How Spending Cuts Pose Threat to Recovery Plan

The name of the economic policy game in Washington these days is “spending cuts.” Responding to the Clinton economic program, congressional Republicans and Democrats alike have been insisting that the Administration’s budget plan include substantially greater cuts in expenditures than initially proposed. And the President has felt constrained to accede to at least some of that pressure, agreeing to more radical surgery than he had originally preferred.

Many different political imperatives have fed this spending-cut frenzy. But the most important has been largely hidden from view: Behind most of the relentless demands for spending cuts lies a consistent and implacable push to reduce the size and role of the government in the United States. And this drive, in my view, is misguided and potentially self-defeating.

First let’s put the issue in context.

The Administration’s economic program, unveiled at the State of the Union address in mid-February, and passed by the House of Representatives Thursday night, features four important elements: some modest short-term stimulus to boost the current recovery; an ambitious plan of tax increases and expenditure reductions aimed at substantially reducing the federal deficit over the next five years; a variety of new “investment” initiatives, such as public spending on infrastructure, designed to improve long-term productivity growth, and tax proposals intended to reverse the trend since the 1970s toward a less equal distribution of tax burden.

Thus, this is a complex and multidimensional plan. But critics of the program’s proposals have insistently sounded two closely related variations on the same basic theme: They have demanded either that the Clinton plan incorporate additional spending cuts, beyond those already in the Administration’s recommendations, and/or have pressed for a deficit-reduction package that would involve relatively less reliance on tax hikes and relatively greater emphasis on spending reductions.

Why, in the face of such a complex set of program proposals, have so many in the Congress and the media focused so obsessively on this one theme?

Apparently, this obsession does not stem solely from a concern to reduce the deficit more than the Clinton Administration has proposed (although many critics would undoubtedly prefer greater deficit reduction). If that were the primary rationale, then one might expect at least a few critics to be suggesting further tax hikes, rather than spending cuts, as a reasonable way of achieving additional deficit reduction. And this we certainly have not seen.

Nor does the spending-cut fixation seem primarily to reflect demands by the broader public for slashing government expenditures. Public opinion polls continually report that a substantial majority of the public is prepared to absorb somewhat higher taxes if they are fairly applied and contribute to deficit reduction, and if they help finance some productive new government expenditures, such as enhanced support for education.

The usual suspects in Washington are much more preoccupied with additional spending cuts, it would appear, than the folks outside the Beltway.

It may be, of course, that many of the usual suspects in Washington are simply scrambling to avoid the tax hikes proposed by the Clinton Administration because their incomes put them in the top brackets that would be most heavily affected by the Administration’s push for greater fairness in the tax structure. Or perhaps they are primarily beholden to wealthy interest groups who themselves hope to avoid getting socked with higher tax bills. Or maybe both.

I cannot discount this explanation completely since I would never underestimate the selfishness of Washington politicians and pundits. But I don’t think it’s the whole story, or even the most important leitmotif , in the Washington saga.

First, this explanation would only account for those who insist on fewer tax increases and greater reductions in expenditures--shifting the balance between the two--and would not account for the legions of lawmakers who have largely accepted the inevitability of the tax increases and have focused almost exclusively on the spending side of the ledger.

Second, I think there is another, less directly self-interested, more ideologically driven force involved. Both the clamor for additional spending cuts and the uproar over the balance between tax increases and spending reductions share a common thread. Both presuppose that, at any given level of the government deficit, the size of the government should be smaller than it has been.

If you propose a shift in deficit-reduction proportions away from tax increases toward further spending cuts, then you achieve a smaller government role with the same size deficit. If you just propose further spending reductions, leaving the tax increases alone, then you achieve both a smaller deficit and a smaller government role. Whichever tack you pursue, shrinkage in the ratio of government spending to aggregate output would result.

And this is no accident. The political right has been campaigning to squeeze the size and the role of the government for years. Now, with a President finally taking deficit-reduction seriously, they’re singing their chorus fortissimo. All around Washington, day and night, we hear the same insistent refrains: Spending is bad, taxes are bad, government programs are bad, slash and burn the public sector.

It’s time to confront that campaign directly and vigorously. If the size of the government is the issue, then the right is dead wrong. The government should play a larger, not a smaller role in the United States. We urgently need expanded government spending on infrastructure, education, training and technological development. We need a government that plays a more forceful and leading role in shaping corporate policies for investment, work relations, product development and marketing. We need a government that plays a growing, not shrinking role in providing child care, housing and affordable transportation.

This is not a blanket and mindless defense of the current spending levels on all existing federal government programs. Indeed, for example, the defense budget could be cut much more over the next five years than the White House has proposed. Rather, as the Clinton Administration itself insists, we need an economy prepared for the 21st Century and a government that can help take us there. We need new, different and better government programs--and plenty of them.

Is there room for the government to expand its role? We can best assess the relative size of the government by looking at total government tax revenue as a percentage of total output. If the U.S. government were “too big,” we might expect to find our tax burden at the high end among our leading competitors. Precisely to the contrary, taxes as a percentage of gross domestic product in the United States were lower in 1989 than in any of the other members of the G-7, the seven most powerful advanced economies--lower even than Japan and only four-fifths the average burden in the other five.

Nor can the right claim that our economy was leaner and meaner as a result of this lighter tax burden. Among those same seven leading advanced economies, U.S. productivity growth during the 1980s lagged considerably behind the others, at only a third of the Japanese rate and 60% of the average of the other five.

In short, we need a more active, not a more withered government. The Clinton Administration should resist the clamor for further spending cuts and, in effect, a smaller government. Caving in to these demands will only undermine the very economic policy objectives it has worked so hard to advance.