Good economic times are yielding dubious fiscal policy, while bad times gave us good fiscal policy. Perhaps that's not so surprising. Still, it's disappointing that politicians, reaping the benefit of a revenue windfall to the U.S. Treasury following years of hard-won fiscal restraint, have chosen this time to complicate the tax code and keep plenty of pork in the budget. The reduction in the capital-gains tax rate is of doubtful economic value at this bullish moment, education credits will simply induce educational institutions to hike tuition, and some noxious subsidies to industry have been retained.
To be sure, we like parts of this budget, such as the $275 billion reduction in projected spending over the next five years, the allocation of $24 billion in much-needed health insurance for children, and expanded savings incentives. No question, the agreement is a political landmark: This was supposed to be the era of gridlock in Washington. Instead, President Clinton and Congress are rushing to take credit for each other's ideas.
Our preference would have been to simplify the tax code by introducing fewer and lower marginal tax rates, broadening the tax base, and closing loopholes rather than opening up new ones. We suspect, though, that as long as U.S. economic growth continues at about 3%, this budget deal is affordable. But there's no guarantee that such growth can carry on indefinitely, and it would have been better to strike a budget deal that promoted long-term growth and budget balance. Deeper reforms--such as smaller cost-of-living adjustments for Social Security and income-based premiums for Medicare--are yet to be tackled. We hope politicians have the will to pursue tough fiscal policies while the economic backdrop is still favorable, the better to ensure that it remains so.