The deficit devil made him do it - Bill Clinton's economic proposals to include the raising of taxes - Column

0 Comments | Insight on the News, March 15, 1993 | by Terry Eastland

Any hope (or Hope, as we now must capitalize it) that a new Democrat might talk sense about the federal budget deficit has vanished with the president's presentation of his economic program.

In his first Oval Office speech to the nation, for example, Clinton said that "all during the last 12 years, the federal deficit has roared out of control" and that during those awful years we "piled up four times as much debt as in the previous 200." Clinton thus did not try to educate the public about the deficit but trafficked in the old-fashioned (and quite bipartisan) trade of deficit-mongering. Such activity has always been a prelude to calls for higher taxes, and so it is now. Indeed, in his televised remarks, after bemoaning the deficit, Clinton then explained why it is that, contrary to his campaign promise to cut taxes on middle-income earners, he wants now to increase them; the deficit, he said, made him do it.

The proverbial horse of Clintonomics is now out of the barn and unlikely to return. But as it gallops to its likely inglorious destiny (more government, less economic growth, and yes, bigger deficits), it might prove useful to think carefully about the deficit that ostensibly helped open the barn door.

As currently measured, the federal deficit (or surplus) is the difference between certain, but not all, outlays and cash receipts. As economist Arthur Laffer points out in a lucid, timely treatment in the March issue of the World & I, and as economists have known for years, the current method of keeping the federal budget is problematic.

It excludes off-budget items (the major one right now is Social Security). It does not distinguish between capital and current expenditures, as every state and local government does. And it does not take account of the effect of inflation (the so-called inflation tax) upon the real value of government debt, on which interest is annually paid.

As Laffer explains, there are good economic reasons for including all off-budget items, distinguishing between capital and current expenditures (and thus reducing the spending side of the ledger), and taking into account the inflation tax. Other adjustments reasonably might be made. Like other countries, we could combine the national budget with those of all political subdivisions - for us, these would be our state and local governments. And we could also take into account the inflation tax on the debt issued by state and local governments. Performing all of these operations for 1990, Laffer finds not the reported $277 billion deficit but a $141 billion surplus!

It is not hard to figure out why Clinton has failed to propose even one reform of federal budget accounting. He wants to spend more but has discovered that taxing only those making in excess of $200,000, as he had promised in the campaign, won't yield the necessary revenues. So he has opted for taxing more people - all those, apparently, making more than $30,000. To win legislative approval of these taxes, Clinton has rhetorical needs. The big bad deficit fills these needs. To propose something sensible about budget accounting obviously would have cramped his rhetorical style: A chart showing the federal budget as it properly should have been kept over the past 12 years would not exactly have complemented his Oval Office talk.

Belying his reputation as a keen student of economics, Clinton also purveyed some hoary myths in that address. "When the deficit gets bigger and bigger and bigger, the government takes more of your money just for interest payments, and then it's harder for you to borrow money for your own business or to afford a new home or to send a child to college." Come again? The bigger the deficit, the more the debt, and the higher the interest payments. But there is no evidence associating budget deficits with higher interest rates or inflation. And Clinton actually spoke that sentence in a week when it became easier than it has been in 20 years to "afford a new home" as mortgage interest rates dropped yet again. Of course, what would make it harder "for you" are higher taxes, which are paid now and leave "you" with less to spend.

President Clinton has eschewed the "tax and spend" philosophy of Democrats, but his deficit-mongering rhetoric is cloaking an economic program that embraces precisely that philosophy. Laffer has usefully supplied along with his article charts (not yet shown on prime time) that are entirely relevant to the current debate and that suggest the directions economic policy should take.

One shows the rise since 1953 of government nondefense spending as a share of gross domestic product; it has gone from 12.5 percent to 29 percent. The other shows that since 1918 the ups and downs of economic growth have closely tracked changes in the top marginal tax rates. The implications are clear: If there is a fiscal trend to worry about and try to control, it is that of nondefense spending. And if it is economic growth we wish to spur, we should be cutting, not raising, marginal tax rates. Did someone say Reaganomics?