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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: gao seng who wrote (223187)	1/29/2002 12:51:30 PM
From: gao seng	Read Replies (2) \| Respond to of 769670

Outside View: Deficits? What deficits? By Phil Kerpen Special to United Press International Published 1/29/2002 12:33 PM WASHINGTON, Jan. 29 (UPI) -- Republicans and Democrats are locked in a heated public battle about what caused the impending spiral of budget deficits. Democrats, led by Sen. Tom Daschle, D-S.D., claim tax cuts destroyed fiscal discipline, while Republicans argue that the unprecedented explosion in discretionary spending is the main culprit. Both sides seem to take as a given that major deficits are coming and threaten to undermine long-term prosperity. But the numbers simply do not bear this out. Last month, Republicans on the Senate budget committee predicted the 2002 budget would be balanced, predicting a budget surplus of only $1 billion. While this is a staggering decline from central budget office's prediction of a $304 billion surplus as recently as May, it's hardly fiscally irresponsible. Where did the surplus go? More than two-thirds of the decline was due to the economic recession. The remaining third was split between tax cut and new spending. Nonetheless, Daschle recently laid the blame for the declining surplus squarely on the tax cut. And he went even further, predicting debilitating deficits going forward that would increase long-term interest rates and prevent economic recovery. What numbers did Daschle base these claims on? Certainly not the projections released by the Democrats on the Senate budget committee. Its projections, released Jan. 10, predict sizable surpluses over the next 10 years. The budget committee's Democrats agree with Republican projections from December that the budget will be about balanced in 2002. They foresee a deficit of $1 billion in 2002, ballooning to $5 billion in 2003, then evened out by surpluses throughout the rest of the decade. Borrowing $6 billion over the next two years will not place any pressure on long-term interest rates, which are already at their lowest point in about 35 years, and fell by more than a full percentage point last year. If even the Democrats predict deficits too small to be significant, then where are all these big deficit numbers coming from? The answer lies in the bizarre distinction between "on budget" and "off budget" items in the federal budget. In 1990, Congress changed the way the federal budget is calculated, arbitrarily excluding Social Security and Medicare from the official budget ledger. This has the effect of ignoring about a quarter of the federal budget. From a macro-economic perspective this makes no sense. A large "deficit" that excludes off-budget items is not a meaningful number because the government doesn't ever have to borrow money to pay it. The real economy is indifferent to the government's accounting methods. Keeping Social Security funds separate would make sense if those funds were really put in a trust fund to pay for the benefits of future retirees. But that's never how it has actually worked. Social Security has always been a pay-as-you-go system, in which the payroll taxes paid by workers are immediately transferred to retirees. Unfortunately, no accounting gimmick can save Social Security. Demographics are funny that way -- all the baby boomers lining up for retirement are unlikely to care whether their checks are "on budget" or "off budget." The reality is that there are only two ways for Social Security to remain viable in the long term. One of them is for the system to make a transition to an investment model using personal accounts, a winning campaign issue that Bush should put back on the agenda. The other is to substantially boost economic growth. Somewhere between 4 percent and 5 percent growth the economy grows its way out of the Social Security demographic problem. Growth solves a lot of problems, actually, including deficits. The Democrats' analysis holds the recession responsible for 68 percent of the drop in the 2002 surplus. Even a modest boost in economic growth has a huge effect on federal revenues; so large that it dwarfs all of the other factors. That's why the traditional battle of tax cuts vs. spending should be viewed as those issues relate to economic growth. Tax cuts spur economic growth by creating supply-side incentives, meaning that people are more likely to work and invest when they can keep more of the income they earn. The Kennedy and Reagan tax cuts made it clear that this equation works -- in fact, in the 1980s we learned that this equation works even when the government is accumulating large deficits. If the budget takes a short-term hit to promote a higher growth path, that's clearly a price worth paying. But even the short-term effects of a tax cut are not necessarily negative for the federal budget. Capital gains cuts produce higher revenues immediately because investors are far more likely to realize their gains when the tax rate is lower. The budget deficit debate is really about politics, not policy. The Democrats are trying to blame deficits on the Bush tax cut because discrediting the president on the economy is their only chance to make major gains in the midterm elections. Facts don't permit them to claim that the tax cuts had a direct negative effect on the real economy, so they employ the twisted logic that the tax cut caused deficits, which pushed up interest rates, which hurt the economy. But the projected deficits are far too small to have any impact on the economy, and long-term interest rates are historically low. Don't be fooled. upi.com