Balanced Budget Is No Longer a Priority for Conservatives
By Terry M. Neal
washingtonpost.com
Wednesday, April 30, 2003; 3:54 PM
For years, George Voinovich was considered a rising star of the GOP. Before coming to the Senate in 1998, he was a Republican mayor in the overwhelmingly Democratic city of Cleveland, and later the governor of the populous swing state. He managed to stay popular while adhering to party principles. Well, mostly -- but more on that later.
There was a time when it was considered conservative to not just cut taxes, but to do so with an eye toward balancing the budget -- which meant spending cuts. And such thinking dominated the ideology not that long ago. The first plank of the 1994 Contract With America called for a balanced budget amendment.
But both major parties seem to have given up on that goal.
On one side is President Bush, who has proposed more than $2 trillion in tax cuts at a time when government expenditures and deficits are soaring, without outlining broad budget cuts. The other end of the spectrum is represented by Democrats such as Rep. Richard Gephardt (D-Mo.) and former Vermont governor Howard Dean. The two presidential candidates are proposing a repeal on the recent tax cuts and instead want to spend massive amounts on health care. But neither Democrat has outlined major cuts to avoid permanent structural deficits.
To Republicans in the middle, such as Voinovich and Sen. Olympia Snowe of Maine, who oppose Bush's most recent tax cut, it's just as irresponsible to cut taxes without regard to balancing the budget as it is to spend money without regard to the budget.
This ideological divide has irked those in the Bush administration and led to both Republicans coming under intense pressure from the White House and congressional colleagues. Advocacy groups have also joined the fray. A tiny ad buy from the conservative Club for Growth suggested that these "Franco-Republicans are as dependable as France was in taking down Iraqi dictator Saddam Hussein" and generated tons of free media coverage.
For his part, the president has intensified his effort to get at least a $550 billion tax cut package approved, arguing the bigger the cut, the more jobs that will be created.
"Some members of Congress support tax relief but say my proposal is too big," Bush said recently. "Since they already agree that tax relief creates jobs, it doesn't make sense to provide less tax relief and, therefore, create fewer jobs."
Federal Reserve Chairman Alan Greenspan said Wednesday he remained hopeful that the end of the Iraq war will result in stronger economic growth and repeated his opposition to substantial tax cuts that would run up a larger deficit.
"I haven't changed my view from where I was in February," Greenspan said in response to questions about President Bush's tax package.
But who is right? Will the second major tax cut in two years create jobs and stimulate the economy and long-term growth, or will it lead to major deficits that drive up interest rates, reduce saving, expand the trade deficit and imperil long-term growth?
Like most things in Washington, it depends on whom you ask.
The Battleground
Voinovich took over Cleveland after decades of Democratic dominance in the early 1980s and helped restore the bankrupt city's fiscal health. As governor in the 1990s, he cut the welfare rolls, increased school funding, worked with then-Sen. Bob Dole (R-Kan.) and then-Rep. Newt Gingrich (R-Ga.) to limit unfunded federal mandates on the states.
But there were early clues to the trouble in which Voinovich might find himself in Washington. As governor of Ohio in 1992, he helped the state overcome a fiscal crisis by raising taxes, according to the Almanac of American Politics (although he points out that he later reduced taxes when the economy improved). And since coming to the Senate, he has voted against a series of tax cuts that he believed would bust the budget.
Now he and Snowe are standing up to Bush, who originally proposed a tax cut of about $726 billion. House leaders have tentatively agreed to a figure of $550 billion. But even that smaller figure is too large for Voinovich and Snowe, who say they can't live with anything larger than $350 billion unless the government finds "offsets" for anything over that amount.
Voinovich points out that even the $350 billion is money the government does not have. Furthermore, he says, the extraordinary spending the government is doing on defense and homeland security makes it even more imperative to not cut taxes beyond that.
"Three hundred and fifty billion dollars is a responsible package, and if the president wants to do more than that, and some of my colleagues in Congress, let's offset it," he said on NBC's "Meet the Press" last Sunday. "Let's not just borrow that money, and put the jacket on the backs of my children and grandchildren and your children and grandchildren."
The Argument
The Bush rationale for tax cuts is pure supply-side economics. In a nutshell, the argument is that cutting taxes stimulates job creation, which expands the economy. While the tax cuts might result in short-term deficits, supporters argue, government receipts should actually increase in later years.
Bush's original plan proposed the elimination of taxes on corporate dividends and accelerating the tax rate cuts approved in the $1.35 trillion 2001 tax cut plan, increasing the child tax credit and eliminating the "marriage penalty."
But many economists argue that additional tax cuts will create long-term structural deficits of the sort that are unlikely to be overcome by growth in the economy. The most pernicious effect of those deficits would be to drive up interest rates, while reducing savings and capital formation.
In his NBC interview, Voinovich referred to a report from Goldman Sachs, the Wall Street investment firm. That report predicts a slower than anticipated economic recovery, federal spending increases for defense, homeland security, aid to the states and entitlements such as Medicare, and a "persistent deterioration in the equity market" that will result in lower than expected tax revenues this spring.
The result, predicts Goldman Sachs, will be a short-term deficit of $425 billion next year, compared to the $200 billion predicted by the Congressional Budget Office, and a total of $4.2 trillion in deficits over the next decade. Company analysts Bill Dudley and Ed McKelvey argue that the "deterioration in the budget balance will result in higher interest rates than would otherwise be the case. Some argue there is no link between budget deficits and interest rates, citing the lack of correlation. This argument is not compelling."
Instead of demanding balanced budgets and the scaling down of big government, as the Contract With America demanded, many conservatives have quietly concluded that cutting taxes now will force major spending cuts and the reining in of big government in the future.
"Tax cuts force that debate," said Bill Beach, director of the conservative Heritage Foundation's Center for Data Analysis.
Others have questioned the wisdom of another major round of tax cuts at this time. In March, the non-partisan Committee for Economic Development, a group of current and retired business leaders from companies such as Verizon, BellSouth, BankAmerica and General Electric, issued a report that concluded: "Deficits do matter. To the extent deficits are paid out of domestic savings, they leave less money behind to finance investments in plants and equipment, research and technology, and human capital that make us more productive. To the extent they are financed by foreigners, they increase our nation's international debts, divert our future income to service those debts, and increase economic instability. In either event, deficits will reduce our future standard of living."
But what does it mean for the average person? It's impossible to say with certainty, and difficult to illustrate in meaningful ways. But let's say mortgage rates, which are at near historic lows now begin to rise from around 6 percent to say, 8 percent. The difference in the monthly payment on a $250,000 house would be nearly $400 a month ($4,800 a year) on a 30-year fixed mortgage, or $700 a month ($8,400 a year) on a $500,000 house.
In other words -- at least in the minds of Bush tax cut opponents such as Voinovich -- there are costs associated with growing deficits that could more than undermine the benefits of a tax cut.
The Other Side of the Coin
There is, of course, another side to this argument. As The Post's Jonathan Weisman reported Tuesday, the White House Council of Economic Advisers has calculated that the full $726 billion package would create 1.4 million jobs through 2004; a $550 billion package would create just over a million jobs. White House spokesman Ari Fleischer told reporters last week that a $350 billion package would create about 425,000 fewer jobs.
In other words, in Bush's view, the bigger the better.
The Business Roundtable, an influential coalition of 150 big business CEOs, supports the Bush tax cut plan. Earlier this year, it commissioned a study from PricewaterhouseCoopers that concluded "the administration's program would be stimulative in the short run and growth-enhancing in the long run."
The report predicted implementation of the full Bush tax cut plan would lead to creation of an average of 900,000 jobs a year through the next decade and would add $1.5 trillion in new income over the same time period.
"Because of the stimulus it would impart, the proposal would increase the federal deficit, including the additional interest expense, by just two-thirds of the static revenue loss," PricewaterhouseCoopers official Kenneth L. Wertz wrote to the Business Roundtable.
That cost, the Business Roundtable concludes, is well worth it.
"Our view is that we have an extremely poor economy, 1.6 percent growth," said Business Roundtable spokeswoman Johanna Schneider. "We feel that the economy can grow at a 4-5 percent rate. But it needs a stimulus."
Action on the Other Side
With the war in Iraq all but over, the economy once again becomes the focus in Washington. It is on this front that Democrats, battling it out in a virtually invisible primary, hope to raise their profiles and make inroads against Bush's popularity. While the GOP battles itself on tax cuts, Democrats are hoping for a replay of 1992, when a tanking economy proved to be the first President Bush's undoing.
Democrats believe the economy will prove to be equally problematic for Bush the son. For one thing, public approval of Bush's job performance on the economy pales in comparison to his handling of the war on terrorism and the war in Iraq.
Before Bush can make headway on his tax-cut-based economic recovery plan, he has to first win over the likes of Voinovich and Snowe, which appears to be no simple task.
© 2003 Washingtonpost.Newsweek Interactive
|