Skip to comments.Symposium Q: Can Republicans really be trusted to stem runaway spending in 2004?
Posted on 01/22/2004 9:32:34 PM PST by writer33
YES: The GOP budget plan is steering the nation and the economy out of the 'perfect storm.'
No one doubts that President George W. Bush inherited what Office of Management and Budget Director Josh Bolten calls "a perfect storm" - an imploding market punctuated by a symptomatic series of corporate scandals, exacerbated by a costly terrorist assault on American soil.
The deficit magnitudes are not in question. The shortfall for the fiscal year ending Sept. 30, 2003, was $374 billion. The projected deficit for fiscal 2004 may exceed $500 billion. It is how the president addresses this imbalance that draws fire, left and right. While attacking the spending side, these critics pay little heed to the transformational changes that accompanied them in national security, entitlement reform and economic efficiency.
The deficit, a product of multiple crises, is surely steep. But it is below its historic peaks. The shortfall equaled 3.5 percent of gross domestic product (GDP) in fiscal 2003 and may reach 4.5 percent of GDP in fiscal 2004. By contrast, Reagan-era deficits reached 6 percent of GDP.
Bolten observes that spending growth unrelated to national security has declined consistently relative to the 15 percent increase in the final Clinton budget - to 6 percent in fiscal 2002, 5 percent in fiscal 2003 and no more than 4 percent in fiscal 2004.
But the debate over the Bush budget concerns its magnitude less than its tendency. From 2001 to 2003, the federal budget increased $296 billion. Roughly 34 percent of this increase went to defense; another 11 percent to homeland security. But entitlement outlays accounted for most of the rest: roughly 15 percent for Social Security, 9 percent for Medicare and 14 percent for Medicaid. The combined impact of these programs - defense, homeland security, Social Security and medical care - thus encompassed 83 percent of the total budget increase.
The deficit means different things to its different critics: an indictment of defense costs or tax cuts to those on the left; an indictment of spending, particularly of entitlement growth, to those on the right.
Let's start with the military budget. The $87 billion supplemental request shocked only those who didn't understand the stakes involved. The low-tech, mass homicides of 9/11 cost this country roughly $150 billion in reduced GDP. Testifying before the Senate Appropriations Committee, Defense Secretary Donald Rumsfeld recently listed some of the damages incurred: $50 billion in costs to the insurance industry; $33 billion in private-sector security expenses; $21 billion to New York City for direct damages; $18 billion in cleanup costs at the World Trade Center site; $11 billion in lost business to the airline industry; $7.8 billion in lost income for the families of the roughly 3,000 murdered victims; $6.4 billion in lost wages for nonvictim New York City workers; $4 billion to the victims' compensation fund; $1.3 billion by state governments for homeland security; and $700 million to repair the Pentagon.
The capitalist order depends on a baseline of respect for persons and property - "Thou shalt not kill" and "Thou shalt not steal." Terrorism on the scale of 9/11 threatens that order's existence. Through such acts terrorists could manipulate capital markets to finance their future activities. Creative destruction, the hallmark of market economics, would be replaced by cancerous destruction.
President Bush undertook the effective response that was available: to disincent the terrorist enterprise. That meant killing the terrorists in their persons while placing a military presence at the throat, or in the face, of their state sponsors. Thus far the dividends have surpassed expectations: mass terror extinct on U.S. soil and a chain-reaction change of heart among state sponsors of such acts. Given what was at stake, the budgetary "price" was cheap.
The second controversial expenditure of the Bush budget is visible only to critics on the left - i.e., "tax expenditures" in the form of lower marginal rates, investment tax credits, child credits, and reductions on the taxation of inheritance, capital gains, dividends and other forms of saving. It was a bold move by President Bush to lower taxes in the face of the "perfect storm" raging about the budget, but the results have been gratifying. GDP growth hit a sizzling 8.2 percent in the third quarter of 2003, spurred by revivals in manufacturing, foreign trade, retail sales, housing construction and, finally, employment.
It is not our intention to justify every domestic expenditure of the Bush budget. But it is fair to state that where he has accepted major domestic-spending increases, he has balanced them with structural reforms that will move the budget back toward balance in the future.
Let's look at the Medicare prescription-drug bill just passed. The president and the Republican Congress fulfilled a promise that they have been making to America's seniors year after year: Medicare should have a prescription-drug option.
The reforms contained in this legislation were substantially greater than anything that could have passed Congress as stand-alone measures. These included tax-sheltered, personally controlled health-savings accounts (HSAs) for everyone, and a huge pilot project for privatizing Medicare involving 8 million to 10 million seniors.
The health-care-cost crisis plaguing the private sector in the United States is so acute that small businesses and large companies use the word "unsustainable" to describe it. In fact, the chief executive officer of Wal-Mart recently said it was time for the "government to step in" on health care.
Why would a Wal-Mart executive prefer socialized medicine to the current health-benefits environment? Answer: Business is being hammered relentlessly by health-care costs.
Here are some sobering numbers. In 2003, the average cost of health insurance for a family was $9,068 per year, and health-insurance costs are expected to rise by at least 10 percent this year. A 12 percent increase would mean health costs have doubled since 1999. The employer-provided health-insurance base is shrinking. It now is at 45 percent, down from 63 percent 10 years ago. At the current rate of decline, only 36 percent of the population will have employer-provided health insurance five years hence.
All conservatives know that HSAs, tax sheltered and individually controlled, are the sole practical market reform that can derail the march to socialized medicine and its inevitable service declines, cost inefficiencies and treatment quotas. A Reason magazine article titled "Health Insurance Crisis Again" recently explained that "such plans typically cost 20 percent to 60 percent less than conventional health-insurance policies." As Newt Gingrich recently wrote in Saving Lives & Saving Money, HSA-style accounts will enable everyone to "become the primary guardian of how money is spent on health care. No longer beholden to insurance companies' regulations, doctors will be driven by market forces to provide better care at lower cost."
The 60-vote hurdle necessary to move legislation in the Senate is insurmountable unless some Democrats vote with Republicans - i.e., they get something they want, so we get something we want. But failure to pass the president's prescription-drug package would have relegated the only practical mechanism we have to control health-care costs to think-tank forums, where some of our friends seem to want it.
Critics of the right savage this proposal on the basis of the prescription-drug benefit that accompanied it. But without the transformational power of a direct consumer market in health care, it is hard to see how the burgeoning cost of Medicare can be contained.
It also should be noted that hundreds of billions of dollars in HSAs will build up over the next five to 10 years, providing a working model for Social Security privatization - a point that Sen. Ted Kennedy (D-Mass.) made repeatedly in his filibuster of HSAs and the Medicare prescription-drug bill.
The Bush tax cuts contained other generous provisions for savers and investors, and the 2004 budget may contain more. If capital markets prove vigorous in 2004, we may see the centerpiece of the Bush entitlement-reform agenda: personal retirement accounts within the Social Security system. The bipartisan President's Commission to Strengthen Social Security (2001) designed three workable models for such accounts. The partial conversion of Social Security tax into personal savings, fully inheritable, accumulating at market rates, is the last, best chance to improve retirement security while avoiding a budget crisis.
Absent such sweeping reform, it is likely that the 2004 budget will include other incentives for savers and investors - a supplementary retirement-savings account and/or a "universal" IRA for a variety of life-cycle needs, such as education, home ownership and health care.
To summarize, the Bush administration approach to entitlement reform is to substitute personal, tax-advantaged savings and investments for a portion of the traditional "safety net," creating higher rates of accumulation and return on the one hand, and a competitive benchmark for the public sector on the other.
President Ronald Reagan's supply-side tax cuts turned the United States into a haven for capital. His 401(k) revolution turned the American laborer into a worker-capitalist, an owner of financial assets. And his defense buildup won the Cold War. In the process, he threw the federal budget into deficit. But the structural changes he effected transformed not only the economy, but the electorate. The taming of inflation in the 1980s, and the balancing of the budget in the 1990s, were direct consequences of the new economy and the new labor market.
Today, President Bush is undertaking a comparable revolution. His war against terror sustains the capitalist order; his tax cuts magnify it. His transformation of entitlements forces market incentives on the nation's most hegemonic bureaucracies, making Americans the masters of their own health care, retirement and education. To the extent that the president's reforms take root, the budget deficits accompanying them will be remembered no more than those of his illustrious predecessor.