June 8, 2003
Deficits and Dysfunction
By PETER G. PETERSON
have belonged to the Republican Party all my life. As a Republican, I have served as a cabinet member (once), a presidential commission member (three times), an all-purpose political ombudsman (many times) and a relentless crusader whom some would call a crank (throughout). Among the bedrock principles that the Republican Party has stood for since its origins in the 1850's is the principle of fiscal stewardship -- the idea that government should invest in posterity and safeguard future generations from unsustainable liabilities. It is a priority that has always attracted me to the party. At various times in our history (especially after wars), Republican leaders have honored this principle by advocating and legislating painful budgetary retrenchment, including both spending cuts and tax hikes.
Over the last quarter century, however, the Grand Old Party has abandoned these original convictions. Without ever renouncing stewardship itself -- indeed, while talking incessantly about legacies, endowments, family values and leaving ''no child behind'' -- the G.O.P. leadership has by degrees come to embrace the very different notion that deficit spending is a sort of fiscal wonder drug. Like taking aspirin, you should do it regularly just to stay healthy and do lots of it whenever you're feeling out of sorts.
With the arrival of Ronald Reagan in the White House, this idea was first introduced as part of an extraordinary ''supply-side revolution'' in fiscal policy, needed (so the thinking ran) as a one-time fix for an economy gripped by stagflation. To those who worried about more debt, they said, Relax, it won't happen -- we'll ''grow out of it.'' Over the course of the 1980's, under the influence of this revolution, what grew most was federal debt, from 26 to 42 percent of G.D.P. During the next decade, Republican leaders became less conditional in their advocacy. Since 2001, the fiscal strategizing of the party has ascended to a new level of fiscal irresponsibility. For the first time ever, a Republican leadership in complete control of our national government is advocating a huge and virtually endless policy of debt creation.
The numbers are simply breathtaking. When President George W. Bush entered office, the 10-year budget balance was officially projected to be a surplus of $5.6 trillion -- a vast boon to future generations that Republican leaders ''firmly promised'' would be committed to their benefit by, for example, prefinancing the future cost of Social Security. Those promises were quickly forgotten. A large tax cut and continued spending growth, combined with a recession, the shock of 9/11 and the bursting of the stock-market bubble, pulled that surplus down to a mere $1 trillion by the end of 2002. Unfazed by this turnaround, the Bush administration proposed a second tax-cut package in 2003 in the face of huge new fiscal demands, including a war in Iraq and an urgent ''homeland security'' agenda. By midyear, prudent forecasters pegged the 10-year fiscal projection at a deficit of well over $4 trillion.
So there you have it: in just two years there was a $10 trillion swing in the deficit outlook. Coming into power, the Republican leaders faced a choice between tax cuts and providing genuine financing for the future of Social Security. (What a landmark reform this would have been!) They chose tax cuts. After 9/11, they faced a choice between tax cuts and getting serious about the extensive measures needed to protect this nation against further terrorist attacks. They chose tax cuts. After war broke out in the Mideast, they faced a choice between tax cuts and galvanizing the nation behind a policy of future-oriented burden sharing. Again and again, they chose tax cuts.
The recent $10 trillion deficit swing is the largest in American history other than during years of total war. With total war, of course, you have the excuse that you expect the emergency to be over soon, and thus you'll be able to pay back the new debt during subsequent years of peace and prosperity. Yet few believe that the major drivers of today's deficit projections, not even the war on terror, are similarly short-term. Indeed, the biggest single driver of the projections, the growing cost of senior entitlements, are certain to become much worse just beyond the 10-year horizon when the huge baby-boom generation starts retiring in earnest. By the time the boomer age wave peaks, workers will have to pay the equivalent of 25 to 33 percent of their payroll in Social Security and Medicare before they retire just to keep those programs solvent.
Two facts left unmentioned in the deficit numbers cited above will help put the cost of the boomer retirement into focus. First, the deficit projections would be much larger if we took away the ''trust-fund surplus'' we are supposed to be dedicating to the future of Social Security and Medicare; and second, the size of this trust fund, even if we were really accumulating it -- which we are not -- is dwarfed by the $25 trillion in total unfinanced liabilities still hanging over both programs.
A longer time horizon does not justify near-term deficits. If anything, the longer-term demographics are an argument for sizable near-term surpluses. As Milton Friedman once put it, if you cut taxes without cutting spending, you aren't really reducing the tax burden at all. In fact, you're just pushing it off yourself and onto your kids.
You might suppose that a reasoned debate over this deficit-happy policy would at least be admissible within the ''discussion tent'' of the Republican Party. Apparently, it is not. I've seen Republicans get blackballed for merely observing that national investment is limited by national savings; that large deficits typically reduce national savings; or that higher deficits eventually trigger higher interest rates. I've seen others get pilloried for picking on the wrong constituency -- for suggesting, say, that a tax loophole for a corporation or wealthy retiree is no better, ethically or economically, than a dubious welfare program.
For some ''supply side'' Republicans, the pursuit of lower taxes has evolved into a religion, indeed a tax-cut theology that simply discards any objective evidence that violates the tenets of the faith.
So long as taxes are cut, even dissimulation is allowable. A new Republican fad is to propose that tax cuts be officially ''sunsetted'' in 2 or 5 or 10 years in order to minimize the projected revenue loss -- and then to go out and tell supporters that, of course, the sunset is not to be taken seriously and that rescinding such tax cuts is politically unlikely. Among themselves, in other words, the loudly whispered message is that a setting sun always rises.
What's remarkable is how so many elected Republicans go along with the charade. The same Republican senators who overwhelmingly approved (without a single nay vote) the Sarbanes-Oxley Act to crack down on shady corporate accounting of investments worth millions of dollars see little wrong with turning around and making utterly fraudulent pronouncements about tax cuts that will cost billions or, indeed, even trillions of dollars.
For some Republicans, all this tax-cutting talk is a mere tactic. I know several brilliant and partisan Republicans who admit to me, in private, that much of what they say about taxes is of course not really true. But, they say, it's the only way to reduce government spending: chop revenue and trust that the Democrats, like Solomon, will agree to cut spending rather than punish our children by smothering them with debt.
This clever apologia would be more believable if Republicans -- in all matters other than cutting the aggregate tax burden -- were to speak loudly and act decisively in favor of deficit reductions. But it's hard to find the small-government argument persuasive when, on the spending front, the Republican leaders do nothing to reform entitlements, allow debt-service costs to rise along with the debt and urge greater spending on defense -- and when these three functions make up over four-fifths of all federal outlays.
The starve-government-at-the-source strategy is not only hypocritical, it is likely to fail -- with great injury to the young -- once the other party decides to raise the ante rather than play the sucker and do the right thing. When the Democratic presidential contender Dick Gephardt proposed in April a vast new national health insurance plan, he justified its cost, which critics put at more than $2 trillion over 10 years, by suggesting that we ''pay'' for it by rescinding most of the administration's tax legislation. Oddly, it never occurred to these Republican strategists that two can play the spend-the-deficit game.
Not surprisingly, many Democrats have thrown a spotlight on the Republicans' irresponsible obsession with tax cutting in order to improve their party's image with voters, even to the extent of billing themselves as born-again champions of fiscal responsibility. Though I welcome any newcomers to the cause of genuine fiscal stewardship,
I doubt that the Democratic Party as a whole is any less dysfunctional than the Republican Party. It's just dysfunctional in a different way.
Yes, the Republican Party line often boils down to cutting taxes and damning the torpedoes. And yes, by whipping up one-sided popular support for lower taxes, the Republicans pre-empt responsible discussion of tax fairness and force many Democrats to echo weakly, ''Me, too.'' But it's equally true that the Democratic Party line often boils down to boosting outlays and damning the torpedoes. Likewise, Democrats regularly short-circuit any prudent examination of the single biggest spending issue, the future of senior entitlements, by castigating all reformers as heartless Scrooges.
I have often and at great length criticized the free-lunch games of many Republican reform plans for Social Security -- like personal accounts that will be ''funded'' by deficit-financed contributions. But at least they pretend to have reform plans. Democrats have nothing. Or as Bob Kerrey puts it quite nicely, most of his fellow Democrats propose the ''do-nothing plan,'' a blank sheet of paper that essentially says it is O.K. to cut benefits by 26 percent across the board when the money runs out. Assuming that Democrats would feel genuine compassion for the lower-income retirees, widows and disabled parents who would be most affected by such a cut, I have suggested to them that maybe we ought to introduce an ''affluence test'' that reduces benefits for fat cats like me.
To my amazement, Democrats angrily respond with irrelevant cliches like ''programs for the poor are poor programs'' or ''Social Security is a social contract that cannot be broken.'' Apparently, it doesn't matter that the program is already unsustainable. They cling to the mast and are ready to go down with the ship. To most Democratic leaders, federal entitlements are their theology.
What exactly gave rise to this bipartisan flight from integrity and responsibility -- and when? My own theory, for what it's worth, is that it got started during the ''Me Decade,'' the 1970's, when a socially fragmenting America began to gravitate around a myriad of interest groups, each more fixated on pursuing and financing, through massive political campaign contributions, its own agenda than on safeguarding the common good of the nation. Political parties, rather than helping to transcend these fissures and bind the country together, instead began to cater to them and ultimately sold themselves out.
I'm not sure what it will take to make our two-party system healthy again. I hope that in the search for a durable majority, Republicans will sooner or later realize that it won't happen without coming to terms with deficits and debts, and Democrats will likewise realize it won't happen for them without coming to terms with entitlements.
Whether any of this happens sooner or later, of course, ultimately depends upon the voters. Perhaps we will soon witness the emergence of a new and very different crop of young voters who are freshly engaged in mainstream politics and will start holding candidates to a more rigorous and objective standard of integrity. That would be good news indeed for the future of our parties.
In any case, I fervently hope that America does not have to drift into real trouble, either at home or abroad, before our leaders get scared straight and stop playing chicken with one another. That's a risky course, full of possible disasters. It's not a solution that a great nation like ours ought to be counting on.
Peter G. Peterson is chairman and co-founder of the Blackstone Group and chairman of the Federal Reserve Bank of New York. He served as secretary of commerce under President Nixon.
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