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| SPENDING THE SURPLUS | |
 October 3, 2000  |
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Economics correspondent Paul Solman examines a critical debate-night quandry: What to do with the budget surplus?
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PAUL SOLMAN (from 1988): Let's use the standard graphic device for representing the budget: the pie…
PAUL SOLMAN (from 1992): As you may have heard, we're gonna come up a little short again in '92, to the tune of something like $300 billion. PAUL SOLMAN: But now, suddenly, the government is running a surplus: an estimated $230 billion this year alone, and, as projected by the Congressional Budget Office, roughly four and a half trillion dollars over the next decade. |
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| Trading places | ||||||||||||||||||||
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PAUL SOLMAN: That's Al Gore, of course, and what he's saying illustrates another big change over the years: even in an era of surpluses, the Democrat sounds like the fiscal conservative. VICE PRESIDENT AL GORE: Our national government should do what so many families have done for years, namely set aside some money for a rainy day, to be absolutely certain that we never spend money that we don't have. PAUL SOLMAN: Gore pledges to use some two-thirds of the projected surplus to lower the accumulated national debt. Essentially saving the money. It's a position once associated with old-time, fiscally conservative Republicans. But then came Ronald Reagan, supply-side economics, and today, George W. Bush. When it comes to paying down the debt, the Republican candidate would use much less of the surplus than the Democrat -- between a quarter and at most a half, depending on how you interpret Bush's Social Security plan.
PAUL SOLMAN: Underlying Bush's program is an assumption: that tax cuts will spur economic growth and result in a bonanza of greater surpluses in the future. Leaving aside their differences for a moment, though, both parties intend to pay off at least some of the national debt, which now totals more than $5 trillion. But, why? And that is where this story really starts. Why use budget surpluses to pay down the debt? Well, to answer that it helps to remember what the national debt is in the first place. Fortunately, back in 1995, a group of Virginia high school students did a memorable, if breezy, show and tell. |
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| Fast times at Fairfax High | ||||||||||||||||||||
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PAUL SOLMAN: The amount of government borrowing each year to cover the deficit was represented here by annual infusions -- out in the real world, money borrowed each year from the public by selling government bonds. The point of this demo, the more bonds issued to cover cummulative deficits, the more the national debt expanded.
PAUL SOLMAN: Now the reason economists think a large national debt is damaging is that it soaks up money that would otherwise be put to more productive use. Paying down the debt, says MIT economist Robert Solow, frees up money for private investment. PAUL SOLMAN: If the government buys back my $1,000 U.S. Bond and everybody elses… then what happens? ROBERT SOLOW: I have to do something with my wealth that will earn a return and what's left for me to do with my wealth that will earn a return is to lend it to - to a business. And the business will use it, will use my wealth, access to it, in order to invest. In order to build a productive factory or something. We can invest in modern plant equipment and if we do that, then we have some hope that 40 years down the road our productive capacity will have grown enough so that this larger population will be able to live in the style to which we have become accustom and I hope they will too. |
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| Growth through investment | ||||||||||||||||||||
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PETE PETERSON: Anybody that thinks about this problem has to know that when the boomers start retiring and these deficits, you know, go six, seven, eight hundred billion dollars a year, who's ever running the country at that time is going to have several choices: they can cut the benefits, they can increase taxes, or they can try to borrow huge, unprecedented amounts of money. PAUL SOLMAN: Peterson and others have been making this case since the early days of big budget deficits -- when this TV ad first ran in 1985. AD ANNOUNCER: You owe the United States government, in round numbers, $50,000. [BABY CRIES] PAUL SOLMAN: We may be generating surpluses at the moment, says Peterson, but they're a drop in the bucket.
PAUL SOLMAN: Twenty-one trillion in -- PETE PETERSON: Trillion dollars in cash deficits. GOVERNOR GEORGE BUSH: What I want to do is take two trillion, half of the four trillion and save it for Social Security. PETE PETERSON: People talk about how they're gonna to put a couple of trillion dollars away, you know, in a lockbox and even throw in interest, you know, on that money.
PETE PETERSON: I wish them well but I don't think there's ever been a lockbox that can't be picked by co-conspirators in the White House and Congress to spend it. |
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| Pumping up government assistance | ||||||||||||||||||||
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PAUL SOLMAN: Now if Pete Peterson fits the old image of a deficit hawk Republican, sociology professor Dalton Conley seems the classic liberal Democrat. To him, surpluses mean that the government can finally afford to do its job. In fact, he's just written a book about growing up white in a multiethnic housing project, a product himself of generous federal assistance. DALTON CONLEY: I got the free lunch in school that was paid for by federal funding; I had -- additional funds that followed me to whatever school I went because I came from a low-income school district. The - of course my parents wouldn't have been able to live in New York City without aid for housing and Head Start and the library we're sitting in, were funded by federal grants too-- things like this do make a difference to kids' lives. PAUL SOLMAN: Conley thinks both candidates are paying far too much attention to paying down the debt and that the surplus would be better spent mainly on social programs -- investments in people, rather than on a debt that is already shrinking in relative terms.
PAUL SOLMAN: Fifteen percent-- I remember doing a pie where it was 15 percent… DALTONCONLEY: And it will keep going down as long as we make the right investments and continue to grow the economy. Entrepreneurs and private capital alone won't do that, because there are some things that are public goods that aren't provided by the market.
DALTON CONLEY: I'm sure that you borrowed money to buy a house or to go to school. If you're investing in things that are going to yield future economic gains and returns in human terms as well, then it's not a bad idea to have debt, and in fact it's a good idea to plant the seeds of future economic growth now. |
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| A balancing act | ||||||||||||||||||||
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PAUL SOLMAN: So the traditional Democrat wants to use more of the surplus to address problems that the economic boom hasn't yet solved, helping lift up the less advantaged in neighborhoods like his. The old-time Republican deficit hawk, by contrast, wants to use more of the surplus to pay down the debt, saving, in effect, for rainy days to come. And the candidates? Well, they say it is a balancing act. The Democrat, promising to devote most, but by no means all, of the surplus to debt reduction. The Republican, counting more on tax cuts to grow the economy and avert a dreary debt-ridden future. There remains, however, a final reminder. All of this accounting is based on a projected surplus. But Bob Solow says we mustn't forget that it's just a guess.
GOVERNOR GEORGE BUSH: Four trillion dollars… PAUL SOLMAN: In other words, all these numbers you'll be hearing in the campaign have a huge margin of error. VICE PRESIDENT AL GORE: Read my plan…
JOHN DRISCOLL: These numbers are hard to get a handle on. As a matter of fact, almost as hard as nailing Jell-o to the wall. PAUL SOLMAN: The numbers were slippery in the 90s, as we approached the bridge to the 21st century; they're slippery still, here on the other side. |
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PAUL
SOLMAN: Since my career as a journalist and ham began in 1970, presidential
candidates have come and gone; oil prices spurted up, down and up again;
Japan's economic sun rose, then set. But there's been one constant theme
over the decades: the ever-growing national debt and the budget deficits
that kept pumping it up.
PAUL
SOLMAN: And we've used various props to describe the deficits: like
this coconut custard pie in the 1980s, to illustrate the relative shares
of federal spending or this icing on the cake of 1992; to show how deficits
were still with us as government revenues continued to fall short of
spending. 
VICE
PRESIDENT AL GORE: Today, I am announcing that we will under-spend the
surplus rather than over-promise our way into an economic hole. 
GOVERNOR
GEORGE BUSH: Half the surplus is gonna go for Social Security reform
and to pay down debt. One quarter is gonna go for new programs that
are needed. But I think it's fair, and I think it's right, that one
quarter go back to the hard working Americans who pay the bills. 
STUDENT
(from 1995): The beach ball is a representation of the national debt.
Every 15 seconds of air that Deficit Man puts into the beach ball indicates
the deficit for one fiscal year.
STUDENT:
So, this is one year worth of the deficit into the debt.
PAUL
SOLMAN: Solow got a Nobel Prize for a model of economic growth like
this, driven by investment. And most economists agree with him -- that
we ought to be paying down the debt over time. But some traditional
Republicans go a lot further. Longtime deficit hawk Pete Peterson, President
Nixon's Secretary of Commerce, says we should use all the surplus now
to pay off our debts because our children and grandchildren will be
taking on so much debt for our Social Security and Medicare in the future.
PETE
PETERSON: I have computed in today's inflation-adjusted dollars how
much the deficits in cash are going to be over the next 75 years. It's
a stunning number, just for Social Security. It's 21 trillion dollars.
VICE
PRESIDENT GORE: I'll secure the future of Social Security and Medicare
by putting them in an ironclad lockbox with a sign that says "Politicians,
Hands Off."
DALTON
CONLEY: The fact of the matter is the debt is going down both as a percentage
of the economy and as a percentage of federal outlays -- it's down to
about 11 percent now of the budget as opposed - from 15 percent just
a few years ago.
PAUL
SOLMAN: Conley means public goods like the Williamsburg Bridge, right
next to the housing project he grew up in. The East Side bridge is falling
down, it seems: reinvest in it and you'd cut commuting time for low-income
workers across the river, make the economy run more efficiently in general.
In economic terms, says Conley, it's not how much money you borrow,
but what you do with the money.
ROBERT
SOLOW: All we know is that right now the country is, the economy is
very strong. It's growing faster than we had previously hoped or thought
that it could do. It is generating right now budget surpluses, which
we are accumulating. And if we are absolutely lucky and Jupiter and
Saturn are in exactly the right conjunction and God is as usual concerned
with the welfare of Americans, then we'll be able over a long period
of time to accumulate the surplus. But to -- we do not know to within
a couple trillion dollars, what it will be.
PAUL
SOLMAN: Which reminds us of our fast times at Fairfax High, and teacher
John Driscoll's social studies class.