80s, the U.S. government would actually be running a $100 billion surplus. Think about that long and hard in this election season. Presidential candidates are starting their competitive bidding on tax cuts, with nary a nod to equivalent cuts in government spending. The last thing this country needs is another experiment with a fiscal free lunch. We do not believe that tax cuts pay for themselves dollar for dollar (although they can boost growth and raise government revenues). The '80s experience with tax cuts shows that old-fashioned restraint is required to reduce the deficit. That means curbing the growth of entitlement spending. But then, we're not running for office.
The timing for this tax policy nostalgia couldn't be worse. The U.S. is now in a virtuous economic cycle. At 1.7% of gross domestic product, the nation is running a smaller budget deficit than Japan or Germany. As a result, inflation is low, growth is good, and the dollar is strengthening. America is in its best economic shape in 20 years. To ruin that now with wild, inflationary tax cuts would be a political crime.
The saddest part of this spectacle is the attempt by some of his advisers to, in effect, disgrace Bob Dole. For his entire political life, Dole has stood above all else for one thing: a balanced budget. Supply siders in his own party attacked his "root-canal" economics and his call for spending discipline.
Now that he's running for President, Dole's handlers want him to turn his back on a lifelong record. It was wrong for President Clinton to pander to voters by saying that attempts to curtail the growth of Medicare and Medicaid amounted to actual cuts in these popular entitlements. It is wrong for Dole to pander to voters by suggesting that new tax cuts will put money in their pockets but won't increase the deficit. The bond market will certainly raise interest rates if the deficit gets out of control again, hurting economic growth and jobs.
Let's face it, a 15% across-the-board cut in the marginal income tax rate will cost upwards of $600 billion over seven years. A $500 tax credit for charitable deductions will cost up to $300 billion. Letting people deduct Social Security payroll taxes comes to $350 billion. These are cuts currently favored by Dole's advisers. Clinton's people are talking about a $40 billion tax credit for education and training. Who is going to pay for these cuts? Congress is already cutting discretionary spending sharply. That leaves--guess what--Medicare, Medicaid, and Social Security. As the GOP has discovered, the public isn't keen on hacking at these programs.
It's all about growth. Being pro-growth is cool these days in Washington, where a higher growth rate is seen as the way to reduce economic anxiety. Old supply siders are slipping on new pro-growth clothes to push their tax cuts through Dole. We think curbing the increase in entitlements, reducing the deficit, and letting interest rates drop sharply is the way to go. That's what the old Bob Dole stood for, and we have a feeling we're going to miss him.