Budget Surplus Could Leave U.S. Broke

Congress has spent the summer in the thrall of a weird kind of giddiness.

The discovery that the budget surplus may be a trillion dollars larger than previously believed has prompted visions of a kind of domestic End of History. No more scrimping and scrounging: There is talk of new tax cuts, paying off the national debt, new prescription drug coverage, and, well, pretty much anything anybody wants.

Yet somehow, even while it dreams of untold abundance, Congress finds itself virtually impoverished. The chairs of the various committees, charged with doling out the funds to run the federal government during the next fiscal year, have trimmed the FBI's budget and slashed science research -- not because anybody believes these things are wasteful, but simply for lack of money. Even with these savings, the House leadership has sunk to new depths of chicanery and beggary.

Recently, Speaker Dennis Hastert decided to fund the 2000 census as an "emergency" -- who saw it coming? -- and beseeched Republican governors to please donate any spare welfare funds to their needy brethren in Washington. Sounding a bit like a United Way commercial, Hastert implored, "We're trying to balance the budget."

Trying to balance the budget? What about those trillions of dollars in surpluses? Something here is profoundly screwy. To understand how it got this way, we must examine the paradoxically named Balanced Budget Act of 1997.

When President Clinton and the Republicans made a budget deal two years ago, each side received a little something. Clinton got a new health-insurance program for poor children and a tuition tax credit, and the GOP got cuts in estate and capital-gains taxes. In the ensuing jubilation over a bipartisan deal to balance the budget, few bothered to ask how the two sides managed to eradicate the deficit without requiring any sort of sacrifice.

In fact, they pulled it off by fiddling with something called discretionary spending. This is the money that the government spends on the military, education, highways, and everything else besides paying interest on the debt and entitlements such as Social Security and Medicare. While Congress can set the total level of discretionary spending years in advance, it doles out the funds to individual programs on a yearly basis. Clinton and the GOP took advantage of this by declaring that, starting two years later, Congress would begin to steadily ratchet down discretionary spending until 2002, culminating in -- ta da! -- a balanced budget. This is like claiming you'll lose 30 pounds by fasting all of next February -- you're not going to do it, nor should you. Yet this farcical promise allowed the two sides to claim fiscal rectitude while leaving it to future Congresses to decide the cuts.

Now fast-forward to the present. Congress is trying to enact the cuts required by the 1997 act, and, to nobody's surprise, it can't be done. In the coming years it will get much harder still. By 2002, assuming the defense budget keeps pace with inflation, all other government operations will have to be cut by 20 percent.

Why, then, don't they just use part of this giant surplus to ease the domestic spending caps? Because without those caps, the surplus all but disappears. Here's how: When government economists calculate the size of the budget surplus, they assume that all current laws will be carried out into perpetuity. (As budget geeks, their role is not to question political assumptions, but dutifully to crunch numbers.) Since the sham 1997 Balanced Budget Act is on the books, the budget scorers assume that Congress will enact large discretionary spending cuts over the next few years and that the savings from those cuts will be used to pay down the national debt, which, in turn, will reduce the government's interest costs and create even larger surpluses. When you hear about the $ 2.9 trillion surplus from a politician, or read about it in the newspaper, or see it on the cover of this magazine, this is the scenario they are relying on.

But since that premise is implausible, so, too, is the projected surplus. Assume that, instead of enacting huge cuts in discretionary spending, Congress merely allows that part of the budget to keep pace with inflation. (Given that Congress has already promised to spend much more on highways and defense, this is a conservative assumption.) Then discount the portion of the surplus that derives from Social Security, which both parties have promised not to touch. Finally, figure in some emergency spending to cover the odd hurricane or military action. That pretty much takes care of the whole surplus. To be sure, it's possible that further economic growth will brighten the picture, but spending the money in the hope that it will eventually materialize is hardly fiscal conservatism. The on-budget surplus is almost entirely an illusion, the product of cooked books and wishful thinking.

At the time it was enacted, the cap on domestic spending was seen as nothing more than a convenient device to snatch a little political credit. Yet it has had a deleterious result that nobody imagined at the time. The phantasmal trillions flowing into the national coffers have so powerfully seized the imagination of Congress that any whiff of restraint has been swept away. They have also allowed conservatives to cast the debate as a choice between tax cuts and new government programs, when, in fact, the choice is between tax cuts and existing programs. The Republican budget assumes that future Congresses will cut domestic spending almost in half -- a ludicrous proposition. If the president and Congress carve up the surplus between them -- say, a tax cut and prescription drugs -- then the practical result will be to plunge the budget back into red ink. The primary effect of the Balanced Budget Act, in other words, will have been to undo balanced budgets.

It is no longer surprising that such a result would delight Republicans -- this, after all, was the essential fiscal policy of the Reagan administration, their golden age. On the other hand, one might expect Democrats to recoil from such recklessness. Yet many House Democrats, bought off by pork-barrel spending in their home districts, have supported reckless Republican spending bills. This represents, at least, a traditionally Democratic sort of venality. What is truly baffling is the claque of Senate Democrats who have openly salivated for a giant upper-class tax cut. Louisiana senator John Breaux, exemplifying the intellectual depth of this faction, recently appeared before a group of reporters chanting, "Tax cuts, tax cuts!" Nebraska senator Bob Kerrey said of the GOP plan, "To me, this is a no-brainer. It increases Americans' income by $ 800 billion." Of course, any use of a surplus (including paying down the national debt) would increase Americans' income. The distinctive feature of the GOP tax cut for which Kerrey voted is that the Americans whose income would be increased tend to reside at the upper end of the income scale. It's one thing to sell out the broader interest on behalf of your own constituents and quite another to do it on behalf of the other party's constituents.

While the leading pro-tax-cut Democrats all declined my requests for interviews, their motives can be gleaned from the public pronouncements of New Jersey senator Robert Torricelli, whose mental processes lie delightfully close to the surface. "There is no financial base for the core issues of the Democratic Party," he told journalist Elizabeth Drew. "Civil rights, the environment, pro-choice -- they have a voting constituency, but they have no financial strength. In current American politics, you can't survive without a financial constituency."

And then there is this Torricelli gem from a few weeks ago: "Democrats have largely captured the education and environmental issues, and have an expanding advantage on guns and abortion," he explained to The New York Times. "There is no reason for us to lose on the tax issue." No, there probably isn't, unless by "reason" one includes such considerations as the good of the country.

In addition to this rather naked striving, there is also a simpleminded variety of centrism that assumes that the proper solution always lies between the two extremes. So, if Clinton wants a $ 250 billion tax cut, and the Republicans want $ 800 billion, then the best public policy must be somewhere around $ 450 billion.

Recently, Breaux has dressed up his coarse tax-cutting urges in the soothing, high-minded tones of bipartisan statesmanship. "The bottom line here is that unless we both try to merge our different ideas, nothing is going to happen," he expounded last Sunday. "We're not going to have Medicare. We're not going to have a tax cut unless we come together."

So, both parties can just get together and work out a mutually pleasing deal. Hmm. Where have we heard that before?