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TIMES BOARD OF ADVISORS

Now Is the Time to Get Long-Term Budget Problems Under Control

February 18, 1996

Amid the clamor of competing claims, charges and countercharges, a remarkable event has unfolded in Washington's annual budget follies. The fiscal year 1996 budget has been lapped by the 1997 budget. Getting lapped often occurs in the Indy 500 or in early heats of Olympic long-distance races, but it has never happened with the federal budget before. President Clinton has issued what amounts to a sham budget for fiscal year 1997 at the same time there is no agreement on the 1996 budget.

I am not one of those who believe that any deal is better than none, or that gridlock must be avoided at all costs. Competing visions of the nation's future deserve to be debated and difficult issues confronted.

Republicans displayed the courage of their convictions and presented a detailed blueprint to bring the budget into balance by 2002. (It was last balanced in 1969.) They proposed principled policy reforms that generally make only modest changes, but have been pilloried by a news media that used to berate politicians for not offering a real balanced budget plan. The president also correctly saw short-run partisan political advantage in pretending to be willing to make tough choices, while greatly exaggerating his differences with the Republicans.

Even once-stalwart deficit hawks such as Leon Panetta, former House Budget Committee chairman and now the president's chief of staff, and Alice Rivlin, former director of the Congressional Budget Office and now the president's budget director, are engaging in this same hyperbole.

The most frequently heard--and most politically potent--charge is that Republicans are savaging Medicare. Well, here are the facts:

The Republican plan calls for $284 billion of spending on Medicare in 2002 (compared with Clinton's proposal of $289 billion). Medicare spending would grow significantly, but the projected growth would slow from about 9% a year to 7% a year, and the elderly would be given more choices. Market forces would be used to control costs rather than government command and control, and all seniors would have the choice to continue their current arrangements with their doctors.

That's savaging Medicare?

The Republican's public relations mistake seems to have been to take the task of balancing the budget seriously. Clinton's initial budget, which did not receive a single vote in the Senate, called for deficits of $200 billion a year for as far as the eye could see. The bare-bones plan he finally submitted is simply not credible. The bulk of deficit reduction is unspecified and delayed until the end of the seven-year period--well after a hypothetical second Clinton term.

That's real accountability! Agree to a budget that may or may not be balanced, depending upon what the president and Congress elected in the November 2000 elections decide.

To be sure, there are serious policy differences. Clinton still believes in activist government. Indeed, he proposed numerous new minor programs in his State of the Union speech. But the man who told us the "era of big government is over" is the same president who spent his first two years trying to engineer the largest expansion of government since the 1960s, with his proposed government takeover of the health-care system.

There are legitimate issues over what will happen if programs for the poor currently mandated from Washington are returned to the states. Republicans argue that states would have far greater flexibility to run the programs efficiently and could save money by eliminating Washington bureaucrats. They also believe tougher work rules and other provisions could alter the behavior that helps perpetuate a large welfare-dependent underclass. Democrats worry that we can't the trust the states to provide assistance to the truly needy.

Republicans believe that given the historically slow economic expansion, the economy needs a boost from a tax cut (although reducing tax rates would be better for the economy than a child credit). The proposed capital gains tax rate reduction would spur entrepreneurship, innovation, small business creation and job growth.

Republicans focus on tax reform to spur growth; all their presidential candidates are for a fairer flatter tax of one sort or another. Democrats, on the other hand, tend to want to use the tax system to try to redistribute, rather than generate, income. The surest way to spur growth is to control the growth of spending and to reform the tax code with lower rates that tax savings only once, not twice or three times as under current law. That would be a potent combination for the economy.

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If the 1996 election is going to be about how to get the economy to grow and alternative visions of the role of government, let's not forget that the problem of balancing the budget by 2002 is the easy part. Keeping it balanced after 2002, when the ratio of retirees to workers starts to zoom, will be far more difficult.

The Congressional Budget Office projects long-term deficits from 15% to 20% of gross domestic product--three to four times the largest deficit in the post World War II era--as the baby boomers retire.

If we do not begin to control the growth of spending, especially in entitlement programs, and implement tax, trade, regulatory and other reforms to spur growth sometime in the next year or two, we will be horribly ill-prepared to deal with these far larger budgetary problems that are certain to confront us.

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