Some Simple Rules to Judge What Candidates Say About the Economy

The American voters read George Bush’s lips in 1988, and now they feel betrayed. Frankly, this reaction does them no credit. Instead of being angry at the President for breaking a promise, they should be annoyed with themselves for believing such a foolish pledge in the first place.

Anyone who bothered to look at the evidence in 1988--and apparently precious few did--could see that significant cuts in spending and increases in taxes were required to restore fiscal sanity. Instead, Bush offered to drive us deeper into the deficit hell to which Ronald Reagan first transported us, and millions of voters scrambled to jump on board.

To avoid being hoodwinked again, Americans should demand facts rather than fairy tales. And when they read the candidates’ lips this time around, they should keep in mind a few elementary economic principles:

* Government deficits are not always harmful. If this year’s misguided nostrum, the balanced budget amendment, had been in effect in 1991 and if it had actually been honored--a big assumption--the government would have had to slash spending and increase taxes, exacerbating an already painful recession. The government would have been prevented from extending unemployment compensation or providing additional assistance to millions of Americans thrown out of work by the economic slowdown. Counter-cyclical government spending for these purposes has not only eased the pain of recession, but has also provided a demand kick to the anemic economic recovery.

The balanced budget amendment is a bad idea. The fact that 70% of the American population supports it is a powerful argument for requiring elementary economics for all high-school students. Then, when they read Bush’s--or indeed Ross Perot’s--lips on the balanced budget question, they would not be persuaded.

* The deficit cannot be cured by cutting waste, if one defines waste as bloated government bureaucracy and unwanted or unnecessary spending programs. The big-ticket items in government spending are defense, interest on the debt, the savings and loan bailout, Social Security and Medicare. Most other government programs are trifling by comparison. And even if we cut defense spending by $100 billion over the next five years and even if the economy fully recovers, the underlying deficit will hover discouragingly around $200 billion for the foreseeable future. This despite the ambitious five-year deficit reduction package adopted as a result of a last-minute political compromise between the Congress and the Administration in 1990. Down-scaling existing government agencies will not suffice. Nor, of course, is anyone seriously suggesting that the government renege on its interest payments or on its commitment to the nation’s thrift institutions.

So candidates proposing to eliminate the deficit by eliminating waste must mean waste in Social Security and Medicare. When Perot promises to cut waste where the “big money” is, he has these programs in his mind, even if he does not have them on his lips. A careful electorate had better learn to read his mind, since his lips are barely moving.

I happen to believe that Social Security for wealthy Americans should be taxed as regular income--even though my father and his pals at the golf club will never forgive me if this becomes national policy. I also believe that we need a national health care program that strictly controls costs. Perot can’t bring himself to espouse higher taxes on Social Security for the wealthy, although he claims to believe that many of them would be willing to sacrifice their Social Security voluntarily. I’d be delighted if they did so, but I’m not counting on it. Most wealthy people did not get that way by turning down free money. The vast majority of older Americans believe that they have a right to both Social Security and Medicare regardless of their income and regardless of the fact that they are collecting multiples of what they put into the system during their working lives. I doubt very much that the powerful American Assn. for Retired Persons would countenance means-testing their favorite programs, even in response to the respectful entreaties of their fellow citizens in an electronic town hall meeting.

Perot is also unwilling to be specific about how he would handle the nation’s health care crisis, perhaps because he has made hundreds of millions of dollars from the frightfully wasteful insurance system we now enjoy. Whenever any candidate talks about waste, American voters should instantly think health care and insist on a detailed proposal to stop the ravaging of the nation’s finances by a system that is out of control.

Perot has claimed that he can reduce the deficit without even breaking a sweat. In reality, blood, tears and sweat will be required. The question, as always in politics, is whose. It is not a question he is eager, or even willing, to address.

* In direct contradiction to 12 years of Republican ideology, there is no relationship between the level of taxes a nation pays and its economic performance. American voters should be suspicious of any politician who promises not to increase taxes on the grounds that higher taxes will hurt the economy. The United States ranks at the very bottom of all the industrial nations in terms of its overall tax burden--measured as total tax revenue as a percentage of annual economic output. Yet although our competitors pay higher taxes, their economies are nevertheless doing better than ours in most ways that count. They have higher savings and investment rates, and their real wages have been growing faster than ours for more than a decade. They even have money left over to support ambitious environmental programs and aid Russia’s economic recovery, while we pull our pockets inside out and shrug helplessly. Once the recession is over, if we increase our overall tax rate to the average rate paid by the other advanced industrial countries, we could raise an additional $400 billion to $500 billion in government revenue and miraculously cure our deficit problem.

Perot claims that he will not raise taxes except in some kind of “incredible emergency” that he can’t envision. At least this is what he claims now. A few years ago he was singing a rather different tune. But surely anyone who witnessed the Los Angeles riots must realize that the nation confronts an emergency shortfall right now in the kinds of programs that are essential to the long-run competitive health of the American economy and the long-run peace of the American polity.

This brings me to my final elementary economic principle.

* The most important determinant of the economy’s future living standards is investment, both private and public. Gov. Bill Clinton’s lips speak the truth when he emphasizes the need to invest more in the nation’s public infrastructure, its research and development and its people. Clinton is also right when he says that Washington should divide its budget into an investment account covering spending that generates economic returns and a consumption account for everything else, from Social Security to government operations. We must spend more on the former account while we get the latter one under control. Finally, Clinton should get credit for the single best idea of the campaign so far: his proposal to establish a national trust fund out of which any American could borrow money for a college education so long as they pay it back either as a small percentage of their income over time or with a couple of years of national service.

Perot’s favorite tag line to his very quick, sometimes humorous, and usually vague answers is, “It’s that simple.” Economics, however, isn’t that simple. If it were, we’d have constant prosperity. Economics is complex. Perhaps that’s why so many Americans hate economics, and why economics professors are parodied in popular movies and commercials. Fortunately, however, there are a few simple economic principles that, even taken by themselves, without graphs or mathematical formulas, can help American voters distinguish between those politicians whose lips shouldn’t be read, those whose lips can’t be read and those who are proposing sensible solutions to the nation’s pressing economic woes.