Dwindling Dollars: The Shrinking Surplus

MARGARET WARNER:

To shed some light on the new CBO surplus projections, and what they mean, we turn to Dan Crippen, the CBO's Director; Alice Rivlin, herself a former CBO Director, who also served as Director of the Clinton White House Budget Office and a member of the Federal Reserve Board, she's now a senior fellow at the Brookings Institution; and Rick May, who served as Republican staff director for the House Budget Committee in the 1990s, he's now a legislative consultant at Brownstein, Hyatt and Farber, a Washington law firm. Welcome to you all.

Dan Crippen, let me start with you. Flesh out this report for us. Now, just three months ago, you were projecting a much bigger surplus including nearly $120 billion in non-Social Security surplus. Now that's gone. What happened?

DAN CRIPPEN:

Two things happened since January: that is, the passage of the tax bill, which your piece alluded to, and the economy is performing less well than we had hoped and thought back in January. Between the two, it's erased about $120 billion of the surpluses that we expected, leaving us with about $150 billion yet though in surpluses.

MARGARET WARNER:

Can you quantify how much of this vanishing surplus, for lack of better phrase, comes from the tax cut that is more money going out versus the slowdown in the economy, which is less money coming in?

DAN CRIPPEN:

It varies over time. In the first couple of years, it's more..

MARGARET WARNER:

Now you're talking, you're looking at the four-year projection.

DAN CRIPPEN:

Four or longer because most of the numbers we're now looking at or deal with are so- called ten-year projections. In the first few years it's mostly the economic slowdown this year and next that have a big impact, and then after that, the tax cut takes over. So in terms of the total ten years it's about two-thirds legislative changes and a third the economy, a third or less.

MARGARET WARNER:

So if we're focused first of all on this current fiscal year, the one where $9 billion will have to come out of Social Security to go for current government programs, that year ends in just five weeks. Is the government already dipping into Social Security money to pay bills or, if not, when does that start happening?

DAN CRIPPEN:

We don't know for sure. We won't know until the Treasury gives us a final statement both for the month of September which they will do in October and ultimately a reconciliation for the year. So it's entirely possible that we're wrong. I mean, it could be… To put this in a little bit of perspective, we talk about trillions both in terms of $2 trillion budget, a $10 trillion economy. But one way that I find it easier for me to think about is take off some zeros and assume we have a $2,000 budget, which is the equivalent and what we're talking about here is $9. And so whether or not we're going to be $9 to the good or bad relative to this line is unknowable. We predict that it will be $9 in the red but we don't know.

MARGARET WARNER:

So when the House Budget Committee Chairman Jim Nussle says the CBO was wrong, earlier in the year, they were wrong in May, they could be wrong again, he's right.

DAN CRIPPEN:

He is right.

MARGARET WARNER:

Finally, do you see much significance.. The White House came out with their own budget projections last week, which showed for same… Let's just take the first four years, the first term of George Bush's term that they would stay just on the sunny side of keeping an operating surplus and not having to dip into Social Security. How do you explain the different conclusions and how significant do you think they are?

DAN CRIPPEN:

It's two factors. One, the Office of Management and Budget, the administration, made a slight change in accounting for Social Security revenues. It's an accounting change that we may well mimic at some point but we don't normally make in the middle of the year. So that's one piece. The other is that they are more optimistic about the economic outlook. That is, they expect a recovery more quickly and more robustly than we do. So in the short run that's the two factors that really account for most of the difference. Your question about significance, there isn't much significant difference.

MARGARET WARNER:

All right. Alice Rivlin, tell me, do you find these new surplus projections alarming?

ALICE RIVLIN:

I find them somewhat alarming. The problem is that the economy has slowed. That's in the short term what's really disturbing, and the reason the projections have changed so radically in such a short time. We don't know when it's going to speed up. For the long run, I find it alarming for a different reason. If you look out beyond, say, 2006, you don't see much surplus out there either even on fairly optimistic projections. That's where we used it to pay for the tax cut, which I thought was a mistake.

MARGARET WARNER:

Rick May, how do you look at this?

RICK MAY:

I look at it as pretty much as fairly good news. We have a second largest surplus in our nation's history. We have a tax cut enacted at a time when we need tax cuts to spur the economy on. And third, we have a situation where fiscal discipline will have to reign throughout the day because we have no additional money to spend for new government spending. So I would argue it's almost like winning the Trifecta at the racecourse. We've got three good things going on from a fiscal conservative standpoint.

MARGARET WARNER:

Ms. Rivlin, your response to that.

ALICE RIVLIN:

Oh, I don't find it such good news. In the next four or five years, OMB and CBO are absolutely in sync. What they're telling us is there is no surplus outside of Social Security. And we need to save more than the Social Security surplus to provide for older people retiring and the large costs of Medicare down the road. So I find these surpluses in the near-term unfortunately small. Now I'm not so worried about this year or even next year. We needed this rebate to help bring the economy back. It's the longer run that worries me.

MARGARET WARNER:

So you're saying, just so I understand you, you're not that concerned with what some of the Democrats on the Hill are talking about raiding Social Security this year, some $9 billion, that doesn't trouble you particularly?

ALICE RIVLIN:

No.

MARGARET WARNER:

It's the longer term.

ALICE RIVLIN:

No, it doesn't. I think "raiding Social Security "is a bit of a misnomer. The Social Security taxes go into the trust fund. They aren't used for anything else. It's just the government has to borrow to cover other expenses. We've done that before. Fortunately, we're not in a position to have to do it very much right now. But it's appropriate when the economy is growing very slowly to have a decreasing surplus from one year to the next in the short run.

MARGARET WARNER:

So, Mr. May, are you saying though that… respond to her point about the long term, that the only surpluses the CBO is projecting or even the White House are Social Security surpluses for ten years or, as the old phrase was, as far as the eye can see, and that that is troubling given the fact that the baby boomers will be retiring in less than that time.

RICK MAY:

It's troubling only to a certain degree in the short term. I think it's fair to say that if the economy starts booming again like it did in the earlier part of the or the later part of the '90s, those projections will change again just as the projections have changed from January now to August, if the economy is growing at a reasonable rate way beyond the rate of today, which is less than 1 percent, those numbers will change again, the projections will change again, the dollars of the surpluses will increase, therefore there will be more debt reduction as Alice just mentioned that's needed in the future.

So again all this relates to the basic fundamental point of a strong economy is good for the budget, a strong economy is good for the Social Security and Medicare, and a strong economy is good for everyone. So these are projections that are designed to sort of give you a snapshot of what is the best guess today. As Dan mentioned earlier, that could change very, very quickly. They could be wrong. OMB has been wrong. Everybody has been wrong. So it's kind of like, you know, complaining about the surplus today… That's like complaining about winning the Powerball jackpot on Saturday night and having to share with three other people. It's still not bad news. We still have a surplus. We have $153 billion surplus. And of course that's good. 1997 we passed the balanced budget amendment. People would have loved to have a surplus of $153 billion.

MARGARET WARNER:

All right. Dan Crippen, let's look at these out years now. Your projections, which had actually a small operating surplus for next year and then a small operating deficits for the two years after that, I gather though that doesn't include any… For instance, just in next year's budget, which begins October 1, some of the big items that both the President has said he wants and the Democrats and the Republicans on the Hill have said they want.

DAN CRIPPEN:

That's right. What we've included is required by the budget act our statute is to take last year's spending on appropriations in particular and add an inflation factor. So this report assumes that last year's spending plus inflation will be what the Congress enacts for appropriations this year. They have not enacted any of the 13 regular bills and there has been, in fact, a supplemental appropriation enacted that will add to spending over the course of time.

MARGARET WARNER:

So, in other words, for instance, the president's desire for $18 billion more for defense or both the Democrats and the Republicans' desire for a lot more for prescription drug benefit for the elderly. That is not included.

DAN CRIPPEN:

That's correct. Neither of those are included in these numbers we've reported today.

MARGARET WARNER:

So, Alice Rivlin, does that suggest that, in fact, the numbers may get a lot worse or should the Congress and the president say, "here's our straitjacket. We better stick to it. Let's not spend for any of these additional items that we'd like to have"?

ALICE RIVLIN:

I think it's almost inevitable that the numbers will get worse because there is a consensus in the country– and I think between the president and the Congress– that we need to spend some more money for defense and we need to spend some more money for education. And there are quite a lot of other things that we need to spend money on — not even thinking about the need to rescue the Social Security system and the Medicare system so that they are ready to deal with the retirement of the big bulge of baby boomers a few years from now. That's going to be very expensive. And it is going to more than use up these surpluses.

MARGARET WARNER:

Do you agree that, Rick May, in fact, next budget year the numbers will be worse just given what both the president and the Congress have said they want?

RICK MAY:

I'm not sure whether it will be worse or not frankly. I think we have to wait and see. Just as you have seen a major change from really April, not really January, April was when CBO came out with their last numbers until today, we've had this big difference. Budget numbers, budget projections are volatile by nature. The economy is very complex. And lots of things can change good and bad within the next couple of months. The tax rebates are coming now into people's pockets. They're using it. Withholding tables have been changed on income tax so people are getting more money in their paychecks.

No one really knows what impact those tax changes are going to have on the health of the economy. A healthy economy, as I mentioned earlier, will change these budget numbers– good or bad. I think we have to kind of wait and see. But, again, it's important to maintain fiscal discipline. I think the financial markets are probably more concerned… they don't care about this $153 billion whether it came out of Social Security or not. What they're I think concerned about is whether the spigot of more spending is going to be opened up.

MARGARET WARNER:

Are you saying though that if the numbers don't change, then both the president and the Congress should hold back from some of this spending that they want and Ms. Rivlin believes there's sort of a consensus in the country to do?

RICK MAY:

Yes, I guess is the short answer to that question because I think there is need for fiscal discipline. I think there is always the ability of the Congress and the President to work together in finding a new set of priorities, which means you may have to unfund old priorities. So, there's always that flexibility. Plus it's also important, even this current b budget that has been decried a being sort of a slimmed-down version, it still allows spending to increase by over 4 percent when inflation is only at 3 percent. It's still a real increase.

MARGARET WARNER:

Ms. Rivlin, the Democrats today, Kent Conrad, the head of the Senate Budget Committee, were calling on the president to step forward, (a), acknowledge there's a problem – that was their phrase — and, two, come up with a sort of a rescue effort was also his phrase, that essentially something had to be done now to steer the ship in another course. Do you think that's the case? I mean, if you were the president's Budget Director, would you be telling him that he should do that?

ALICE RIVLIN:

I'd be telling him he should be pretty worried for the year after next and down the line even if the economy comes back. I think that the tax cuts were excessive, and he should be thinking about compromising with Congress to pare them back in order to make room for the other things that he and they say they want to do, like saving Social Security and Defense and Education.

MARGARET WARNER:

And you'd be giving him the opposite advice.

RICK MAY:

Absolutely. I think Dr. Rivlin is a well respected economist, but I'm sorry I think she's wrong on this one because I think changing the tax code now, shifting those monies back into a greater government spending programs I think would be the absolute the wrong signal to send to the financial markets. People want certainty. They don't want uncertainty. If consumer confidence, as you mentioned earlier at the top of the show, is declining, I think the worst thing we could do is take away some of their tax cut and give it to the government to spend more money.

MARGARET WARNER:

Final question to you, Dan Crippen. We've heard a lot in the last couple years, the fat years, about also paying down the national debt and doing it quickly. Where do your projections foresee that effort going?

DAN CRIPPEN:

We believe that by our numbers that where before we thought that that could be paid down as much as we could by about 2006, we now look at around 2010. So it would stretch it out a few years.

MARGARET WARNER:

All right. Thank you all three very much.