TOPICS > Economy

Spending Blueprint

February 3, 2003 at 12:00 AM EDT
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MARGARET WARNER: To analyze this new budget proposal, we turn to experts from two Washington research groups. Robert Greenstein is executive director of the Center on Budget and Policy Priorities, and William Beach is senior fellow in economics at the Heritage Foundation. Welcome to you both.

As we could see from Senators Conrad and Nussle, Nichols, the lines are pretty tightly drawn here. Which side do you come down on, Bob Greenstein?

ROBERT GREENSTEIN: I find this budget nothing short of astonishing. We’ve had the greatest reversal of fortunes in recent history over the last two years going from big surpluses to deficits as far as the eye can see. And what’s really troubling, Margaret, is that we’re only five years from when the baby boomers start retiring.

We know, every long-term forecast tells us, when they retire in large numbers, daunting deficits, way beyond anything we’ve seen for half a century come back and threaten the economy. What’s the president’s response? To make the problem much worse.

It isn’t just that there are these big expensive new tax cuts here. The design of the tax cuts is such that their cost is much greater after the period your budget figures cover, than it would be now. There’s a huge new tax cut the White House announced just last Friday, none of us had known about before, that is designed through budget gimmicks, so it has almost no cost in the first ten years, and then massive costs out when the baby boomers retire.

So I view this budget, I’ve been here following budgets for 31 years, this is the most reckless, the least responsible budget I’ve ever seen a president of either party propose. Digging a hole much deeper for the nation, future generations, and the economy, in the very period not that far away when the nation ages and the boomers retire when we know we face the biggest challenges we’ve seen in a long time.

MARGARET WARNER: Digging the hole, William Beach?

WILLIAM BEACH: Well, that’s a very warm response that Bob has given. But I think this budget has some very good things about it, I give it two, maybe two and a half cheers. On the first side, the most important sign for this country now the president allow indicates funds for the defense, both national defense and homeland security. That’s very important.

The priorities are right in this budget, in our view -and also for strengthening the economy. The tax measures, also the spending measures that I’ll mention in a moment, are well calculated to do something that’s absolutely crucial for the surpluses and the deficits that Bob is very concerned about, and that is to build the base from which the revenues are taken. And we think that the economic plan is a very good plan, is a very strong plan.

I would predict that if it is enacted by Congress, signed by the president in basically the way that he has in mind, that the capital side of the economy, that is, the factories and machines that people use to really build equipment and to build a tax base, will be nicely recovered. The second thing, the second cheer I want to give…

MARGARET WARNER: Let me just interrupt you because you are talking about different things and I’d like to get each of you to respond to the other’s point, so let me just ask you this, Mr. Beach. What about the point Mr. Greenstein made, though, that this is a five-year budget, the baby boomers start to retire in five years and even the White House has the budget in big deficit, five years from now? When does this growth kick in, and put the budget back into some situation in which it could pay for baby boomer retirement costs?

WILLIAM BEACH: Well, economists were looking at this, this whole business of when will the deficits shrink back to manageable size, and the deficit right now that we’re looking at is not unmanageable. 2008, 2007, 2009, we’re looking for that to be a time when that, you know, could happen. The most important thing though for the issues that are being raised here are the baby boom generation is to make sure that we are properly reforming Medicare, that’s the big issue, the president has said let’s do that now, and Social Security.

But one other point on this budget: the president has put in place a budget that grows very slowly. You look at the budget mechanisms, make sure your revenues are growing strongly and make sure that you are holding spending, when F DR put together budgets during World War II, he also went through and made sure domestic spending was not as rapid as it was in the 1930s.

MARGARET WARNER: All right, this does put a 4 percent cap on discretionary spending, the non Social Security-Medicare kind of spending, in fact, if we don’t count the military it’s just 3 percent. What do you make of that?

ROBERT GREENSTEIN: Well, that 3 percent includes increases in homeland security and education and veterans’ health. If you look at domestic discretionary, that’s non-entitlement programs, outside of homeland security, education, and veterans’ health, what the president’s proposing is actually 7 ½ percent below the 2002 level, adjusted for inflation. Now I say 2002, because we don’t have a 2003 – the budget for that never passed.

But I do want to come back to this point, the economy. You know, we’ve heard this for a long time, when Ronald Reagan came in, the statement was made, we’ll do big tax cuts and they’ll more than pay for themselves, they’ll grow the economy; it didn’t work.

The Congressional Budget Office, which for the last number of years has been headed by a Republican appointee who served in Pres. Bush’s father’s White House has said that the tax cut passed in 2001 will at most increase the economy by one half of one percent over ten years and is just as likely to decrease the size of the economy by half a percent.

The New York Times on Saturday had a story explaining the economists across the country think that these so-called savings proposals announced on Friday will do nothing for the economy, because if you allow very wealthy people, as the proposals do, to take $45,000 a year for a family of four that they already are investing and to just shift it into a tax-sheltered vehicle, that doesn’t increase national saving, it drains revenue.

The bottom line is the surest way we know over the long-term to protect the economy is to have enough saving by not having massive deficits. The president’s plan doesn’t improve the economy, it doesn’t grow revenues. It starts to build huge holes in revenue down the road.

And it does have very small, questionable spending cuts that lead you to questions about priorities. It cuts over the next four years the number of children — low and moderate-income working families getting child care by 200,000. It cuts by over half a million the number of children in those families getting health insurance through the children’s health insurance program. So you have to ask yourself the question, is the highest priority facing the nation tax cuts averaging about $100,000 a year for millionaires?

MARGARET WARNER: Let’s ask Mr. Beach that. Is the highest priority giving tax cuts of $100,000 a year to wealthy folks?

WILLIAM BEACH: No, that’s not the object of the plan here. The president has put in place a tax cut plan which will create jobs. We’re looking at 2004 about a million, maybe a million and a half additional jobs if this plan is passed. If the plan is passed, this is the biggest deficit, next year’s deficit is smaller. How large is this deficit?

MARGARET WARNER: Aren’t they roughly the same, 307, 304 billion, but…

WILLIAM BEACH: But the path thereafter is downward. And if we also address the question with Medicare and Social Security, this makes good progress there. We have a tax code, Margaret, that is very complicated, and is hard to comply with. This is the first step towards fundamental tax reform. So those are very good public policy objectives to have.

MARGARET WARNER: Let me just ask you to comment on where Mr. Greenstein’s comment that this is the sort of 80s redux?

WILLIAM BEACH: When tax rates were cut in the 1980s revenues went up. Spending went out the roof.

ROBERT GREENSTEIN: That’s not true, that’s not true.

WILLIAM BEACH: This is a very large problem which congresses have had. When Pres. Clinton signed legislation to cut the capital gains tax cuts, people in town, Bob included, thought it wouldn’t raise any money. It raised an enormous amount of money.

ROBERT GREENSTEIN: That’s not true either.

WILLIAM BEACH: We have a record of these kinds of reactions occurring, both in the 1960s, 1920s, 1980s, 1990s. So we don’t have to take that risk any more, we know that certain things work well from a tax standpoint.

MARGARET WARNER: Are you saying, Mr. Greenstein, that tax cuts do not help stimulate economic growth, do not help create jobs, investment so forth?

ROBERT GREENSTEIN: It depends on the kind of tax cuts. But you have two effects from tax cuts. Certain kinds of well-designed tax cuts can help the economy and help jobs and growth, in and of themselves, if they’re paid for. But if those tax cuts increase deficits and debt, tin creased deficits and debt reduce saving and harm the economy.

So you have to balance the two effects. The estimates of the president’s plan, the tax cut enacted in 2001 from neutral observers, like the Congressional Budget Office, was no significant net effect on economic growth, which means you don’t offset these big deficits that are coming.

Now, the model for me, interestingly enough, we talked about the 80s, let’s look at Ronald Reagan. Ronald Reagan put through a big tax cut in ’81 like George W. Bush did in ’01. A year later, for other reasons, the economy in both cases, both presidents faced much darker fiscal situations. Ronald Reagan, Bob Dole, Howard Baker and David Stockman responded in ’82 and thereafter by undoing some of the ’81 tax cut. This president is digging the hole deeper.

MARGARET WARNER: Brief response.

WILLIAM BEACH: Well, no, the record of the 80s is the basis of the economic growth of the 90s. And we all know what that is. What President Bush is laying right now is the basis of economic growth in the next ten years. If we don’t have it, Margaret, we won’t be able to fix the many problems that Bob has rightly identified, Social Security, Medicare and all the issues that deal with children. We need this tax cut, we need this budget.

MARGARET WARNER: To be continued. Thank you both.