Alice in budgetland - Alice Rivlin memo about budget causes problems

National Review, Nov 21, 1994 by Lawrence A. Kudlow

THERE must in something

about the air in Room 245 of the Old Executive Office Building, where successive directors of the Office of Management and Budget have dwelt in splendid isolation, genuflecting at the altar of the balanced budget and obsessing over the current deficit, completely divorced from political and economic reality. Most recently Alice Rivlin, and before her David Stockman and Richard Darman, somehow decided that they, and not their President or political party, must set the agenda.

In 1982, Stockman (after his earlier perfidy in the Atlantic Monthly) made sure everyone in town knew about various Social Security benefit-reduction proposals being considered by the Greenspan Commmision. Later that year the Democrats used this to trash Republicans in the mid-term election, costing the GOP 26 seats in the House. In 1985, Stockman and Darman kept pushing President Reagan toward a freeze in Social Security cost-of-living adjustments and other cuts. The Gipper eventually backed away from the deal, but Democrats used it mercilessly in 1986 to help recapture the Senate. In 1990, of course, Darman and Chief of Staff John Sununu pushed President Bush into a high-tax budget deal that doomed his Presidency.

This year the shoe is on the other foot. As the Democrats launched their ritual election-eve accusations about Republicans bent on slashing Social Security, a thermonuclear memo from Alice Rivlin found its way, via Bill Kristol, to the front page of the Washington Post. This "illustrative package" detailed $725 billion in entitlement savings, including cuts in Social Security COLAS, cuts in benefit payments, and another increase m the tax on benefits, along with Medicare rollbacks, COLA deferrals, and contribution increases for federal retirees.

In addition, the Rivlin memo proposed $775 billion in tax increases, including sharp limits on mortgage-interest deductions, elimination of the state-and-local-tax deduction, higher capital-gains taxes for estates and inheritances, tax hikes for "above average" health plans, elimination of itemized deductions above the 15 per cent tax bracket, and a repeal of tax-bracket inflation indexing. The plan also includes a 2.5 per cent value-added tax, estimated to bring in $160 billion, for a grand five-year total tax hike of $935 billion.

This plus the entitlement savings would be used to finance nearly $50 billion of "government investment" programs (read: more spending) including an infrastructure bank, a national information infrastructure system, National Service Corporations expansion, more Head Start, Education Goals 2000, job training, a 10-billion welfare-reform add-on, 24 new Metro Empowerment Zones, and a "clean car" program. All told, Mrs. Rivlin hopes to lower the budget deficit total by $274 billion ("modest") to $399 billion ("steeper and deeper") over the next five years.

Mrs. Rivlin's memo, which is entitled "Big Choices," agrees that the defeat of President Clinton's health-care package leaves the Administration without a domestic policy. And she says, "We know that the Republican strategy features empty promises about deficit reduction and unspecified spending cuts coupled with attractive-sounding tax cuts." She is anxious to respond in advance of Senator Bob Kerrey's entitlement-commission report, which is expected by mid December. Yet the Rivlin memo is part of the normal fall budget review conducted each year by the OMB director. That is why the non-denial denials by Mr. Clinton and Chief of Staff Leon Panetta ring so hollow.

So far, Mrs. Rivlin has not been taken to the woodshed. Indeed, observes Senator Phil Gramm (R., Tex.), this is not just a set of options, but a clearly defined agenda which continues to transfer resources from the private sector to the public sector." In fact, there is not one single policy item designed to encourage economic growth by encouraging private saving, investing, or risk-taking. Aside from mounting another assault on the "rich," Mrs. Rivlin continues to believe that high-tax deficit reduction will release saving for private investment and reduce long-term interest rates." But the facts say otherwise. Following the tax-heavy budget deals of 1990 and 1993, the economy is experiencing a sub-par recovery in which private saving and household net-worth accumulation is running well behind the 1980s pace. We will never tax our way to higher saving or wealth creation.

Moreover, despite Clinton's crowing over this year's $203-billion budget deficit and his forecast that next year's may be lower, the baseline used in Mrs. Rivlin's memo shows the deficit rising to $235 billion by the year 2000, and the Congressional Budget Office puts it at $257 billion. What's more, since passage of last years budget deal, long-term interest rates have skyrocketed and the dollar has plummeted. After reviving during the Reagan Eighties, the U.S. economy's long-run potential to grow has been so sapped by tax and regulatory reversals that the CBO now projects only 2.4 per cent annual growth during the next five years, significantly below our 45-year postwar trend of 3.1 per cent.