With President Clinton's veto of the Republican budget plan, fiscal politics is playing out as a simple two-way choice. Do we use most of the projected federal budget surplus for a tax cut (the Republican position) or to pay down the national debt and shore up Social Security and Medicare (the White House position)? So far, the Administration seems to be winning. Most voters prefer saving social insurance to tax cuts.
But this framing of the issue leaves out a third option--restoring some public spending. The surplus derives from three main sources: higher than projected economic growth, reduced interest costs, and sharp reductions in domestic spending. A third of the anticipated surplus is the result of the stringent caps that were the enforcement mechanism of the 1997 budget deal. Of the projected $2.9 trillion, 10-year surplus, about $900 billion reflects cuts in federal outlays.
As a result of the caps, both parties have become the party of reduced domestic spending. According to an analysis by the Economic Policy Institute (on whose board I serve), the Republican budget would cut nondefense discretionary spending by 20.1% over 10 years. But the Clinton budget would also cut domestic spending--by 6.4%. By 2009, even the Clinton budget would cut spending by 12.5% relative to 1997 levels. For example, the Republican budget would drop 430,000 children from Head Start. President Clinton's would drop "only" 112,000. So while Clinton proposes to use some of the surplus for favored domestic Administration initiatives such as 100,000 more schoolteachers and 50,000 more police, the White House is actually robbing Peter to pay Paul.
BADGE OF PARSIMONY. EPI economist Dean Baker, using data from the Office of Management & Budget and the General Accounting Office, finds that domestic public investment is now down to about 1.4% of gross domestic product, from an average of 2.4% two decades ago. Under the budget caps, it is projected to drop to 1% a decade from now.
The two-way debate should actually be a three-way choice: paying down the debt, vs. a tax cut, vs. restored public investments in human capital and needed infrastructure. Paying off the national debt is a needless badge of parsimony. Yet both parties are playing this pointless "fiscal responsibility" game, each daring the other to flinch first by lifting the budget caps.
Throughout the postwar economic boom, the U.S. carried a very substantial national debt--over 100% of one year's GDP in the late 1940s. This debt was gradually reduced as a share of GDP thanks to robust economic growth. Even so, the annual deficit averaged about 1.2% of GDP between the Presidencies of Truman and Carter. Under Reagan, of course, the national debt grew far faster than did the economy, leaving an enlarged debt. Not until Clinton did either party equate budget surplus with fiscal virtue.
EDUCATION FIRST. Today's economic boom is partly the result of private entrepreneurship and partly the fruit of public investment--in education, infrastructure, and research and development. Under the budgets of both parties, all these categories of outlay are to be cut. What's restricting growth today is a shortage of skilled workers. But despite the new philanthropic interest in public schools, the private sector cannot be solely responsible for education. Whether one favors vouchers, charters, or traditional public schools, public education must be tax-supported.
Ironically, increased outlays for such national needs as education, training, research, and health care are highly popular with the voters. An ABC/Washington Post poll recently asked voters to rank their preferred uses of the surplus. Thirty-seven percent favored education and health spending. Social Security was next, favored by 29%. Only 19% wanted to reduce the debt, and just 14% wanted a tax cut. Polling by the Pew Center confirms that the top voter priority for the surplus is education spending, followed by Social Security and Medicare.
Both likely standard-bearers, Vice-President Al Gore and Texas Governor George W. Bush, are outdoing each other to champion education. But unless one of the candidates challenges the spending caps, this will largely be an exercise in posturing. Domestic public outlay is now at its lowest level in three decades and heading still lower. Federal education spending has dropped from 11.9% of total national spending on education in 1980 to 7.6% in 1999. This is bad economics and not even good politics. Only in Washington are surplus and further debt reduction equated with virtue. The voters want a broader choice, and they deserve one.