Money Falling From Heaven

We now have a curious situation in Washington. It seems to be raining money. Just the other day, the Clinton administration released new budget projections that raised the estimated surpluses over the next decade by more than $1 trillion. In February the surpluses from 2001 to 2010 totaled $2.9 trillion. The new estimate is $4.2 trillion. The numbers are dizzying and--because they've risen so rapidly--somewhat mystifying.

Despite this, politicians have reacted predictably: let me at the loot. George W. Bush has made a huge tax cut a centerpiece of his campaign. It would cost an estimated $1.3 trillion over 10 years. Last week Congress started debate over a new Medicare drug benefit. The White House's own drug proposal carries a 10-year estimated price tag of $253 billion. The Republican alternative might be two thirds of that but is hugely complex and (as Democrats complain) possibly unworkable.

To forge a compromise, President Clinton suggested that the Republicans support his drug plan and, in return, he would accept their tax cut to ease the so-called marriage penalty (this involves higher taxes for two workers who marry). The tax cut would be worth about $250 billion over a decade, bringing the total cost of the compromise to about a half-trillion dollars. And let's not forget Al Gore. Every few weeks his campaign cranks out a major spending program or tax proposal. His latest is a package of tax credits and subsidies to promote energy efficiency. The projected 10-year cost is almost $150 billion.

There's a casualness to all these proposals that is bred by the ever-expanding size of the projected surpluses. Among economists, the new consensus is that computers and related technol-ogies have improved the economy's long-term prospects. Small apparent increases in economic growth then produce higher incomes, from which the government receives more in taxes. In early 1999 the White House projected average annual economic growth of almost 2.4 percent over the next decade. By February 2000 the rate was up to 2.7 percent. Now it's 3 percent. These numbers are in line with many private forecasts.

We all benefit from the phenomenal power of compounding. A simple example shows the magic. Consider a worker with a $50,000 salary. If it grows 2 percent a year, it's $60,950 after a decade. If it grows 3 percent, it's $67,196. That's 10 percent higher. A similar arithmetic is now transforming budget projections. On paper there's a huge tax windfall.

The headline-grabbing number has been the $1 trillion rise this year in the 10-year surplus. Actually, the increase since early 1999 has been twice that--about $2 trillion. The White House argues that the probable surpluses are now so large that some of them can be tapped. Enacting all Clinton's proposals (the Medicare drug benefit, tax cuts and other spending increases) would still leave most of the surplus to repay the federal debt. At year-end 1999 it was $3.6 trillion. Clinton estimates it can be repaid by 2012.

Superficially, this is a powerful argument. But it's misguided for three reasons.

First, it makes the budget projections seem more certain than they are. We don't truly know how long higher U.S. economic growth will continue. Anyone who thinks we do should recall Japan. In the late 1980s its economy surged. Growth was high, inflation low. The stock market was buoyant. Government budgets swung into surplus. No one predicted that the 1990s would bring economic stagnation and huge budget deficits. Such are the perils of forecasting. Budget estimates are just that--estimates. They dance around. (The doubling of the surplus in 18 months hardly inspires confidence.) But once enacted, spending increases and tax cuts are difficult to reverse.

The second problem involves "discretionary spending"--$620 billion in 2000. This is a third of the budget and is split almost evenly between defense and nondefense programs, from education to highways. Budget projections assume spending only for "current services." Beyond inflation, there's not much room for growth. This may underfund many programs, particularly defense. Procurement has already suffered; the Congressional Budget Office estimates spending is about $30 billion annually below what's needed to maintain present forces. Military readiness has declined; since 1991 the share of Air Force fighters that are "mission capable" has dropped from 83 to 73 percent. The point: spending projections may be unrealistically low--and surpluses overstated.

The final problem is timing. We're about to have an election. Anything Clinton and Congress do now will compromise the next president's ability to craft a comprehensive approach to the budget. It's true, as Clinton says, that a drug benefit ought to be added to Medicare. But it's also true that a drug benefit could be the major "sweetener" in any larger overhaul of Medicare, intended to control costs and prepare for the retirement of the baby-boom generation. Enacting a drug benefit now would reduce the already low odds of putting together such a package. Clinton and Congress shouldn't tie the hands of their successors.

The present partisan controversies mainly engage rival ambitions. Clinton is desperate for a large domestic legacy. A Medicare drug benefit is probably his best shot. The Republican Congress is frantic to seem compassionate and constructive. Selective tax cuts and a Medicare expansion might do the trick. There are surely grounds for compromise, but any compromise would serve these competing ambitions more than the national interest.

Let's hope it doesn't happen. Almost everyone seems to regard partisan stalemate as immature and deplorable while compromise is sober and responsible. Not so. In this case, paralysis is a policy. Doing nothing means devoting most of the surpluses to paying down the federal debt. It means making hay while the sun shines. Not only is this a policy, but for the moment, it's the best policy.