The Budget Debacle : Time Is Running Out For An America Lacking An Economic Plan

Was the budget compromise worth saving? George Bush’s bully pulpit didn’t work when he tried to convince the nation in a televised address Tuesday night that it was all for the best. No one ever supposed that Bush had the charisma of Ronald Reagan, or his predecessor’s capacity for using oratory to sway public opinion. But perhaps there were other reasons why Congress found it so easy to resist Bush’s pleas and his arm-twisting. The plan gave too much to the rich and the military, without solving the underlying problems of the U.S. economy.

If the alternative to this flawed agreement is no deficit-reduction agreement at all, isn’t it worth doing? According to Alan Greenspan, chairman of the Federal Reserve Board, the plan would have brought down interest rates and promoted economic growth. So we all benefit in the end--even if today’s sacrifices may not be as equitable as they might be. Administration economists agreed.

The problem with this logic is that it’s built on quicksand. The economic projections underlying the plan assumed that oil prices would fall, that America would stay out of a recession, that the costs of the savings-and-loan bailout won’t escalate and that the world won’t be experiencing a credit crunch. All these assumptions are dubious, to say the least. They run counter to every observable trend.

If oil prices continue their upward climb, and if Japan and Germany continue to use up their spare cash, interest rates will stay high and go higher, regardless of the budget accord. We’re in a world economy now, if you hadn’t noticed. U.S. interest rates don’t depend solely on how much money is left over after the U.S. government and U.S. consumers and corporations stop spending. U.S. interest rates depend on how much is left over after governments, consumers and companies all over the world stop spending.

Cutting America’s budget deficit by $34 billion--what the compromise sought for next year--is like taking a bucket of sea water out of the Pacific. It doesn’t have much effect on the tide.

Meanwhile, the U.S. economy is likely to continue its downward slide--so even the $34 billion cut is optimistic. Welfare and unemployment insurance costs are likely to rise precipitously. The federal government will have to bail out some big banks and insurance companies, as well as more S&Ls.; And tax receipts will shrink. My best guess is that the deficit-cutting agreement would have ended up reducing next year’s budget deficit by $24 billion--hardly a figure to write home about.

The irony is that cutting government spending and raising taxes right now, by even this relatively small amount, is the wrong tonic for a weakening economy. Consumers and corporations are already holding back, as high oil prices and their own massive borrowings scare them away from the market. It’s the lesson that John Maynard Keynes should have taught us a half-century ago: Unless government picks up the slack, we could face an even deeper and longer recession.

But what about the budget deficit? Isn’t it a big problem? Yes, but we should have got serious about reducing it three years ago--when the economy was riding high. Maybe we can safely raise taxes and cut spending a few years from now, when world interest rates and oil prices have come back down to earth and the U.S. economy is more buoyant. But not now.

In fact, cutting the budget deficit is so important over the long term that it might even be worth rewarding the wealthy and the denizens of the Pentagon with huge windfalls, if that’s the price of getting an agreement.

But it’s not worth that price right now, when all we get in return is a sluggish economy and a pail of seawater.

The best thing that could be said for the defeated budget accord was that almost every major Washington lobby hated it. Farmers, truckers, liquor manufacturers, cigarette manufacturers, the makers of yachts and advocates for the elderly are still hollering. Conservative Republicans are angry that the compromise didn’t include a capital-gains tax cut, and that Bush has so obviously reneged on his “no new taxes” pledge. Liberal Democrats are upset about proposed cuts in domestic programs like Medicare and farm subsidies.

If everyone’s angry, it must have been fair.

But not quite everyone is angry, and it’s here that we have cause for concern. The folks most content with the terms of the long-awaited budget compromise were two groups who expected to take a big hit--who should have taken a big hit--and didn’t.

First, the very wealthy. Yes, they’d have to pay a tiny surcharge on their yachts and jewelry, and wouldn’t have quite as many deductions as before. But even if these inconveniences were included, their effective tax rate would have jumped only a tad--from 28% to 29%. Champagne was flowing: The so-called bubble--that allows higher-income earners to pay a lower marginal rate than the 33% paid by those below them--continues to bubble away.

What’s more, the plan created a loophole wide enough to drive a 10-ton tax shelter through: It allowed investors to deduct from their incomes a quarter of the price of any stock they buy in small and medium-sized businesses. Big businesses could be expected to transform themselves into collections of small businesses to take advantage of this provision. Wealthy investors--and their tax lawyers--would reap a bonanza.

Wealthy retirees were especially pleased. Their Social Security remained untouched. There would be no increase in the proportion of Social Security benefits subjected to income tax, and no lifting of the ceiling on earned income subject to Social Security tax. As a result, the scandal continues: Upper-income retirees will go on taking from Social Security at least 3 times what they originally put into the system, counting inflation. And today’s poor working Americans--most of whom pay more in Social Security payroll taxes than in income taxes, because the system is so regressive--continue to pick up most of the cost.

Tax progressivity, in other words, is still a nostalgic dream. Americans within the top 10% of incomes would have continued to pay about $90 billion a year less than if the tax code were as progressive as in 1977. The top 1% would bear the lightest relative burden--continuing a trend that started years ago. In 1989, the top 1% paid a combined federal-state-local tax rate of only 26.8%, compared with 29% in 1975 and 39.6% in 1966.

Lower-income taxpayers, on the other hand, would have taken a drubbing. Taxes on beer, cigarettes and alcohol would comprise a much higher portion of their income than the wealthy, of course. And if they weren’t poor enough to qualify for Medicaid, their Medicare bills would go up. Here again, is a continuation of the trend that began years ago. In 1980, the bottom fifth of taxpayers paid an average 8.4% of their income in federal taxes. Last year, they paid 9.7%--an increase of one-sixth. Under the proposed compromise, they’d have paid about 10.8%.

The other people who breathed a big sigh of relief were Pentagon officials and defense contractors. On paper, it looked like they’d take a $182.4 billion cut over the next 5 years. But look again: This was a reduction in projected increases. The generals were elated because they got a much better deal than they would have gotten even from their own appropriations committee. The House had already approved a level of defense spending for next year lower than that included in the compromise.

In fact, defense spending would have stayed flat, without any real cuts. And their allotment didn’t include all the extra money spent in the Persian Gulf--that will come to at least $7.5 billion this year--even if U.S. allies kick in all the money they’ve promised--and far more if there’s a war out there in the desert.

In other words, the federal government planned to spend exactly as much five years from now defending the world from communism as it does now--even though it’s hard to find any red-blooded communists these days, even though many Western Europeans would like U.S troops to leave and even though Europe and Japan are now capable of paying for their own defense.

The budget compromise obliterated the Peace Dividend. Make no bones: This was a big victory for the Pentagon.

So there you have it: The big winners were the very wealthy and members of the military-industrial complex; the losers, most of the rest of us. Not a particularly compelling argument for why the package should have been enacted.

If the polls are to be believed, the public has great confidence in Bush’s handling of foreign affairs, but far less confidence in his management of the economy. Bush spent almost two years of his presidency trying to cut capital-gains taxes. This single issue became the centerpiece of his economic policy. Other important issues--the budget deficit, along with Latin American debt and U.S. trade competitiveness--got less attention. Meanwhile, the U.S. economy sputtered, the military continued to pile up huge bills, the rich got even richer and the poor even poorer and opposition mounted toward capital-gains breaks for the fat cats at the top. There was never much evidence that capital-gains tax cuts would spur economic growth anyway. In the end, Bush had to give up the fight.

Bush staked it all on his deficit-reduction plan. Of course, the huge federal deficit is itself evidence of the blatant failure of the Reagan-Bush Administration’s experiment with supply-side economics, starting with the tax cut of 1981 and the subsequent military buildup. But the plan contained many of the same ideological blind spots. Here again, the biggest beneficiaries were the very rich. Here again, the military was given far more money than it can use. And here again, was scant evidence the plan would have helped the economy, especially in its current condition.

Less than two years from now, Americans will decide whether to reelect Bush. When Gov. Mario M. Cuomo of New York, Sen. Bill Bradley of New Jersey, Gov. Bill Clinton of Arkansas or Jesse Jackson asks them whether they’re better off now than they were four years ago, it’s likely that they’ll answer with a resounding “no.”