Samuelson: 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.

Clinton and Obama haven't said when, if ever, they'd balance the budget. But each has a long list of new spending increases and tax cuts. Both have health-insurance proposals intended to cover the 47 million uninsured. Clinton says her plan would cost $110 billion. Half would be paid by raising taxes on those with incomes exceeding $250,000, something that Obama would also do. Obama would provide a permanent $500 tax cut for about 150 million workers, or $1,000 for a two-earner family; he would also exempt retirees with less than $50,000 from income tax. Clinton would provide annual government matching grants of $1,000 for retirement savings for couples making up to $60,000. Both would provide more-generous tax credits for college. Their lists run on.

Both campaigns insist that all their new proposals are "paid for" through tax increases, closed loopholes, reforms of government contracting and various assumed "savings." It seems doubtful that this claim would survive a strict scrutiny of funding sources, but even if it did, budget issues would remain. Neither candidate offsets the increasing AMT; possibly, savings from withdrawing from Iraq might cover some of those costs. Still, sizable budget deficits would continue.

The truth is that most Americans don't seem bothered. That's why politicians in both parties devote so little effort to addressing government spending or the deficits. As a society, we seem to have made a choice. It is to not control government. Note how our debates proceed. Almost every new spending plan or tax cut is simply piled atop previous spending programs or tax cuts. Democrats have spent seven years denouncing Bush's tax cuts but are willing to repeal only the cuts benefiting those at the tip of the income scale, above $250,000. Perhaps three quarters of the tax cuts would remain. When Republicans created the Medicare drug benefit (2007 cost: $41 billion), it was sim-ply added onto existing benefits.

What we get is government by accretion. Government acquires more and more functions, because no one dares strip away any of the existing functions. People, states, localities and industries think they have a moral entitlement to their tax breaks, benefit checks, subsidies and spending programs. No one's Social Security or Medicare benefit can be reduced or modified, even if the recipient is wealthy and the cost is undesirably high. Outmoded or ineffective programs cannot be ended. There is an unstated presumption that the gradual growth of government is unthreatening to the economy, and although this was arguably true in the past, it may be less so in the future. As the population ages, taxes, budget deficits or both will rise. The increases could be substantial. The fact that we are not debating the possible consequences is a cop-out—but it is a cop-out in which the broad American public is conspicuously complicit.

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