What Everyone Should Know About the Budget Debate

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Mark Weisbrot
Knight-Ridder/Tribune Media Services, August 11, 1999

This column is for those who really want to understand the debate that has been raging over what to do with the projected Federal budget surpluses over the next 10 years. It's not as difficult as it seems. What makes it so confusing is that politicians in both parties are generating a lot of fog, and most of the pundits and commentators are just shining their brights on it, making it that much harder to see what's in front of us.

Here's the story: over the next ten years, the Federal government is expected to take in about $3 trillion more than it expects to spend. Now this is a big number, but not as big as it seems when you compare it to our national income over this period: it comes out to about 2.7% of our income.

What to do with this windfall? The Republicans want to allocate $792 billion (about a quarter of the surplus) to tax cuts, mostly to two groups of people: the rich and the filthy rich. President Clinton and most Democrats say we can't afford it.

Both parties want to reserve $2 trillion for paying down the national debt. They say that since $2 trillion of the surplus comes from Social Security payroll taxes, it can't be spent without endangering future Social Security benefits.

When both political parties agree on something, it's a good time to run a fact check. As it turns out, this $2 trillion can be spent on anything we choose, or it can be used to pay down the national debt, but it won't affect Social Security either way.

To understand this, think about what happens when you loan money to the government by buying a U.S. Treasury bond. The government then spends that money on housing subsidies for poor families. Has your money been "raided"? Hardly. You will be paid back when the bond matures, and get interest payments on the bond until that time.

The same is true for the money that Social Security loans to the Treasury-- including the $2 trillion that it will loan to the Treasury over the next 10 years. And this is true regardless of whether that money is spent on health care or education, or whether it is used to pay down the national debt held by the public.

So why pay off the national debt? Some argue that it will lower interest rates and therefore stimulate growth. This rests on a number of dubious assumptions, but even if we accept them all, the effect turns out to be so small that it can hardly be measured: paying off the whole debt over the next 15 years would only increase our national income in 2015 by about one half of one percent.

Using the surplus to pay down the debt makes about as much sense as a family paying off its mortgage loan, and thereby not having enough money to send the children to the dentist or doctor. This analogy is quite real, since we have about 11 million children without health insurance.

Of course the Democrats are correct to point out that the $1 trillion of surplus that does not come from Social Security is mostly fictional: it depends on massive spending cuts on everything from meat and poultry inspection to national parks, to the preschool Head Start program. These cuts are not going to happen, and everyone in Washington knows it. But the question of whether this part of the surplus will materialize is not all that important, unless we swallow the story that the other $2 trillion of projected surpluses must go to debt repayment.

The Democrats reason that they're not going to get any spending on programs that would help poor or average income Americans, so long as the Republicans control Congress. So they figure it is better to pretend that we need to "save Social Security," and pay down the debt, rather than see the surplus squandered on yet another tax cut for the rich.

But this is short-sighted, to say the least. Polls show that most Americans are against the tax cuts, and the Republicans don't have the votes in Congress to override a Presidential veto on the issue.

This is clearly one of those times when it is better to fight for what you want and lose, than fight for what you don't want and win. Promoting the nonsensical notion that we must pay off the national debt before we can do anything about America's real economic problems-- poverty, education, or health insurance for the 43 million uninsured Americans-- is a dangerous game. We may all live to regret it.


Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is also president of Just Foreign Policy