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 | DOLE'S FISCAL GAMBLE
AUGUST 6, 1996TRANSCRIPT |
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Four leading economists analyze Bob Dole's proposed fiscal package that includes an across-the-board 15% tax cut, a $500 per child tax credit, and a reduction by half of the capital gains tax. He announced his plan in a speech in Chicago yesterday, noting his formula would cost $548 billion over 6 years.
JIM LEHRER: Now, how this Dole plan looks to Martha Phillips, executive director of the Concord Coalition; Jeff Faux, president of the Economic Policy Institute, a
Washington research group; Allan Meltzer of Carnegie Mellon University, former member of the Council of Economic Advisers under President Reagan; and Judy Shelton, an economic adviser to the Dole campaign. Mr. Faux, does this plan make economic sense to you?
JEFF FAUX, Economic Policy Institute: No, it doesn't. Actually, the plan is full of contradictions. On the one hand, it wants to balance the budget. On the other hand, it reduces the tax revenues of the government. The plan talks about savings, and yet, the tax cuts would encourage consumption. The plan purports to help the middle class, but most of the benefits will go to the upper 10 or 20 percent of the population.
This is really Reaganomics II. We've been there before, and we're still paying for it. We're cutting back these days on Medicare. We're cutting back on federal aid to education because we don't have the money because we spent so much on tax cuts in the 1980's. This is Reaganomics II. We've been there; we've done it; we're still paying for it; and there's no reason to believe it would work in the 1990's when it didn't work in the 1980's.
JIM LEHRER: Judy Shelton, he says it didn't work in the 80's. Why would it work now?
JUDY SHELTON, Dole Campaign Adviser: This is a very sound program. It's based on tax relief, tax reform, and lower federal spending. I really like it when people invoke the Reagan years because there are some statistics that go to the heart of the issue. From 1981 to 1989, personal income tax receipts went up 56 percent. The problem is under Democrat-controlled Congress, spending went up 69 percent.
Now we have a chance with Republicans controlling Congress, with Bob Dole in the White House, to at least control federal spending. Then you get the burst in growth from tax relief, from reducing the regulatory burden, and instead of it being an either/or proposition of tax cuts versus a balanced budget, it's really a one-two punch.
JIM LEHRER: Did the tax cuts of the Reagan administration in the 1980's actually stimulate growth in the U.S. economy?
MS. SHELTON: Absolutely. We had a 3.9 percent growth rate, which is about twice what we do now.
JIM LEHRER: Jeff Faux, do you dispute that figure?
MR. FAUX: Yes. The way to look at these, at these numbers, is to look at them through the business cycle, and when you look at investment, for example, and this plan is aimed at the promise that it will increase investment, investment actually decreased between the business cycles in the 1980's versus where it was in the 1970's. In the 1970's, private investment grew about 4.6 percent. In the 1980's, it grew about 2.6 percent. Every economist understands you have to look at these things through the business cycle. When you do that, clearly Reaganomics failed.
JIM LEHRER: Looking at different figures, or reading them differently, Ms. Shelton?
MS. SHELTON: The stock market doubled, umm, unemployment went down, inflation came down. All of the indicators were very positive. It was a superb period for the United States.
JIM LEHRER: Ms. Phillips, where do you come down on this on whether or not this should be done now and whether this is the, the instrument to fix the economy now?
MARTHA PHILLIPS, Concord Coalition: I think that the plan that has this large a tax cut and at the same time that it's trying to balance the budget. It's probably asking too much out of our legislative processes
and out of our political processes.
This balanced budget plan doesn't reduce the deficit during the first presidential term of office. Between now and 2000 the deficit would go from $117 billion up and then down to 106 (billion dollars). That is not a lot of deficit reduction over the next four years. Then it goes into free fall to zero in the last two years. We've seen a lot of--
JIM LEHRER: Based on--based on the assumption--
MS. PHILLIPS: Based on Bob Dole's deficit path that he's laid out in his plan. And we've seen a lot of budget plans that say, umm, we'll balance the budget later but for right now we've got some spending we've got to do, some tax cuts we've got to have. We'll balance it by the end of six years, but not in the first four years.
JIM LEHRER: Let me--you state the case simply for us all, because the Concord Coalition's big thing is, is reducing the budget deficit. Tell us again why it's so important to do that and why that is your all's number one priority.
MS. PHILLIPS: Reducing the budget deficit is the key fundamental basis for strengthening the economy over the long run, not supply side tax cuts or other things that sound too good to be true. The reason balancing the budget is so important is that we have to increase productivity of every worker in the work force, and the budget deficit right now is gobbling up savings that should be going into investments that will make us more productive.
And until we do something about that, we're going to be in trouble, and then there's the long-term problem of when all of the baby boomers become the senior boomers, all of them, all of us line up for our Social Security benefits, we don't know how we're going to pay for these programs, and we've got to work into our budget scheme some sort of a control over these runaway entitlements that are looming not so far over the horizon.
JIM LEHRER: You have no problem with tax cuts but just not now until, until the budget is in balance?
MS. PHILLIPS: You know, eat our spinach first. Dessert can come later. We do not believe that tax cuts will yield the phenomenal returns. The--a small tax cut, judiciously targeted, carefully put in, with a reasonable estimate might work. But that's not a good political package. That's too sensible to make sense on the soap box.
JIM LEHRER: All right. Professor Meltzer, where do you come down on this?
ALLAN MELTZER, Carnegie Mellon University: Well, I think this is a gamble, but it's an interesting gamble. And it's probably one worth taking. The argument that people are having over whether the budget will be balanced in 2002 is really very small beer, because everyone knows that if it's balanced in 2002, it's going to be out of balance in 2003, 4, 5, and it's going to be--there's going to be a lot--
JIM LEHRER: Why do we all know that?
PROF. MELTZER: Because we have these rising entitlement expenditures which by 2025, just 30 years from now, are going to be somewhere between 24 and 25 percent of total GDP. That is, the deficit is going to be 20 to 25 percent of GDP. So we have to do something about that long-term problem, and there are only three things that we can do--nothing more. We can cut the entitlements by making people work longer, retire--
JIM LEHRER: We're talking Medicare, Medicaid, and Social Security basically.
PROF. MELTZER: Medicare--right, right.
JIM LEHRER: Okay.
PROF. MELTZER: We can either cut those expenditures, we can raise taxes, or we can take a shot at trying to increase the growth rate. Now, if we increase the growth rate by 1/4 of 1 percent, which is doable within the range of --
JIM LEHRER: A quarter of 1 percent. Put that in terms that we can understand.
PROF. MELTZER: Sure. We're growing at about 2.2 percent now.
JIM LEHRER: Okay.
PROF. MELTZER: If we were to grow at 2.45 percent, well within the historical range of the U.S. economy, we'd have something like $17 billion next year but a trillion extra dollars in 30 years.
JIM LEHRER: All right. Now how do you read the record on the connection between lowering the tax rates and stimulating the economy and improving the growth rate just the way you said?
PROF. MELTZER: Well, I think that the evidence is mixed, but, you know, we have two experiments. Democrats like to forget about the fact that John F. Kennedy did exactly--had a supply side tax cut, although he didn't use those words, but it was a supply side tax cut, to get the economy moving again.
I think most people would say that, on balance, a fair assessment would be that on balance we did raise the growth rate marginally, that is, within the range that I'm talking about, for a few years. Then we have to do it again.
JIM LEHRER: You say it's a gamble. Is it a gamble that is risk-free?
PROF. MELTZER: The risk--
JIM LEHRER: Unlike all other gambles in the world? (laughing)
PROF. MELTZER: That's right, Jim, like all other gambles in the world, it has some risk, and the risk is that we'll have a somewhat larger deficit in the next few years, but it's really a risk that's very much worth taking because what we're doing is we're betting that we have can have a trillion dollars more in GDP, 15 percent larger, enough to pay, for example, for all the Medicare, medical costs of the U.S. in the current year, $1 trillion more to pay for a lot of these programs, private and public, in 30 years, and that's a gamble that's worth taking because the alternatives are things that we don't like, either raise taxes or cut back on spending or both.
JIM LEHRER: Just a second. I want to get back to Ms. Phillips on that. Why not roll the dice, take a gamble, see it as an experiment?
MS. PHILLIPS: Well, I think that it's a dangerous gamble because I'm not convinced the spending cuts are going to come along to neutralize the economic impact of the tax cut. I mean, we've seen time and time again that people want to take the good part of the package and leave the less attractive part of the package on the platter.
JIM LEHRER: The spinach, in other words?
MS. PHILLIPS: Yeah, right.
JIM LEHRER: I see. I see. Jeff Faux, yes.
MR. FAUX: I think we have to make some distinctions here. Nobody doubts that if you went into deficit
spending in the short-term you could increase some growth but that's what we did in the 1980's. We bet on this horse before, and we bet big time. And we ended up being the largest debtor country in the world, and we ended up being unable to satisfy basic human needs in this country today because we took that gamble.
Well, nothing has changed in the world in physics or in economics from the 1980's. We are still in that situation. We dug a big hole in the 80's because we made the assumption that if we just cut taxes, we'd have this spurt of growth. It proved to be not true. It turned out that we didn't have that spurt of growth and the promises that were made--let's not forget--that we'd balance the budget in 1984--just evaporated.
JIM LEHRER: Ms. Shelton, a couple of folks have mentioned this, and many of the Democrats mentioned this yesterday, that there is no guarantee that anything is going to happen, other than that the spinach will not be eaten. Now, the critics say it never has been eaten in the past. What makes it--why is--is Sen. Dole so convinced it will happen this time?
MS. SHELTON: Well, he's a critical factor. It's Sen. Dole. He is a deficit hawk. He--having a balanced budget is the most important component to him of this package. He recognizes that it takes tax relief to release the potential of the American economy, and our future prosperity lies in letting individuals make their own decisions about how much to spend, how much to save, how much to invest, and there can be no question--in fact, I listened to Nobel Laureate Gary Becker explain this at a press conference today--that in Economics 101, the first thing you learn is that people respond to incentives.
If I'm an individual and I've just learned that my taxes are going to be 15 percent less, that I'm going to get a credit for raising my child, that I have a chance to put money away tax free into an account for education, that there will be tax reform to simplify the code, so I'm not criminalized because I can't understand how complex it is, I see an opportunity to work and have some connection between my effort and the rewards to me economically speaking.
JIM LEHRER: So you don't see it as a gamble at all? You think it's a sure thing?
MS. SHELTON: Well, I think that the status quo is, is a real gamble. Right now, we are being taxed more heavily than we have been since World War II. In fact, right now, the percentage of Gross Domestic Product that goes to the federal government is over 20 percent. That's higher than during Vietnam. We cannot keep our current tax code, and we cannot keep this excessive taxation in place.
JIM LEHRER: Prof. Meltzer, do you agree that the status quo is a bigger gamble than what you're suggesting?
PROF. MELTZER: The status quo is going to leave us with a huge problem, and that's the problem that I talked about before. So the way to solve that problem seems to me the best way to solve that problem now when we have a lot of time, is to try to get more money into investment. And that's what this will do, and that's certainly what happened with the Kennedy tax cuts, and I believe that's what happened with the Reagan tax cuts.
But those experiments are followed, one by the Vietnam War, one by the defense build-up, which contributed a lot to the, to the budget deficit, so we can argue endlessly about that, but the emphasis should not be on whether the deficit is going to be a few million dollars or billion dollars larger in one year or another; the question should be what are we going to do about those huge entitlement problems that are looming just over the horizon.
JIM LEHRER: Do you see it the same way, Ms. Phillips, that down the road it's the entitlements, it isn't the other thing?
MS. PHILLIPS: Oh, the entitlements are clearly the major problem down the road, and that's why it's rather distressing that the Bob Dole package does not--it takes Social Security off the table, it says in a couple of places specifically Medicare is off the table, except for the amount that had already been proposed by the congressional Republicans, and, um, defense is off the table, which is not a long-term problem, but they've taken fully 2/3 of the budget off the table.
So all of the balancing effort has to be done with the remaining 1/3 which is domestic programs where you find that Republicans in Congress even have hit their bottom level, they really have gone about as low as they can go, and we're talking about continuing large cuts in the future for that, and leaving these long-term problems of Medicare and Social Security untouched.
JIM LEHRER: It's been suggested--
MR. FAUX: The problem with entitlements--
JIM LEHRER: Hold on one second. Yeah, go ahead. Yes, go ahead.
MR. FAUX: The problem with entitlements is really not the question here. Uh, it's been a--it's a myth that Social Security is eventually in trouble, and the Medicare problem is really a question of health care, which the country still needs to address. The Dole program does not deal with any of this. What it does, it assumes, again, the fairy tale that we had in the 1980's.
You have to ask yourself: Is it possible to cut taxes dramatically, to leave defense and entitlements, hold them harmless, and to balance the budget at the same time? This is common sense, and the answer is no.
JIM LEHRER: Judy Shelton, it's been suggested in the last 24 hours that this was more of a political document than it was an economic document because it doesn't deal with some of these tough issues like entitlements. Guilty as charged?
MS. SHELTON: Not at all. Just the opposite. One thing that was very clear to all of us participating in the process of devising the economic plan is that they didn't, they didn't want our political considerations. They said come up with the best economic plan that you can, and we believe that people do respond to cuts in marginal tax rates and especially the capital gains cut. That's key.
JIM LEHRER: Political document, Ms. Phillips?
MS. PHILLIPS: I think it's clearly a political document. They have eased up on taxation of Social Security benefits, spousal IRA's, I mean, everything that you could possibly want on the tax side if you're a voter, and the spending cuts are sort of vaguely described. I mean, they're in there if you look but they're not up front where anybody can figure out who's going to get hit.
JIM LEHRER: A political--
PROF. MELTZER: I'm amazed at Ms. Phillips. I mean, the Concord Coalition has done a wonderful job of bringing home to us how important these long-run deficit problems are, and to say that this program doesn't do anything about the entitlements programs is simply wrong.
It does something by increasing the growth rate, and the alternative would be to raise taxes or cut the programs. Those are not very popular things to do, so we ought to try the experiment and see if it's going to work, recognizing that, as I said at the beginning, it's a gamble.
MR. FAUX: Well, we tried the experiment. It's what got us into trouble in the first place. What we need is a much more sensible program that's devoted to the problems that we had--not to go back to what are the tired, worn out programs of the past that haven't worked.
JIM LEHRER: We have to leave it there. Thank you all four very much.
PROF. MELTZER: Thank you. MR. FAUX: Thank you.
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