When Congress acts this year on tax and budget legislation, it will do
more than choose between various Republican or Democratic blueprints for
how to dispose of federal budget surpluses, how to distribute tax relief,
or how to deal with a sluggish economy. It will choose between two very
different visions of the nature of the economy, the best way to make it
grow, the proper role of government, the moral underpinnings of progressive
taxation, and the responsibility of this generation to the needs of its
parents and children. We must not let the blizzard of complicated numbers
and the fog of technical language obscure the fundamental choice.
The last two decades have provided a unique controlled experiment in
economic and fiscal policy. Beginning in 1981, President Ronald Reagan
convinced narrow majorities in Congress that cutting marginal tax rates
on high earners would produce long-term economic growth, raise incomes
across the board, produce booming revenues, wipe out budget deficits,
and rein in excessive government spending. The results were a short-term
business recovery, stagnant real incomes for most Americans, and more
public debt than had been incurred in the rest of U.S. history combined,
concluding in a deep recession and a period of pervasive mistrust in national
political leadership.
In the 1990s, during the Clinton administration, the country tried a
very different approach. It was based on fiscal discipline to reduce budget
deficits; a renewed commitment to progressive taxation; public support
for private innovation and open markets; and public investment in the
skills and knowledge of citizens from the top to the bottom of the economic
scale. The results were the longest sustained economic boom since the
1960s, the disappearance of federal budget deficits, the creation of the
the first mass upper-middle class in human history, the re-emergence of
U.S. global economic leadership, and finally, the first major increases
in real incomes for lower- and middle-income Americans in nearly three
decades.
FORWARD OR BACKWARD?
The Clinton years saw a sharp rise in average gross domestic product by
a full percentage point (top chart). Meanwhile, deficits plunged for the
first times since the Reagan era, turning into surpluses (bottom chart).
Putting politics aside, which decade's policies and results would any
intelligent observer prefer?
But a return to 1980s policies is exactly what the Bush administration
and most congressional Republicans are proposing. Emulating Reagan's 1981
economic plan, the president is proposing income tax cuts aimed in no
small part at lowering the top marginal rate on the highest earners (the
targeting of relief to high earners is compounded by his proposal to repeal
the federal estate tax). As in 1981, the Bush tax plan is being proposed
as part of an overall budget that deliberately underestimates the revenue
losses from tax cuts; deliberately overestimates the savings likely to
be produced from future spending cuts, as yet unspecified; and deliberately
subordinates long-term fiscal discipline and debt relief to a short-term
obsession with cutting taxes.
While Bush administration officials are careful not to publicly embrace
the discredited supply-side economic theory that cutting marginal tax
rates "pays for itself" in higher growth and revenues, belief
in supply-side economics remains strong among many conservative opinion-leaders
and members of Congress who support the Bush plan. And the president has
himself frequently advanced another staple of the 1980s argument for big
tax cuts: the "starve big government" hypothesis that taking
revenues off the table will avoid unspecified types of higher federal
spending.
It would be bad enough if the consequences of following Bush's lead on
fiscal policy were that the country would return to the budgetary and
economic conditions of the 1980s. But it's potentially far worse than
that, for three important reasons.
First, the Reagan tax cut blitz occurred when the country had been mired
in bad economic conditions for several years, with a recession following
a period of double-digit inflation and interest rates. At least Republicans
could then argue that existing economic policies had failed, and it was
worth trying something new. But the Bush tax cut blitz represents a sharp
departure from the most successful economic policies in a generation.
The main short-term threat to the economy comes from a crisis of consumer
and investor confidence that could turn a healthy slowdown from unsustainable
growth levels into a serious recession. Moreover, the President is deliberately
fanning these fears and undermining confidence in an effort to "scare
up" support for his tax cut.
Second, just beyond the 10-year horizons of everyone's budget forecasts,
the baby boom generation will begin to retire, creating a fiscal, and
even a moral, crisis for the country as today's Social Security and Medicare
surpluses turn into giant deficits. The Bush administration message that
the only budget problem facing the country is how to dispose of projected
surpluses ignores this fundamental reality. Yet the president's own agenda
includes a partial privatization plan for Social Security that will incur
roughly $1 trillion in transition costs, and he's also planning to raid
Medicare payroll tax revenues to pay for a prescription drug benefit and
help offset the cost of tax cuts. Finally, the administration is diverting
surplus funds from payments on the national debt into tax cuts, which
will directly weaken the fiscal condition of the country heading into
the baby boom retirement crisis. Clearly, any success the administration
achieves on its budget and tax priorities this year will directly undermine
the ability of the country to cope with future retirement costs.
Third, the economy of the 1980s is long gone, replaced by a knowledge-driven
global New Economy with very different characteristics and needs. One
of the crowning ironies of the early stages of this year's tax debate
is that the revenue projections the Bush administration is relying on
in making the case for its tax plan are in turn based on bullish assessments
of productivity gains attributable to the spread of new technologies throughout
the U.S. economy. Yet the Bush agenda does little or nothing to promote
these new technologies or to equip the American people to use them. Instead,
administration economic policy is focused on old-fashioned business cycle
management strategies in which productivity and real income gains are
at most an afterthought.
Moreover, by directly attacking the progressivity of the U.S. tax code,
the Bush team is failing to recognize the critical economic as well as
moral importance of spreading the blessings of prosperity more broadly
and "expanding the winners' circle" of Americans prepared to
succeed in the New Economy. No economic idea is more thoroughly obsolete
than the notion that economic growth is driven purely by the investment
decisions of those at the top of the income ladder.
The key to the tax and budget debate this year will be the success or
failure of Democrats and responsible Republicans to engage the American
people in a broader debate about each party's vision of the country --
its economy, its values, its priorities, and its future. New Democrats
have a special obligation to champion expanded opportunity in the New
Economy; mutual responsibility for the debts of the 1990s and the retirement
IOUs piling up just ahead; and above all, the belief that these decisions
must be made by Americans as a community that can transcend narrow self-interest
or hostility to the common enterprise of government.
In promoting this kind of debate, New Democrats will have to overcome
an administration that has so far been unwilling to admit the fundamental
choices its agenda represents.
On the eve of President Bush's February 2001 address to Congress, focused
on building support for his tax plan, a Washington Times front-page headline
previewed the president's message as: "Bush To Tell Americans They
Can Have It All." The Times got it exactly right. The Bush administration
claims to offer the country an endless buffet of easy choices, with economic
recovery, investments in education and health care, protection of Social
Security and Medicare, and a $2 trillion-plus tax cut nestled comfortably
together on the same plate. Such an offering will never work because it
rests on an egregious exercise in fuzzy math.
This means Congress and the country face several tough choices this year,
and one really big choice. We can go forward, or go back.
