Wanted: A Bold Budget Debate

It's time for Washington and the nation to begin an honest discussion about the budget and taxes. Call it a guns-or-butter debate for the 21st century. The truth is that most of the political, economic, and financial assumptions made by policymakers in 2000 are in flux. The tech bubble, September 11, and Enronitis are altering the course of future economic growth, government policy, and corporate profitability in ways that are just unfolding. A just-in-time open economy is becoming a just-in-case security economy. Pretending that nothing has changed is foolhardy. And partisan finger-pointing as November elections approach is shortsighted. Both Democrats and Republicans in Congress need to open a serious debate about what kind of policy best suits America today and for the rest of the decade.

There are things we know and things we don't. The budget has moved from a $127 billion surplus in fiscal year 2001 to at least a $100 billion deficit for 2002. Democrats are blaming President Bush's $1.7 trillion 10-year income tax cut for the red ink. In this, they are dead wrong. Very little of the Bush tax cut has been implemented. The current budget deficit is due mostly to lower tax revenues caused by the recession and the tax rebate plus higher spending for defense, Medicare, New York, unemployment insurance, and pork.

The problem is that many of the "temporary" hits to the budget may be far more permanent than recognized. For example, the largest decline in tax revenues is from taxes paid on capital gains, stock options, and bonuses. Indeed, much of the budget surplus of the late 1990s was financed by such levies. It is questionable whether any future surplus can be paid for in that way. Expensing stock options is a high priority for reformers cleaning up the accounting mess, and corporations will probably curtail options once that happens. Furthermore, prospects for the stock market may not be as robust in the years ahead as they were in the '90s. The era of accounting tricks is over. The tech binge is unlikely to be repeated. And the cost of homeland security may affect the bottom line. During the high-risk Cold War years, price-earnings ratios averaged only 15, half today's p-e. Who's to say they won't return to that level? It's terribly unclear at this point.

So is the cost of national security. Defense spending is scheduled to rise by 25% over five years. There is a good chance it will go up by much more. Securing the borders while allowing people and goods to move quickly through them will cost many billions of dollars that are not yet in the budget. Securing transportation systems and nuclear and chemical plants will cost further billions.

Politicians in Washington are blindly forging ahead with assumptions that are weak and policies that are out of date. Voting to make the repeal of the $138 billion inheritance-tax permanent, as the House is preparing to do, is irresponsible when the budget surplus may be in doubt. Passing a gargantuan farm bill is similarly ill-advised.

It may be that, in the end, rising productivity generates a budget surplus that allows America to pay for both guns and butter. But the risk is that by not making budgetary choices now, the country will sink back into a 1970s-style period of stagflation with low growth, high interest rates, and declining productivity. Bad fiscal policy in the '70s undermined the productivity gains of the '60s. The same could happen again, undercutting the gains of the '90s. Gold's rising price already portends an increase in inflation for 2003.

In this time of great uncertainty, it is incumbent upon legislators to be pragmatic and flexible, not ideological and partisan. A budget debate would be a good way to start confronting the choices ahead. The world is changing. Washington must change, too.

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