Huge Surplus Is Built on Big Assumptions

Politicians in Washington, acting as if Uncle Sam had just won the Powerball jackpot, are rapt in dreams of splurging on big tax cuts, extra Medicare benefits, shiny new airports and additional stretches of highway.

But the bounteous federal budget surplus upon which their dreams rest could evaporate before lawmakers get their hands on it. Recent budget analyses that forecast the ever- mounting pot of gold rest on assumptions about politics and the economy that may prove as reliable as the profits from a Ponzi scheme.

One example: Budget analysts base their recent accounting of the surplus--a mind-boggling $5.9 trillion over the next 15 years, by one measure--on the dubious bet that Congress will stay within strict ceilings for spending on current federal programs. But if Congress instead allows spending to grow enough merely to keep pace with inflation, as it often has in the past, much of the surplus will disappear.

And another: White House analysts have taken the unusual step of making their surplus estimates over 15 years, rather than the more conventional five or 10. The longer time period magnifies the effects of good economic news--but it also compounds the effects of even tiny errors in forecasting.

Indeed, the White House admits that if it has overestimated just one variable--productivity growth, or the increase in what one worker can produce in one hour--by a mere half a percentage point over the 15-year period, that would wipe out the surplus altogether.

“If current projections . . . turn out to be even slightly optimistic, the castles that political leaders are building in the sky will all come tumbling down,” said an analysis by the Concord Coalition, a nonpartisan budget watchdog group based in Washington.

What worries many independent budget experts is that, by the time Washington discovers any forecasting mistakes, it will already have spent the money.

“The problem is not in doing projections, even ones for 15 years,” said C. Eugene Steurle, a former senior Treasury official now at the Urban Institute, a nonpartisan policy research group in Washington. “The problem is spending the revenues the projections suggest might become available. It takes all the slack out of the system.”

To be sure, forecasters’ projections could continue to prove too pessimistic rather than too optimistic, as they have for the last five years. Then the budget surplus would turn out to be even bigger than now thought.

The one undeniable truth about recent budget predictions is that they have been way wide of the mark. A recent review of congressional analysts’ five-year deficit projections found errors averaging $250 billion a year over the last 10 years.

But Washington’s traditional caution in the face of uncertain projections seems to be melting in the sun of two recent reports that show surpluses mounting faster than anyone had imagined.

First the White House found that the surplus would total $5.9 trillion over 15 years, half in the Social Security program and half in all the government’s other operations. That was a tidy $1 trillion more than the administration had predicted as recently as February.

Then the Congressional Budget Office issued a 10-year forecast that reflected a similar trend.

Those estimates set off a raucous debate about what to do with the windfall. Clinton wants a new drug benefit for Medicare. Republicans want a big tax cut. The House has passed bills vastly increasing highway and airport spending. And everyone wants to bail out Social Security.

Largely overlooked in the frenzy is the fact that the surplus projections assume that Congress will make significant cuts in “discretionary” spending for programs whose budgets are set year by year in appropriation bills. Spending for these programs--from weapon procurement to education grants, they make up one-third of the budget--has been limited by a series of caps set in the 1997 budget-balancing agreement between Clinton and Congress.

The ceilings, which did not hurt much in the first couple of years, are now growing painful. From $574 billion this year, discretionary spending is supposed to fall to $569 billion in 2002. And Republicans already have committed to spending increases for defense, education and transportation. That would mean deep offsetting cuts elsewhere.

A bitter internal war is raging among Republicans, who control Congress, over whether to raise the spending caps. Conservatives insist they won’t budge. “When hell freezes over,” said House Majority Leader Dick Armey (R-Texas).

Moderates, by contrast, recoil at the political risks. House Appropriations Committee members say the necessary cuts are so deep as to be impossible.

Clinton and the Democrats are ready to pounce. The White House estimates, for example, that one spending bill would have to slash many labor, health and education programs as much as 18%.

“I do not believe there is a consensus in this Congress or in this country to make the kind of draconian reductions that would be required,” said Rep. David R. Obey of Wisconsin, the senior Democrat on the Appropriations Committee.

The government’s giant health care programs have generated much the same kind of concerns as the smaller discretionary spending programs.

In their forecasts of giant surpluses, for example, both White House and congressional analysts assumed the government would stick with a 1997 law to restrict Medicare coverage of home health care, nursing home care and health maintenance organizations.

Congress is now under tremendous pressure from both the health care industry and the elderly to ease those restrictions.

Sen. Sam Brownback (R-Kan.) is usually a budget hawk, a determined opponent of federal spending. But at a recent public hearing in Wichita, he promised to roll back some of the 1997 law’s provisions when he was told that they had proved devastating to rural health care agencies.

Official Washington may find all manner of reasons to roll back some of the tough spending decisions of recent years. But it has voiced almost no objections to the White House decision to measure the surplus over 15 years.

That’s largely because administration budgeteers have used conservative economic assumptions in making their surplus estimates, in sharp contrast to predecessors who depended on projections of unrealistically robust economic growth to justify proposals to boost spending or cut taxes.

But according to a broad spectrum of critics, the credibility the White House added to its estimates with conservative assumptions was effectively subtracted by the decision to extend the estimates 15 years into the future.

“Believe me, we were stretching it when we did five-year projections,” said Leon E. Panetta, who was once Clinton’s chief of staff, his budget director and chairman of the House Budget Committee. “Any time you get out beyond a few years, you’re in never-never land.”

And from the Republican side, Senate Budget Committee Chairman Pete V. Domenici of New Mexico said: “I don’t think [Clinton] should have done 15-year numbers. It created a distorted picture. It made the numbers look way too big.”

Administration officials counter that they have to use 15-year numbers in order to capture what nearly everyone agrees is the biggest budget problem facing the nation, the looming increase in Social Security and Medicare costs with the retirement of the baby boom generation, beginning in 2010.

“We are trying to deal with a long-term problem, and we need a reliable, long-term estimate on which to build a program,” said Joseph J. Minarik, chief economist in the White House Office of Management and Budget.

That justification does not wash with many independent budget experts, who warn that the administration’s 15-year estimates conveniently reach just to the point when Social Security and Medicare costs are expected to soar.

“These are a golden 15 years that we are talking about,” when baby boomers will be in their peak earning years and the fraction of the population that is retired will be unusually low, said Robert Bixby, policy director for the Concord Coalition.

“These are the 15 good years before the 15 bad years,” Steurle said. “If you’re going to go out 15 years, why not go out 20 or 25 years” to capture the full effect of the baby boom generation in retirement? he asked.

Absent such a step, independent budget experts said that the White House and Congress should limit their plans for the surplus to such easily reversible measures as paying down the national debt. Costly and permanent tax cuts and new benefit programs, they said, should be avoided at every turn.

But the impulse to spend some of that $6-trillion windfall may prove irresistible.

“Anything you can do to help restrain these guys is useful,” Panetta said. “They need all the help they can get.”

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

What If . . .

...Congress Breaks the Spending Cap

The bottom line assumes Congress lives within previously legislated caps on “discretionary” spending. The top line shows how much greater outlays would be if Congress allowed discretionary spending to grow with inflation each year.

...Productivity Growth Lags

Center column reflects the administration’s assumption that worker productivity will grow 1.6% a year through 2002 and 1.4% a year after that. The right column assumes productivity of half a point less throughout the period, or about its level during the 1980s.