Use Budget Surpluses for People’s Real Needs

The president’s proposal to put some Social Security reserves into the stock market has got most of the attention, but it’s a sideshow. Even if the scheme worked perfectly, it would only extend the life of Social Security about five years, from 2050 to 2055. And it’s unlikely to see the light of day anyway, given the opposition of Fed Chairman Alan Greenspan, the nation’s chief economist and shadow president.

The really big news that’s getting lost in the noise is what Bill Clinton wants to do with the bulk of the projected government surpluses. He says he wants to use them to “save” Social Security and Medicare. But according to the very conservative estimates of the Social Security Trust Fund’s actuary, Social Security doesn’t get into trouble until the year 2032. Medicare, a much smaller program, gets into trouble in about a decade.

What exactly does the president aim to do with most of the surpluses in the meantime? Store them in some musty attic room in the Treasury? Not at all. Here’s the real heart of the proposal: He wants to pay down the national debt.

His goal is to cut the debt from around 45% of national product, where it is now, to about 15%--its lowest level since before World War I.

So the biggest question we should be debating is whether cutting the national debt this much is the very best use for the future surpluses.

You might prefer a huge tax cut. For example, in order to give the biggest boost to hard-working Americans in the bottom half, we could exempt the first $10,000 of income from the payroll tax.

Or, you might want the government to guarantee universal health care (something the president once talked about but doesn’t anymore). Or you might want to restore some of the $20 billion a year that was recently cut out of Medicare. Or you might want to do some combination of all these things, and more.

But using most of the surpluses to cut the debt is just about the most conservative thing you could possibly do with them. Calvin Coolidge and Herbert Hoover would have approved.

Greenspan said he likes the idea of using most of the surpluses to cut the national debt. But this is because Greenspan’s job is to worry about inflation. And cutting the debt means more money freed up for private spending and private investing, without risking inflation and pushing up interest rates.

But suppose your biggest worry isn’t inflation. Suppose, like me, your biggest worry is the very real possibility of worldwide deflation and high unemployment. You’re concerned that in the years ahead there won’t be nearly enough purchasing power to consume everything the United States and the rest of the world are capable of producing.

Some 40% of the global economy is already in recession. Japan is still flat on its back. Don’t count on Southeast Asia to buy much from the rest of the world. Germany and France, still suffering double-digit unemployment, are slowing down. Just about the only people on the planet who are still buying like mad are American consumers, and we can’t keep it up much longer. We’re going into debt.

So where will the demand come from? Businesses won’t invest if they have too much capacity. The only remaining purchaser--the buyer of last resort, as economist John Maynard Keynes demonstrated 60 years ago--is the government.

And yet, public budgets are being slashed all over the world. The price of admission to join Europe’s Economic and Monetary Union was to get deficits down to less than 3% of national product. The International Monetary Fund demands budget austerity as the price every Third World nation has to pay for getting a loan. The U.S. has slashed its own budget deficit and is now running surpluses.

If you were concerned about a coming global contraction, you wouldn’t want to use the bulk of America’s pending budget surpluses over the next 15 years to pay down the national debt. That would be dangerous in an era of overcapacity. You’d want to use the surpluses for tax relief and for spending on things that people need, like universal health care.

We have become so accustomed to thinking that inflation is our biggest worry that we’ve stopped thinking about the danger of deflation. That’s because most people alive today remember the double-digit inflation of the 1970s but not the Great Depression. Yet today, a global contraction is more likely than an outbreak of inflation.

If Keynes had heard what the president proposed last Tuesday night, and what Alan Greenspan endorsed, he’d be turning in his grave.