Financial Straitjacket: Mission Accomplished

In an article on January 8 The Dubya Report highlighted the comments of unnamed "prominent conservative" to the New York Times. "Starve the beast," he said, referring to the strategy of reducing budget surpluses with a tax cut to the point that conservatives could argue that any programs they didn't like were fiscally unsound. In his news conference on August 25 in Crawford, TX, Bush effectively admitted that this had been his plan all along, saying the absent surplus was "incredibly positive news" because it would put Congress in a "financial straitjacket." Of course in January it seemed like Bush might have money in the budget for his own proposals, such as increased military spending, education, and a prescription drug plan. The economic reality, according to the recent Budget and Economic Outlook by the nonpartisan Congressional Budget Office (CBO), is that there will be a $9 billion shortfall in 2001, even without the full cost of those programs, prompting The Guardian UK to declare "Bush's political fortunes hinge on budget."

Paul Krugman, whose editorial writings regularly excoriate Bush administration economic policy, in a recent piece recalled the hub-bub over The New Republic's May issue. The cover featured a picture of Bush captioned "He's Lying." Krugman observes that Bush was lying then, both about the true cost of the tax cut and the true beneficiaries, and is lying now:

  • Administration spokespeople have claimed that the deficits projected by the CBO are the result of an economic downturn. In fact, both the CBO and the administration's own Office of Management and Budget (OMB) project that the economy will recover in 2002, but that deficits will continue through 2004 because increased revenue from economic recovery will not offset the loss of revenue from the Bush tax cut for the rich.
  • The administration is trying to label Congress as the big spenders. But the only new spending in the CBO projection are the administration's defense and education initiatives.
  • The Bushies have called the current defense and education proposals "down payments" on future increased expenditures. The CBO's rules of estimation require that it assume that current policy will not change. So known requests for funding such as these are not accounted for in the CBO projection.

Paraphrasing Bill Clinton, Krugman observes "It's the tax cut, stupid."

The CBO's $9 billion estimated shortfall is an "on-budget" deficit, meaning that it excludes surpluses in the Social Security trust funds, and Postal Service cash flow. In the last several years both parties have advocated using off-budget surpluses to pay down the national debt. The administration seems prepared to press for increased spending for defense and education, and to insist that any other proposals be evaluated after the military expenditures are set. The hope, apparently, is that this would allow Bush to claim that some of his priorities were preserved, and accuse advocates of any other proposals of dipping into the Social Security trust funds.

One big lie, of course, is that Bush said he would not dip into the Social Security trust funds, and he already has. Treasury Secretary O'Neill telegraphed this in March when he refused to confirm that money taken from the Social Security trust funds would be used to help insure their future solvency. As we've noted elsewhere, the economic effect of spending funds designated for Social Security this year and next is less than the political effect. But a growing chorus of economists, including the directors of the International Monetary Fund have raised concerns about the impact of the tax cut on the U.S. economy over the long term.

The Bushies, of course, led by economic adviser Lawrence Lindsey, continue to mouth the supply-sider mantra that cutting taxes for the rich will "trickle down," ultimately benefitting everyone. In his excellent commentary, "Going for Gold," featured in the notorious May issue of The New Republic, Jonathan Chait notes that "The triumph of supply-side thinking in the GOP has taken place, curiously enough, just as any intellectual basis for the theory has collapsed." While economists agree that high tax rates can influence worker behavior in a way that reduces productivity, supply-siders believe that this is essentially the only economic principle that matters. Starting with this premise, they reason that reducing the top tax rate will cause everyone's income to increase. In the early 80's the 70% top tax rate possibly did create a strong incentive for people in that bracket to spend time and energy creating tax shelters and looking for loopholes. The current 40% top tax rate presumably makes such behavior less likely. Moreover, academic economists have reached something of a consensus over the intervening two decades, and have concluded that tax cuts have little actual effect on worker productivity.

Supply siders predicted disaster when the Clinton administration increased the top tax rate in 1993. Their theory told them that increasing taxes for upper-income taxpayers would lead to economic slowdown if not collapse. The reality, as we now know, is that the economy embarked on a period of unprecedented growth. Tax receipts from wealthy Americans increased; new ventures and innovation flourished.

One concludes that conservatives' adherence to supply-side tenets in the face of empirical evidence is "faith based." In a perversion of the Calvinist "salvation by works" the Bushies cherish a core belief that personal or familial wealth is in fact evidence of moral rectitude. This simplistic notion ignores the factors which contribute to an individual's economic standing over which he or she has no control: genetics, subsidized education, social context, etc. But there are echoes of McCarthyism in some of the conservative rhetoric heard raging against the suggestion that redistributing some of the wealth of the rich benefits society as a whole. Daniel Mitchell of the Heritage Foundation has accused Democrats of advocating "the poisonous Marxist ideology of class warfare." Chait concludes:

For all their histrionics, conservatives are not really worried about Marxism taking root in America, or the specter of class bigotry. What they really fear is that an honest discussion of the class ramifications of the Bush tax cut will lead Americans to decide that they don't much like them. And that they'd rather have larger tax cuts for the poor and smaller ones for the rich. Or that they'd rather have a smaller tax cut for everyone and use the money for a prescription-drug benefit. The Bush administration has understood all along that it can win a debate over economic priorities only by preventing that debate from occurring in the first place....


Sanger, David E. "President Asserts Shrunken Surplus May Curb Congress" NY Times 25 Aug. 25, 2001

Krugman, Paul "Truth and Lies" NY Times 28 Aug 2001

Chait, Jonathan "Going for Gold" The New Republic 10 May 2001