TOPICS > Politics

Balancing Act

May 22, 1997 at 12:00 AM EDT


JIM LEHRER: Still to come on the NewsHour tonight, the budget plan and a Congo update. Kwame Holman begins our coverage of the budget deal by bringing the story up to date.

SPOKESMAN: Mr. President, it’s my understanding that I was to be able to call up an amendment at this time.

KWAME HOLMAN: The Senate this afternoon worked through dozens of amendments on its way to near certain passage of the budget agreement later tonight or tomorrow. But the heavy lifting on the plan occurred weeks ago during a series of reportedly tense, closed-door negotiations in the bowels of the Capitol between White House officials and the top leaders of Congress. Many times it seemed there would be no deal at all.

FRANKLIN RAINES, OMB Director: We’re no closer today than we were the end of yesterday.

KWAME HOLMAN: But mindful of their believe that voters in the last election demanded the two parties work together, Democratic and Republican leaders struck a budget deal on May 2nd, and proudly proclaimed it.

SEN. TRENT LOTT, Majority Leader: Through this budget we will reach balance by cutting spending, not by raising taxes, ladies and gentlemen.

PRESIDENT CLINTON: I wanted a balanced budget with balanced values. I believe we have got it today. There are things in this budget that not everyone will find something that he or she disagrees with. Everyone can find something he or she wishes were in the budget. There is no perfect agreement.

KWAME HOLMAN: Recently given shape by the budget committees, the plan sets priorities for 1998 but also outlines five years of fiscal policy designed to achieve the nation’s first balanced federal budget in 28 years by 2002. The major features of the plan include reductions in the growth of spending on Medicare, the health insurance program for senior citizens, of $115 billion. Growth of Medicaid, the similar program for the poor and disabled, would be shaved by $14 billion. Defense spending would be reduced by $77 billion, and other federal programs would be reduced by $61 billion from current growth levels. But the outline also includes new initiatives, $16 billion to provide health insurance for children from lower income families and $13 billion to expand Pell grants to college students and for other education programs. On the tax cut side families would receive an annual $500 per child tax credit and capital gains and estate taxes would be reduced for a net tax cut of $85 billion. Getting Congress to ratify the deal created by the political leaders was expected but has not been easy. The House debated for 13 hours on Tuesday, right past 3 o’clock Wednesday morning. Ultimately, the House adopted the budget plan 333 to 99. The most notable “no” vote was cast by Minority Leader Gephardt, a possible presidential aspirant and the only top congressional leader to oppose the budget agreement.

REP. RICHARD GEPHARDT, Minority Leader: In my view, this budget agreement is a budget of many deficits; a deficit of principle, a deficit of fairness, a deficit of tax justice, and, worst of all, a deficit of dollars. That tax cut will necessarily result in the top 1 percent of taxpayers in this country getting a tax reduction of about $6,000. And when I talk about the top 1 percent, I am talking about folks making an average of $650,000 a year. Is it shared sacrifice to say to them, you get a huge tax cut every year, 6,000 bucks, but the young family who is trying to make ends meet, we cannot help them enough?

KWAME HOLMAN: But John Spratt of South Carolina, the senior Democrat on the House Budget Committee, disagreed with his leader.

REP. JOHN SPRATT, (D) South Carolina: We have a choice between gridlock and compromise. And what we have before us is just that; it is a compromise. It is not a perfect solution. It is the art of the possible. But if we let the perfect be the enemy of the good, we won’t get anything good done on the deficit this year.

KWAME HOLMAN: Senate debate began Tuesday, but the plan was almost derailed yesterday by an amendment sponsored by Utah Republican Orrin Hatch and Massachusetts Democrat Edward Kennedy. They wanted to install a 43 cents per pack cigarette tax to fund even more health coverage for low-income children than the budget plan also calls for.

SEN. TRENT LOTT: Now I’ve talked to the President because the President is on this. And he has made it clear he supports the concept of Kennedy-Hatch, but he has also committed to me that he is going to work to try to get Democrat voters for our second degree amendment and against making this change in the budget resolution. Now, that is what I have been told by the President of the United States. And if anybody doubts that here on the floor or in the news media, call the White House and check it.

SEN. EDWARD KENNEDY, (D) Massachusetts: It’s going to be an interesting meeting here because I listened to the Senator or Majority Leader speak about how the President is supporting his position when the Vice President is on his way up here to vote for our position. So some–

SEN. TRENT LOTT: Well, maybe they will get together someday, and this would be a good day for them to be together.

SEN. PETE DOMENICI, Chairman, Budget Committee: Frankly, had I the slightest suspicion that the Vice President, himself, would come here and vote inconsistent with the agreement that the President signed, I would have asked that the Vice President sign the agreement. That’s what we should have done, for he feels not bound by it, I assume. He can come up here and vote absolutely inconsistent with it and break a tie, if that occurs, and I doubt that that’s going to occur. And he can feel comfortable, and the President can say–I don’t know what–maybe he’ll say I don’t control the Vice President.

KWAME HOLMAN: Reportedly, the President, himself, did intervene and helped defeat the Hatch-Kennedy amendment by a slim majority. That cleared the way for expected passage of the budget resolution late tonight or tomorrow. Today on Capitol Hill leaders who helped pull the budget deal together were in a jovial mood. House Majority Leader Dick Armey cited the deal’s impact on children.

REP. DICK ARMEY, Majority Leader: We are going to give them with this budget deal the biggest tax cut since 1981, the first balanced budget in 30 years. We believe the interest rates will be lower when they buy a house, and we believe when they, in fact, find their way to jobs in their future life, where they have to pay taxes, those taxes will be lower, and they will have more to take care of their children from their take home pay.

KWAME HOLMAN: But now it’s up to the committees of the House and Senate to put the tax and spending flesh on the budget skeleton. That potentially rancorous process begins in earnest when members return from next week’s Memorial Day recess and will continue until the fall.

JIM LEHRER: Now to the economics of this budget deal and to Elizabeth Farnsworth.

ELIZABETH FARNSWORTH: While members of Congress debate the budget deal, economics are analyzing it. We hear some of that–some of that analysis now from Robert Greenstein, executive director of the Center on Budget and Policy Priorities; John Coogan, a deputy director in President Reagan’s budget office and now with the Hoover Institution at Stanford University; and from Robert Shapiro, vice president of the Progressive Policy Institute, a think tank of the Democratic Leadership Council. Mr. Shapiro, is this budget deal good for the economy?

ROBERT SHAPIRO, Progressive Policy Institute: Oh, sure, it is, Elizabeth. Deficit reduction keeps inflation low. It keeps interest rates moderate, and all of that is necessary for growth. It’s not enough for growth. It’s a part of a larger growth policy. It’s unnecessary but not sufficient cause for growth. But certainly the record of the last four years in which we’ve been able to bring the deficit down steadily as a share of the economy, it has been accompanied by falling unemployment, by falling inflation, and by stable growth.

ELIZABETH FARNSWORTH: Mr. Greenstein, do you agree with that? Is this good for the economy?

ROBERT GREENSTEIN, Center on Budget and Policy Priorities: Well, I generally agree with what Rob said, but the problem is that this budget has very little deficit reduction in it in the short-term. We only have a very small deficit now anyway. Balancing the budget in 2002 is not a very high hurdle to cross. The real question for the economy is: Does the budget make major progress in reducing the real problem for the economy, and those are the very high deficits we face when the baby boom generation begins to retire. We’ve got to start making major progress on that now. The problem with the budget deal is when you look at the fine print, the detail in it has tax cuts that are modest in the beginning but starting about the eighth year, they explode in cost. If you look at the detail, the tax cuts jump 32 percent in cost in the last two years, nearly half of all the tax cuts in the bill are packed into the past three years, and while the tax cuts lose $250 billion in the first 10 years the package is in effect, a conservative estimate is that they would lose $650 billion in the second 10 years. And what’s troubling about that is that second ten years is exactly when the baby boom generation begins to retire and when very serious deficit problems return. The package appears to have in the fine print assumptions. And Congress doesn’t have to do it this way, and I hope they won’t, but it has assumptions in it that the tax cuts will be designed in a way that have a series of gimmicks to postpone the full cost of the tax cuts for the wealthiest individuals until toward the end of the 10th year period, and then they’ll explode on us. If that occurs, then this budget will be a missed opportunity; it will mean that in the long-term we’ve made only small progress on deficit reduction; and that we actually used up a significant share of the Medicare and other savings to give very large tax cuts to people at the highest income levels.

ELIZABETH FARNSWORTH: Okay. I’m going to come back to all these points in just a few minutes, but Mr. Coogan first, what’s your view on how this affects the economy?

JOHN COOGAN, Hoover Institution: Well, as a deficit reduction matter, there’s an old OMB saying that applies to this package, and the saying is that if it ain’t worth doin’, it ain’t worth doin’ well. And as a deficit reduction package, this package is not done very well. As Bob said, there’s only a minimal amount of deficit reduction in it. And there’s a very large concern that in the years beyond 2002 that the deficit will widen. Most of the spending reductions that are in the plan are deferred until the out years, and the taxes that are in the plan are up front. Having said that, there’s more to a budget plan than simply deficit reduction. This plan has important components that I think in the end will improve the performance of the economy. The capital gains tax reduction and expansions in individual retirement accounts are just two. On balance, my sense is that this plan is better than current law, and people should be supporting the plan because it will represent an improvement in the performance of the economy over the long run.

ELIZABETH FARNSWORTH: Talk about the tax cuts. What about those arguments?



ELIZABETH FARNSWORTH: I’m sorry. I’m talking to Mr. Shapiro right now. Thank you, Mr. Coogan.

ROBERT SHAPIRO: Well, I think the fact is from an economic point of view most of these tax cuts are really about social policy. Both of the parties have been able to provide tax cuts I think to their core constituents. I agree, for example, with Ronald Reagan’s Treasury who said that cutting the capital gains tax rate makes the capital markets less efficient, not more efficient. But it is tax relief, I think, for the core–part of the core constituency of the Republican Party. At the same time the educational deduction is not likely to significantly expand access to education. I think that’s tax relief for part of the core constituency of the Democratic Party. That’s the way political deals are put together. The real economics in this–and I must disagree that, you know, we have about $250 billion in deficit reduction and in this plan–that’s equal to about two years of net business fixed investment. The U.S. economy spent about $250 billion in the last two years in all net business investment. That’s real money. I think that really matters.

ELIZABETH FARNSWORTH: So you’re disagreeing with the argument that there is no real deficit reduction here. What about the argument that this was the only agreement that was possible now, and that everybody gets something in these tax cuts, what about that argument?

ROBERT SHAPIRO: I think that’s right. I think that’s right. I don’t think that we should mislead the public to believe that either capital that the capital gains cut is going to cause an explosion of business investment, it never has in the past, nor should we mislead the public to believe that the education deduction is going to have any significant effect on the numbers of young people going to college. It’s not likely to. It is tax relief. It is part of what both parties felt they had to get in order to get this deal.

ELIZABETH FARNSWORTH: Mr. Greenstein, you made some very pretty severe criticism. Do you wish that this particular budget deal had never been done? Do you think it’s worse than no deal at all?

ROBERT GREENSTEIN: I think the devil’s in the details. I”m still hoping that this can end up being a positive deal, but for it to be a positive deal, the Congress and the President have to write the tax cuts in a fashion that they don’t explode in the second 10-year period on us and undo most of the deficit reduction progress we’d otherwise be making in that period, and they shouldn’t be skewed to this degree to the people at the top. Now, I think this is an unresolved issue. In the budget negotiations, toward the end, the White House asked for the agreement to include language. But the kinds of gimmicks that seem to be reflected in the fine print of the budget deal in terms of postponing the full effect of the tax cuts till the eighth year, the tenth year, and so forth, that that not be allowed, the Republican negotiators wouldn’t agree to that. The White House asked that there not be a double capital gains cut, a big across-the-board cut in what’s called capital gains indexing on top of that, the combined effect of which would be through tax capital gains for wealthy investors at a lower rate than middle income people pay on interest on their savings accounts. Now, if the Congress can restrain itself and adhere to those kinds of principles the White House asked for, although they’re not in the final agreement on paper, we could get a moderate enough tax cut that the overall package could be a positive, and then I would agree with pretty much the things that Rob Shapiro was saying; that this lies ahead. We have several months to go. This is just a framework. This is not the details. The details will determine what the final judgment on the deal should be in my view.

ELIZABETH FARNSWORTH: Mr. Coogan, do you agree with that, that what comes is still just as important as what’s happened already?

JOHN COOGAN: Absolutely. Budget resolutions are in many ways like New Years resolutions. Congress promises a lot and then often ends up not delivering on promises. Let me come back to this question about the capital gains tax reduction. Fundamentally, we have a situation in this country where productivity has grown at only a relatively slow rate over the last 25 years. If we’re going to meet the future entitlement commitments that we’ve already made and if we’re going to provide for a better standard of living for future generations, we’ve got to get more capital formation today. A capital gains tax reduction is a small step in the direction to improving the after tax rate of return on capital. It will lead to modest increases in capital formation. It’s not social policy, but it’s economic policy and I think profoundly important economic policy. It’s a step in the right direction, and I think people should be applauding that aspect of the balanced budget agreement.

ELIZABETH FARNSWORTH: Respond to that briefly, and then tell us, you were–you know, you’re talking to a friend of yours who’s not an economist who lives in a small town in–in, you know, whatever state, Colorado, Wyoming, whatever–what would you tell them to look for in these months ahead to try to judge whether this is a really serious, significant change in American budgetary policy?

ROBERT SHAPIRO: Well, I think, you know the most important thing about this budget agreement may be that we may be able to change the terms of the annual debate about the budget. Instead of being a bookkeeping exercise about the size of the deficit, perhaps now we can turn to what I think are much more important issues for the economic future of the country, the priorities with spending, are we going to invest what we need to in education and training, and research, are we going to reform the tax code, and are we going to finally take on the entitlements? I actually disagree that this is a lost opportunity with respect to the entitlements. I think we had to balance the budget before we, in fact, could undertake structural reform in the entitlement programs, because without that, the charge would always be made that the reforms in the entitlement programs were being used to finance either tax cuts or to protect other programs from spending. Once we have in effect a level budget playing field of a balanced budget, there can be no doubt that the reforms that are undertaken in Medicare and Social Security, which Bob Greenstein’s absolutely right, we absolutely must do, are being undertaken to preserve the purposes of those programs and not to finance some other agenda.

ELIZABETH FARNSWORTH: Interesting point. Mr. Greenstein, what about that, that this budget deal was kind of a necessary precondition to then go on to the long-term entitlement reform?

ROBERT GREENSTEIN: Well, that may be true, and there actually is some modest but not insignificant entitlement reform here. I think the Medicare provisions of this package are actually quite reasonable. We need to go farther in the future, of course, on some Medicare changes. But, you know, Rob just mentioned the need to invest in education and research and areas like that. That’s going to be harder under this budget, not easier, because the budget has a much tougher than understood constraint on the amount of money that can be available for the part of the budget that isn’t entitlements and isn’t the Pentagon. And that includes all those areas he’s talking about. Now, when I look at that part of the budget agreement, I think those curbs which will make some of those investments harder would not be unreasonable as part of a plan to really make substantial progress on this long-term deficit, but they’re less reasonable when a lot of those savings go to finance these back-loaded tax cuts that are pretty skewed. John Coogan talks about the capital gains cut. Well, you know, a lot of what’s happened when you do a big capital gains cut is that CEO’s of big corporations have some of their salary converted to stock options so that they can take advantage of capital gains tax cuts. But the figures are, as we review them, that if this tax package comes out the way I fear it will, looking at the fine print of the budget, that when it’s in full effect, about 70 percent of all the tax reduction will be for high income people, probably about the top 10 percent or so of the country, with very large tax cuts at the top. I mean, let me just show you–

ELIZABETH FARNSWORTH: Mr. Shapiro, I’m sorry, I have to interrupt you. We’re out of time. But thank you all very much–I’m sorry, Mr. Greenstein–thank you all very much for being with us.