Crocodile Tears

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MARCH 1, 2004

Crocodile Tears

To trace the Republican Party's evolving view of the deficit during
the Bush years, one need only turn to the editorials of The Wall
Street Journal. In the spring of 2001, before the enactment of
President Bush's first tax cut, the Journal editors were still
floating in the Pollyannaish world of ever- growing surpluses.
"Even if Congress passes Mr. Bush's entire tax cut," an April
editorial pronounced, "federal debt will fall to an estimated 14.4%
of GDP by fiscal 2006. In other words, federal debt is not even
remotely a problem. " A month earlier, when Senate Minority Leader
Tom Daschle warned that Bush's tax cuts would "consume nearly all
the surplus," the Journal replied, "The truth is that if instead of
$5.6 trillion, the surplus were $56 trillion, Senator Daschle and
the like would still be yammering about 'irresponsible' tax cuts."Even after the surplus disappeared, the Journal remained sanguine.
In February 2002, the editors observed, "Another Beltway lament is
that the Bush tax cuts have sent the budget into deficit. ... But
total revenues are projected to rebound smartly in 2003." When,
rather than rebound, revenue fell again in 2003, the Journal was
still undeterred. "The new antitax argument is to lament 'a decade
of deficits' to come," insisted a March 2003 editorial. "This
ignores the fact that the U.S. debt in public hands remains about
36% of GDP." Nine days later, another editorial sneered, "Yes, we
know, there is the 'deficit.'" (The sarcastic quotation marks are a
particularly amusing touch, as if to say, "Oh, riiight, the
budget's in 'deficit.' Whatever you say, Daschle.")

In the last few weeks, however, Journal readers may have detected a
faint note of concern. Tucked into one of its perennial jeremiads
against congressional profligacy, a January 20 editorial worried
that "the ostensibly small-government GOP seems totally oblivious
to the fact that all this spending puts its future economic agenda
in jeopardy. Appropriations do mean taxes, after all, even if
they're deferred taxes." For those who don't follow this debate
closely, "deferred taxes" is a euphemism for deficits. The Journal
is finally acknowledging that, with the budget a half-trillion
dollars in the red, the baby-boomers about to retire, and no sign
of relief on the horizon, the country may have a wee fiscal problem
on its hands.

The Journal lays the blame for this state of affairs on
out-of-control domestic spending. Recent editorials have denounced
"drunken GOP sailors" and threatened "a conservative revolt over
runaway spending." And, indeed, these sentiments reflect pretty
well the position of the conservative movement more generally. "As
2003 closes, the nation finds itself burdened by runaway federal
spending and massive looming structural budget deficits," argued an
oft-cited paper by the Heritage Foundation released last December.
"Republicans are swiftly forfeiting the perception that they are
especially responsible stewards of government finances," complained
columnist George Will. Indeed, in the last few weeks, all the arms
of the conservative intellectual apparatus--National Review, The
Washington Times, Rush Limbaugh, the Cato Institute, the Club for
Growth, and sundry right-wing talk-show hosts--have flayed the
administration and congressional Republicans for their profligacy.
Meanwhile, conservatives in Congress have vowed to slash Bush's
latest budget request.

And so, in a relatively short span of time, the conservative view of
the deficit has gone from myopic denial to borderline hysteria. It
is a sign of genuine progress that Bush's allies finally admit that
vast, structural deficits pose a threat to the continued health of
the U.S. economy. Unfortunately, they have misdiagnosed the nature
of that threat, which is posed by tax cuts and national security
spending, which they support, not by domestic spending. The
conservative uprising may seem like bracing intellectual honesty,
but in fact it's an attempt to deflect attention away from the fact
that the policies they champion have failed even on their own
terms.

The anti-spending backlash has gained such traction--even some
liberals are buying into it--because it contains a few grains of
truth. First, spending has risen noticeably. The catch is that it
has risen from historically low levels. In each of the last three
fiscal years of the Clinton administration, federal spending as a
percentage of the gross domestic product (GDP) reached no higher
than 18.6 percent--lower than at any point since 1966. Today, at
just over 20 percent of GDP, outlays are higher, but they're still
not terribly high by post- Great Society standards. In fact, in
2004, Washington will still consume a lower share of the economy
than it did during any year between 1975 and 1996.

Second, it's also true that Republicans have embraced spending
programs that would make Milton Friedman turn over in his
University of Chicago office. According to Congressional Quarterly,
after Republicans took control of Congress, they "embraced the
practice of earmarking"--the term of art for circumventing the
normal appropriations practice to slip in hometown projects--
"taking it to a degree unimagined when the Republican
revolutionaries of 1994 prepared to storm the capitol." But, while
pork-barrel spending may be a powerful symbol of GOP hypocrisy,
it's not a terribly large part of the $2.4 trillion federal budget.
Likewise, some of Bush's spending initiatives have attracted
attention disproportionate to their size. Bush made an enormous
fuss over his commitment to increase education spending, but
education still accounts for a mere 2.76 percent of the budget.
Conservatives are rightly upset about his funding increase for the
National Endowment for the Arts, but, however shaky arts subsidies
may be in principle, their $18 million cost is peanuts. Even the
farm bill, at $180 billion over ten years, is, again, notable more
for its hypocritical pandering--Bush revived an archaic and
unjustifiable subsidy that Bill Clinton had phased out--than its
scale.

Rather, the most expensive spending programs under Bush have been
for defense, homeland security, and international aid. None of
these areas has grown fat. To the contrary, the military is
overstretched, homeland security underfunded, and aid programs to
build strong governments and civil societies that can resist
radical Islam woefully inadequate. Still, if you add up the cost of
all the legislation enacted since Bush took office--as the Center
on Budget and Policy Priorities did--these three areas account for
30 percent of that cost. New entitlements account for 13 percent,
and, with the Medicare benefit projected to grow, that share will
increase over time. But, rather than tackle these areas of
spending--or address the elephant in the living room, the
president's tax cuts, which account for 55 percent of the "cost" of
legislation under Bush (more on this later)--conservatives have
focused the brunt of their fiscal wrath upon a relatively small and
innocuous slice of the federal budget called domestic discretionary
spending.

Discretionary spending includes everything the government does other
than entitlements, defense, and interest on the national debt. All
of this--from national highways to scientific research to public
housing--accounts for a mere 17 percent of the overall budget. It
makes up a still smaller 3 percent of the total cost of legislation
passed under Bush, and its impact on the budget pales beside the
tax cuts. But, because many of these programs lack strong political
constituencies--at least when compared with heavyweights like
Medicare--they are taking the brunt of the conservative attack.
Heritage paints the growth in discretionary spending as insidious:
"[N]on-defense discretionary spending," argues its December
backgrounder, "has reached 3.9 percent of GDP ($3,900 per
household) for the first time in nearly 20 years." But most of that
increase has come from homeland security. The Center for American
Progress found that, over the last decade, domestic programs
unrelated to security have grown from 3. 3 percent of GDP
to--da-dum!--3.4 percent of GDP.

Trying to balance the budget by squeezing domestic discretionary
spending is like trying to lose weight by giving up that slice of
tomato on your cheeseburger. Not that Republicans aren't trying
anyway: GOP leaders have proposed a total freeze on discretionary
spending this year. Doing so would save $2 billion. To grasp the
absurdity of that effort, keep in mind that this year's deficit is
expected to top $500 billion. Even if Congress persuaded Bush to
completely eliminate all discretionary programs including homeland
security, that would still leave Washington with $137 billion in
red ink.

The big picture, then, is this: Overall spending has crept up a bit,
now taking up 1.6 percent more of the economy than it did when Bush
took office, but it remains modest by modern standards. The really
spectacular change is in tax revenue, which has fallen from 20.9
percent to 15.8 percent of GDP since Bush took office. The collapse
in revenue, in other words, has been more than three times the
growth in spending. This year, revenue will account for a smaller
share of the economy than in any year since 1950. Now, it's true
that much of that revenue loss stems from broader economic factors,
not just tax cuts. But, even if you look only at deficit increases
caused directly by legislative action, the cost of the tax cuts is
still nearly five times the size of all the non-security spending
increases and accounts for more than all new spending (defense,
homeland security, and domestic) put together.

Why, then, do conservatives fixate on the role of spending in
producing the deficit? For one thing, doing so allows them to
pressure the Bush administration and Congress to squeeze spending,
which is what they want to do anyway. More important, it allows
them to avoid acknowledging that they were (and continue to be)
spectacularly wrong about the fiscal impact of the Bush tax cuts.

Recall for a moment that, when asked why it made sense to address a
temporary economic slowdown by opening a permanent drain on federal
revenue, conservatives offered up two fiscal defenses. The first
was the basic supply- side claim that, by unleashing new
incentives, the tax cuts would permanently raise economic growth,
which in turn would create additional tax revenue. Therefore, they
concluded, the tax cut would cost the government far less than
official projections suggested. Heritage fellow Daniel Mitchell
asserted in 2001 that "tax cuts will not result in nearly as much
foregone revenue as static forecasts suggests [sic]." That same
year, Journal editorials touted claims by the American Enterprise
Institute's John Makin and Harvard University's Martin Feldstein
that Bush's tax cuts would in fact "yield a net revenue loss of
only 65% of the officially estimated $1.6 trillion costs." So far,
of course, revenue has dropped far, far more than official
estimates forecasted. (Which should not come as a surprise: In
1993, those same supply- siders argued that Clinton's tax hike
would cause revenue to grow far less than official projections
held, or perhaps even to decline, and instead they skyrocketed.
It's as if the economic gods delight in humiliating the supply-
siders.)

The second, and more popular, justification for tax cuts was that,
by draining revenue from Washington, they would keep a lid on
spending. Curiously enough, some of the people who endorsed this
argument were the same ones who insisted tax cuts wouldn't actually
drain much revenue. (As the Journal editorialized in January 2001,
"[T]here is also a devastating political argument against using the
surplus to pay down the debt. There won't be any. Congress has
demonstrated, again and again, it cannot control itself when there
is money to be spent.") But this argument had its greatest appeal to
those conservatives not inclined to accept supply-side fantasies.
Writing in these pages three years ago, my colleague Andrew
Sullivan argued, "[I]f there is one thing we have learned in the
past 20 years, it's that controlling government spending is simply
impossible without deficits" ("Downsize," May 14, 2001). He also
predicted, "One of the tax cut's effects will surely be that the
United States won't be able to afford a vastly expanded Medicare
drug benefit." Oops.

Today, the very same conservatives who insisted tax cuts were
necessary to hold down spending now concede that Bush has increased
spending at a faster rate than Clinton. None of them have admitted
it, but their theory has failed. Though Republicans control all
branches of government, there is still no political will for
significant spending cuts. (Remember, the most draconian proposal
by House conservatives would reduce the half-trillion-dollar
deficit by $2 billion, or 0.4 percent.) The only question, then, is
whether we should pay for the current level of spending or make
future generations pay for it, with interest.

The great fallacy of the starve-the-beast theory of tax cuts is that
it assumes Washington will spend whatever it can afford, and no
more. There is no empirical evidence to support his claim. The best
study of this, in fact, suggests just the opposite. In 2002,
Richard Kogan, an analyst at the Center on Budget and Policy
Priorities, examined federal budgets since 1976. He found that when
revenue rises, spending tends to fall, and, when revenue falls,
spending tends to rise. (Economy geeks take note: He also found that
this strong correlation held even if you control for the state of
the economy.)

Just look at recent history. Washington tends to restrain spending
when there is bipartisan agreement on the need for fiscal
responsibility. When you remove the restraints on one side of the
equation--taxes or spending--you tend to lose the restraints on the
other side, too. Since Bush only got his initial tax cuts by
dismissing debt reduction and then pooh-poohing deficits as small
and temporary, no wonder there wasn't any public demand for taking a
chainsaw to the federal budget. It's true that Congress cut back on
domestic spending during Ronald Reagan's presidency, but it did so
only after Reagan canceled some of his own tax cuts and raised
other taxes in 1982 and 1983. Two of the most successful efforts to
restrain spending--in 1990 under George H. W. Bush and in 1993
under Clinton--both combined tax hikes with limits on spending.
These two episodes, plus the 1995 showdown with Newt Gingrich, all
proved the same thing: You can get voters to accept spending
restraint for the purpose of shared goals like restoring national
solvency, but not for partisan goals like giving the rich a tax
cut.

If you really want to reduce the size of government, you have to
reduce entitlement spending. Conservatives may hope that, if they
drive the country close enough to insolvency, they will one day
force the public to swallow otherwise unacceptable cuts in Medicare
and Social Security. But this is a pipe dream. Public support for
these entitlement programs is so strong that voters will always
find alternatives. If it comes down to a choice between slashing
Social Security and raising taxes, polls have always shown, voters
prefer to raise taxes. Indeed, the only way Republicans ever get
tax cuts enacted is by insisting that popular entitlements won't be
touched and dismissing any suggestion to the contrary as partisan
demagoguery.

Ultimately, conservatives may have been seduced by the success of
Bush's dishonesty. Bush won approval for his tax cut by convincing
Americans it wouldn't come at the expense of priorities they valued
more. As Sullivan bluntly confessed in his 2001 column endorsing
the tax cut, "The fact that Bush has to obfuscate his real goals of
reducing spending with the smoke screen of 'compassionate
conservatism' shows how uphill the struggle is. Yes, some of the
time he is full of it on his economic policies. But a certain amount
of B.S. is necessary for any vaguely successful retrenchment of
government power in an insatiable entitlement state." The public,
in other words, needed to be fooled into supporting the tax cuts.
The first round of fooling, about the extent to which the tax cuts
would go to the wealthy at the expense of more popular priorities,
went well enough--but, then, most voters don't know how much money
their boss saved on taxes. They do know, however, how much their
mothers' Social Security checks are worth, which is why the second
round of fooling--i.e. , getting them to sign off on substantial
spending cuts--isn't likely to go anywhere. The simple fact is
that, in the long run, conservatives can't affect their hoped-for
"retrenchment of government power" without obtaining the consent of
the public. What they can do is dig the country into a deep fiscal
hole trying.

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