Monday, Sep. 25, 2000
What's The Difference?
By GEORGE J. CHURCH
The numbers sound gigantic, awesome, mind boggling. Match them up against the stunning dimensions of the U.S. economy, though, and the figures the Al Gore and George W. Bush campaigns brandish on the stump suddenly shrink to a kind of marginal gloss. That was one of the first and most often made observations by TIME's Board of Economists when asked to weigh the presidential candidates' competing programs in the national balance. David Wyss, the nonpartisan chief economist of Standard & Poor, prices Bush's and Gore's tax and spending plans at around $1.5 trillion over the next 10 years. That sounds like an awful lot of money, and it is, but in fact it would amount to only about 1% of the total of goods and services the economy is expected to produce over that period.
The upshot: anyone who expects to vote for Bush or Gore according to whose plan seems most likely to keep the U.S. boom bubbling should look for another basis on which to choose. TIME's board painted a rosy picture of economic prospects for the next 10 years--no matter which presidential hopeful wields the brush for the finishing touches. Says Wyss: "You've got to choose between these plans--and between these plans and nothing--on the basis of equity and social effects, not on their economic impact."
Even if the boom does roll on for a decade longer, there is a question of which approach, Bush's or Gore's, would leave the economy in the best shape to weather the shocks foreseeable a quarter-century or so ahead. In the view of the less partisan members of TIME's board, the answer is, neither. But the competing plans pose quite different answers to the question of how best to distribute the benefits--or more bluntly, to that fundamental political question, Who gets what?
There are large areas of agreement between the two sides--much wider than anyone would guess from hearing the candidates slam each other. Agreement begins with the most basic calculation: How much money will be available to fund tax cuts and new spending and to pay off federal debt? Both sides accept a Congressional Budget Office estimate that with no changes in policy, the government will rake in a staggering $4.6 trillion more than it pays out over the next 10 years.
Relatively apolitical members of TIME's board--Wyss and Abby Joseph Cohen, head of the investment-policy committee of Goldman Sachs--are not so sure about that. They cannot suppress a nagging memory: five years or so ago, most economists were forecasting huge federal deficits as far as the eye could see--with as much certainty as they are now predicting giant surpluses for the next decade. Could the current optimism be equally off base?
Democrat Robert Reischauer, president of the Urban Institute and former director of the CBO, points out some ways in which his old agency's forecasts seem more than shaky. The CBO assumes that "discretionary" spending--the amount that Congress is free to raise or lower each year--will increase only as much as inflation does. "Totally unrealistic," says Reischauer. Another assumption is that certain tax credits will expire on schedule, although Congress always extends them, and that the alternative minimum tax, paid by people who get large amounts of income from otherwise tax-sheltered sources, will continue unchanged. "There is no way on God's green earth" that will happen, says Reischauer; Congress will change the tax because it is beginning to hit middle-income people as well as tax-shelter millionaires.
On the other hand, Republican Lawrence Lindsey, a resident scholar at the American Enterprise Institute and former member of the Federal Reserve Board, lists some ways in which the CBO estimates are too conservative. Most important, the CBO estimates the U.S. economy will grow at an average rate of only 2.7% a year over the next 10 years, while TIME's Board of Economists believes potential growth may be as high as 4% annually. Every percentage-point increase in growth increases federal tax collections 1.4%, says Lindsey, so revenues could easily rise far more than the cbo figures. Reischauer agrees, and believes the opposing errors probably offset each other, leaving the $4.6 trillion as a reasonable base for planning.
SAVING THE BIG ONE
The biggest part of that, $2.4 trillion, is expected to come from the Social Security system. Gore and Bush partisans fully agree that all that surplus should in effect be saved by using it entirely to pay off debt. That leaves $2.2 trillion "for other priorities," as Lindsey puts it, and the biggest difference between the two campaigns is whether to address those priorities "mostly on the tax-cut side," as Bush would, or "on the spending-increase side," a la Gore. Even these differences, however, are somewhat less than absolute. Gore also is proposing tax cuts, though smaller than Bush's and distributed differently. Bush, like Gore, wants to add a prescription-drug benefit to Medicare, though it may be smaller than Gore's.
Some of the sharpest debate involves numbers crunching; each side implies the other is fudging its figures. The Gore campaign has long contended its champion would pay off much more debt than Bush would, and the Vice President himself now pledges to wipe out the entire $3.4 trillion federal debt owed to the public by 2012. Bushies contend Gore's figures don't add up and insist that their man also would pay off a great deal of debt--maybe as much as Gore.
There is no doubt, though, that as a stated priority debt reduction looms larger for Gore, who is trying to paint himself as a kind of fiscally conservative populist. Alan Blinder, a visiting fellow at the Brookings Institution and former vice chairman of the Federal Reserve Board, is emphatic about the thinking behind the Gore program he helped to shape. The obvious starting point "if you have just come off the most successful eight years of economic policy in history," says Blinder, is to "figure out what you were doing right and keep on doing it." To Gore, he says, that means above all continuing and accelerating the swing from piling up debt to reducing it. Accordingly, says Blinder, Gore expects to use about two-thirds of future surpluses--the whole Social Security surplus and part of the non-Social Security surplus as well--for that purpose.
Next, asserts Blinder, "a vast swath of the American populace," maybe half, "hasn't benefited very much from the prosperity." Gore proposes to help them through a series of "very carefully targeted tax cuts and spending programs" that Blinder tots up to about $1.2 trillion over 10 years (Bush adviser Lindsey says they would cost $2.1 trillion). Some examples are tax credits "to make education more affordable" and tax cuts "for the purchase of health insurance."
Lindsey talks mostly about tax cuts in defending Bush's program. They are by far the biggest item, adding up to $1.3 trillion over 10 years. One of the oddities in this year's political-economic debate is that both camps talk almost exclusively in 10-year terms, though even a President elected this year and re-elected in 2004 would serve only eight years. The reason is that the CBO has adopted the 10-year standard in all its budgetary forecasts.
The Bush tax program is mainly a classic expression of Republican philosophy: the surplus should be given back to the people whose taxes created it, and they can spend it more effectively on their own than under government direction. But Lindsey insists that it is also designed to solve social problems and promote equity.
INTO THE MIDDLE CLASS
For one thing, Lindsey says, Bush specifically asked him and other advisers to design a program that would make it easier for people to enter the middle class. Lindsey's prime example: a single mother with two children who gets a pay raise from $25,000 to $30,000. Because of the "interaction of taxes"--federal income, Social Security and Medicare taxes, state income tax and a reduction in her federal earned-income credit, the woman would keep only about half of the extra $5,000. Bush's proposed cuts in tax rates and doubling of the tax credit for each child would enable her to keep around $3,300.
Other examples of Bush-style equity: abolishing the inheritance tax, which Lindsey views as unfair (why should the government tax a person's income while he or she is building up an estate, then take away as much as half of it after death?), and reducing income-tax rates on individual proprietorships and partnerships, which now range up to 40%, to the same level as corporations, about 30%. Gore fans regard both as giveaways to the rich.
DEDUCTION OR WIPEOUT?
Perhaps the most telling difference between the Bush and Gore tax programs concerns the marriage penalty--the quirk in the tax code that causes some working husbands and wives to pay more tax than two single people would on the same incomes. Bush promises he would give a new break to those married couples who did not pay the penalty. Gore, says Blinder, would deal with the penalty in a more progressive way--by raising the standard deduction for married couples, which is taken only by relatively low-income people, in order to target any benefit to the neediest.
The only argument at the TIME meeting that came close to shouting concerned Social Security. Martin Feldstein, president of the National Bureau of Economic Research and a Bush adviser, is a strong advocate of diverting some Social Security tax payments into individual investment accounts. At the meeting, Feldstein described that scheme as the best way to keep politicians from in effect raiding the Social Security surplus to finance lavish spending programs. They would do so, he said, by once more running the non-Social Security budget into deficit and blandly contending that the government as a whole still had a surplus. Reischauer and Blinder replied vehemently that today's politicians wouldn't dare. Feldstein nonetheless insisted that the only way to keep the $2.4 trillion Social Security surplus safe was to put some of it into privately held individual accounts that Congress could not touch.
None of this satisfied Cohen and Wyss. Both worried that Gore and Bush were committing the whole non-Social Security surplus to being given away in tax cuts or spending programs. Wyss in particular asserted that Standard & Poor's long-range forecasts show that when "we get out 25 years we have a real problem making this economy function" because of the enormous strain that baby-boomer retirements will continue to put on Social Security, Medicare and other entitlement programs. He fears that neither the Bush nor the Gore program would save enough of the surpluses to begin building reserves adequate to deal with this threat.
"OFF TRACK" ON TAXES
Reischauer too is not wholly satisfied with either program. Both candidates are "off base" on taxes, he says. He would prefer a tax plan that would move back toward the low-rate, broad-based, simplified reform that Congress enacted in 1986 and then began pulling apart again.
But Reischauer adds a more cheering thought: "If three years ago we could have looked at the conversation we are having now, we would have said, 'What are these people complaining about?'" He and Feldstein are especially cheered by the prospect of paying down the national debt by at least $2.4 trillion over the next 10 years. Feldstein calculates that would reduce the debt to less than 10% of gross domestic product--a ratio that "hasn't been seen in any of our lifetimes."
In other words, neither the Bush nor the Gore program may be ideal--but even the most intense partisans cannot call either a prescription for disaster.