What we have here is a difference of opinion. Last week the Bush administration announced that, primarily because of the economic slowdown, the budget surplus for this fiscal year--which ends in five weeks; Congress has passed none of the 13 appropriations bills for this year--would be $158 billion rather than the $281 billion projected four months ago. Mitch Daniels, Bush's budget director, said not to worry: "The nation is awash in money and is going to be." But Kent Conrad, Democratic chairman of the Senate Budget Committee, said, "This is fiscal mismanagement big time."
It is axiomatic that everyone is entitled to his own opinions, but not to his own facts, so what are the pertinent facts? Here are three. The economic slowdown began around June 2000. That the budget is still in surplus is not only remarkable, it is probably unwise. And the bipartisan fetish (Oxford English Dictionary: "something irrationally reverenced") about "preserving" the Social Security surplus is quite new.
At a conference last week Kathryn Shaw, a member of President Clinton's Council of Economic Advisers, said that last summer she told senior Clinton aides that the economy was heading into a recession. When, before his Inauguration, George W. Bush warned that the already protracted slowdown was worsening, critics charged he was talking that way only to build support for his tax cut. The critics implicitly accepted that if Bush was right, a tax cut made sense.
Critics also charged that Bush's somber warnings might be self-fulfilling--that he might "talk down" the economy. But manufacturing employment had fallen in August 2000. Industrial production began falling that September. In December the government's estimate of GDP was $120 billion too high.
Was the beginning of the slowdown--since June 2000 the growth rate has been just 1.3 percent--the result of Clinton- administration "fiscal mismanagement"? Not really. A large factor was that lots of investors, particularly in the technology sector, overdid it. Blame irrational exuberance or animal spirits. Since then, the equity markets have been doing what they exist to do: shuffling capital from less to more productive uses.
To ascribe every dip of the economy to fiscal mismanagement is to subscribe, as Washingtonians in their vanity do, to a Washingtoncentric theory of how the world works. Granted, policymakers, by becoming more modest about their ability to fine-tune the economy, have become better at making business cycles less frequent and less severe. In the 50 years prior to the end of the Second World War, there were three contractions of 5 percent of GDP, two of 10 percent and two of 15 percent. Since 1945 the most severe contraction, that of 1973-75, was less than 4 percent.
Still, the political class in its hubris may believe it has so mastered the management of the economy--controlling or even just predicting the trillions of daily decisions of individuals and institutions here and abroad--that there will never be even short-run bumps and dips. However, relative to the economy, even big government is not all that big. This year's rebates resulting from Bush's tax cut amount to only $38 billion. This year the capital investment of just one company, Verizon, will be $17.5 billion.
By traditional and commonsense accounting, the government is running the second largest surplus in U.S. history. And contrary to commonsense economic thinking, it is siphoning this money out of the economy during a slowdown. Today's worship of surpluses, combined with a redefinition of surpluses (by not counting the Social Security component), is a new wrinkle in contemporary superstition.
Lyndon Johnson's fiscal 1969 budget was in balance counting the Social Security surplus. The next balanced budget, that of fiscal 1998, was balanced only because it too counted the Social Security surplus. As it should have. Most Americans--in fact, about 75 percent--pay more in Social Security taxes than in income taxes. Economic statistics are supposed to give an informative picture of the contours of government and its consequences for the economy. It is perverse to manipulate government statistics to serve the fiction that the surplus of Social Security taxes over outlays--this year, about $157 billion--is somehow not part of the revenue stream that runs the government.
Both parties, to their discredit, have promoted this fiction about not "raiding" money that belongs in a Social Security "lockbox." They deserve the discomfort it is causing them: Neither party can be faithful to that fiction and spend what it wants to for its priorities. But it is particularly dishonest for Democrats like Senate Majority Leader Tom Daschle to blame the $123 billion shrinkage of the surplus on Bush's $38 billion tax cut this year. Instant rebates were primarily a Democratic idea, and Daschle advocated $60 billion in tax cuts this year.
There has been carnage among the dot-coms and implosion on the technology-intensive Nasdaq. California, which is about one eighth of the U.S. economy, has experienced a self-inflicted energy crisis. All this, and still the country has not yet slipped into recession. The economy's resilience, not its weakness, is the real news. So Americans should take a deep breath and take seriously something said by Arthur C. Clarke, the science-fiction author. He warned that people tend to overestimate what can be accomplished in the short run but to underestimate what can be accomplished in the long run.
History teaches that the long-term trajectory of the graph of Americans' material well-being is always up: real (inflation- adjusted) family income increased sixfold in the 20th century. Short-run troughs are incidents, not trends, let alone destinies. As for any political speech extolling the new cult of surplus worship and the sacramental nature of the Social Security surplus, well: When authors sent Benjamin Disraeli unsolicited manuscripts, he replied with crafty ambiguity, "Many thanks; I shall lose no time in reading it."