Focus on Growth, Not the Surplus
The debate in Washington over who "lost" the budget surplus is rife with political deceit and devoid of economic truth. A rare example of fiscal policy acuity is being twisted into a political blame game. Democrats and Republicans alike are claiming that nothing less than the financial integrity of Social Security is at stake. This is utter nonsense. It is time to stop the political finger-pointing and acknowledge that with consumer confidence falling and the economy skirting recession, the focus of government policy should be on growth, not some particular level of the budget surplus or some notion of a "lockbox." Tax cuts that promote economic growth are the correct course of government action, even if they result in a lower budget surplus.
The sharp decline in that surplus simply means that Washington has got the direction of its short-term fiscal policy right. The drop in the surplus is due in large part to the tax rebate checks going out to millions of Americans. This is putting money in consumers' pockets. A one-percentage-point cut in the top income-tax bracket, a shift in corporate tax payments, and the economic slowdown account for the rest of the decline in the surplus.
In most economic downturns, it takes politicians so long to pass any tax cuts that they usually come too late in the business cycle to have any positive effect. Not this time. Driven by the Bush Administration, Congress passed a front-loaded tax cut bill that kicked in as the economy slowed. It should be applauded for its action on taxes, not derided for "losing" the surplus.
The long-term health of Social Security and Medicare can be guaranteed only by strong economic growth. The current political debate over the surplus should be recast in terms of what fiscal policy is best suited to generating growth over the next decade. Through this lens, there are legitimate grounds to rethink the tax bill passed by Congress. The tax cut is well designed to deliver a short-term Keynesian kick, but it turns out to be poorly fashioned to generate long-term economic growth. As it now stands, the tax code lacks consistency and predictability, two key elements in providing incentives for individuals and businesses to save and invest. It dribbles out cuts in marginal rates over many years so that taxpayers have to wait until 2004 for the next one and 2006 for a final cut to 35%. And then, believe it or not, everything reverses in 2011. The income tax, the inheritance tax, and marriage penalties all revert back to the high levels of 2000. This is clearly not the optimal way to cut taxes and help individuals and businesses make investment and spending plans for the years ahead.
Five new Congresses and at least two Presidents will have a chance to change the tax bill and attack this problem. If they're wise, they won't get hung up on short-term swings in the surplus. Politicians must remember that in the end, it is growth that matters most.