The $3 Trillion Cop-Out

The $3.1 trillion budget submitted last week by President Bush with a projected $407 billion deficit for 2009 reminds us of the huge gap between uplifting political rhetoric—including the rhetoric of this campaign—and the grim realities of governing. Budgets are not just numbers. They express political choices. What should government do and who should pay? The reigning philosophy, practiced by both parties and largely approved by the public, is to evade choices. It is to spend more, tax less and deplore deficits. For most Americans, what matters most are their own tax breaks and government benefits and not the budget's larger effects on society.

Since 1961, the federal government has run deficits in all but five years. Only the surplus of 1969 stemmed from deliberate policy: a 10 percent income surtax reluctantly passed by Congress in 1968. The others (1998–2001) mostly reflected good fortune: the end of the cold war, resulting in a 40 percent drop in defense spending as a share of the economy, and an unexpected surge in taxes from the economic boom. Neither was a policy act of the Clinton administration or the then Republican Congress.

Bush says his policies would produce a balanced budget by 2012—three years after he's left office—but his underlying assumptions are laughably artificial. First, he omits most of the future costs of the Iraq War (for budgeting, he effectively adopts his critics' plan of rapid withdrawal). Second, he assumes big savings in Medicare by freezing reimbursements to doctors and hospitals—a policy Congress won't adopt. Third, he doesn't offset the growing revenue bite of the "alternative minimum tax" that would result in a sizable tax increase: an outcome Bush rejects.

The only way Bush could balance the budget would be by not following Bush's policies. The most telling figures in his budget involve his proposal to eliminate or dramatically reduce 151 programs, for savings of $18 billion. That's sixtenths of 1 percent of federal spending. Is that all the White House could find that's worth axing? What's telling, though, is that Congress will probably reject even many of these proposals.

Based on campaign policies, none of the major presidential candidates would do much better. Sen. John McCain, the Republican front runner, and Democratic rivals Sens. Hillary Clinton and Barack Obama are alike in not addressing the central budget issue: baby boomers' retirement costs. Already, Social Security, Medicare and Medicaid (the main programs serving the elderly) are 44 percent of federal spending. In 2007, these programs cost $1.2 trillion, more than double all defense spending.

McCain says spending will have to be cut but doesn't say where. He would eliminate the alternative minimum tax (AMT) and cover the costs by curbing congressional "earmarks" (spending projects designated for specific districts) and closing tax loopholes, according to economic adviser Douglas Holtz-Eakin. McCain's overall goal is fairly relaxed. It is to balance the budget by the end of his second term, says Holtz-Eakin. That would be 2017.