To: Penl'ers -- in view of the rapid advance of the Contract with
America menace, we wanted to get you advance notice of the Dollars
and Sense critique of the Contract, which will arrive to
subscribers and to newsstands at the end of February. Below is the
table of contents, and the first article. For information about
reprints and bulk orders of the issue, contact us. Marc Breslow,
Editor.
FORTHCOMING IN THE MARCH/APRIL 1995 ISSUE OF DOLLARS & SENSE.
COPYRIGHT 1995, ALL RIGHTS RESERVED. NOT TO BE REPRODUCED WITHOUT
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TABLE OF CONTENTS FOR MARCH/APRIL ISSUE OF DOLLARS & SENSE
SPECIAL SECTION: DECODING THE CONTRACT
8 Budget-Balancing Nonsense
The GOP's Contract with the Devil Marc Breslow
12 Is Big Government Really the Problem?
Robert Pollin
14 The Capital Gains Tax Giveaway
John Miller
18 Unnecessary Evil
Why Inequality is Bad for Business
Randy Albelda and Chris Tilly
--------------------------------------------------------- 22
NAFTA Shock
Mexico's Free Market Meltdown James Cypher
26 GATT: A View From the South
Francis Adams
28 California's Melting Pot Boils Over
The Origins of a Cruel Proposition Abel
Valenzuela
THE REGULARS
2 LETTERS: Race Debate; Identity Crisis
4 THE SHORT RUN: Heritage Foundation Hype
6 ACTIVE CULTURE: Defending the Value of Life
7 COMMENT: Power and Paper Doug Henwood
32 PRIMER: Game Theory: Does Greed Explain
Enough? Gil Skillman
36 IN REVIEW: Books
Leslie Savan The Sponsored Life Doug Henwood The
State of the U.S.A. Atlas Jeremy Brecher and Tim
Costello Global Village or Global Pillage
43 ECONOMY IN NUMBERS:
The GOP's 17% Mandate Marc Breslow
BUDGET-BALANCING NONSENSE
THE GOP'S CONTRACT WITH THE DEVIL
By Marc Breslow
Marc Breslow is an editor at Dollars & Sense.
The new Republican congressional leaders want to
accomplish the miracle that eluded Ronald Reagan:cutting
income taxes, increasing military spending, and balancing
the federal budget all at the same time. As of this
writing, the House has overwhelmingly passed the
balanced-budget amendment, moving the struggle to the
Senate. As Majority Leader Richard Armey of Texas wanted,
the House voted without specifying what spending cuts
should be made. Incredibly, Armey acknowledged that the
necessary cuts are so onerous that no one would vote for
the amendment if they knew what it would require.
If the Republicans are intent on counter-revolution,
President Clinton~s fiscal 1996 budget would reproduce
the status quo. While Clinton hyped his own tax and
budget cuts, both are too small to matter much during the
next few years. Even by the year 2000, his middle class
tax cut would be merely 1% of the budget, and his
spending reductions about 3%.
While the Republicans claim that the country~s economic
and social problems result from excessive taxation and
spending by Democratic Congresses, the reality of the
past 15 years is dramatically different. Federal spending
rose slightly faster than growth in the economy during
the Reagan-Bush years, while falling in relative terms
since Clinton took office. And the largest,
fastest-growing spending areas are ones which Republicans
have not opposed ~ interest on the federal debt, Social
Security, Medicare, and other health spending. Meanwhile,
the income tax cuts initiated by Ronald Reagan are
responsible for the increased federal debt burden.
The federal budget deficit exceeded $300 billion a year
five times during 1982 to 1992, and equaled $270 billion
in fiscal 1993, George Bush~s last budget (all in 1995
inflation-adjusted dollars). It dropped to $209 billion in
1994, and will be $193 billion in 1995, estimates the
Office of Management and Budget (OMB). Republican plans to
both raise military spending and cut taxes would increase
the amount by which spending exceeds revenues, worsening
the deficit.
Several of the absurdly-titled provisions in the Contract
with America would cut taxes, including:
~ the American Dream Restoration Act,~ which would give
families an additional $500 tax credit per child, and create a new
tax credit to reduce the taxes of married couples;
~ the Senior Citizens Fairness Act,~ which would repeal the
requirement that seniors who earn more than $34,000 (single) or
$44,000 (couple) pay income tax on 85% of their Social Security
benefits;
~ the Job Creation and Wage Enhancement Act,~ which would
cut the capital gains tax by 50% initially, and further reduce
such taxes by allowing taxpayers to adjust the purchase prices of
their assets for inflation.
~ new tax breaks for individual retirement accounts (IRAs).
~ greater tax breaks for depreciation of business assets,
such as buildings and machinery, allowing deductions for more than
the purchase price of the assets.
Altogether, by the year 2000 the tax provisions would
reduce federal revenues by $74 billion a year, according
to the U.S. Treasury Department. Of these, only the
increased credit for children benefits most taxpayers,
while the others mainly serve wealthy individuals and
corporations. Worse yet, while the ~middle-class~ cuts for
families would remain relatively stable over time, those
benefitting the rich would explode after the first five
years. The Treasury estimates that 50% of the money would
go to the wealthiest tenth of families (those with incomes
above $100,000), while only 20% of the benefits would go
to the two-thirds of families with incomes less than
$50,000.
To these revenue losses the Republicans would add higher
military expenses (the right-wing Heritage Foundation, for
example, wants to spend $160 billion more on defense in
the next five years). The net result is that the Contract
with America would return the deficit to at least its
Reagan-Bush levels, erasing the Clinton administration~s
reduction efforts.
THE BALANCING GAME
For the Republicans to balance the budget, either the
non-military portions of federal spending would have to be
cut, or taxes other than personal and corporate income
taxes would have to be increased. Since the GOP has not
proposed increasing the other major revenue source,
payroll taxes on workers~ wages, their only alternative is
to cut spending items. Yet initially Newt Gingrich
declared most of the largest pieces of the federal budget,
including Social Security and Medicare, off-limits. With
the military sacrosanct, and Congress unable to directly
affect the annual interest on the federal debt, four of
the five largest items in the federal budget could not be
reduced.
After the Congressional Budget Office (CBO) published an
analysis demonstrating the absurdity of balancing the
budget without touching any of this spending, the Newt and
friends backtracked, saying that Medicare spending would
be addressed. But a few weeks later, apparently chastened
by the political power of senior citizens, the
Congressional leaders reversed course again, indicating
they would not tamper with Medicare.
National defense, Medicare, Social Security, and net
interest (on the debt) add up to $977 billion in spending
for 1995, or 64% of the federal budget (see the table).
This leaves only 36% of the budget, or $540 billion,
available for cuts. To eliminate the deficit these
remaining items would have to be cut by about one third.
Are such drastic reductions possible? Probably not, unless
tens of millions more Americans are to be thrown into
poverty or denied health coverage. Of the remaining items
in the budget, the largest are $221 billion for ~income
security~ and $123 billion for ~health,~ the largest
component of which is Medicaid coverage for low-income
families and disabled persons.
Income security encompasses all programs that service
retired federal workers, the poor, near-poor, unemployed,
and disabled. In fiscal 1995, this includes $75 billion
for military and civilian pension and disability programs;
$72 billion for food stamps, unemployment compensation,
and Supplemental Security Income; and a mere 14.4 illion,
or 1% of the budget, for the right-wing~s public enemy
number one, welfare (Aid to Families with Dependent
Children, or AFDC).
While income security spending did rise by 38% since 1980,
this was a far smaller increase than for the four
untouchables, which rose 56%. Moreover, the need for
increased aid to low-income people has resulted from
economic stagnation and increasing inequality since the
1970s, not from overly-generous programs created by
Democratic congresses. The number of families receiving
welfare has risen, in large part due to falling real wages
and rising unemployment. But the average monthly benefit
level has dropped dramatically, from $714 in 1970 to $510
in 1980 and $394 in 1993 (all in 1995 dollars).
All other types of spending, including international
affairs, energy, natural resources and the environment,
education and training, and transportation, total to only
14% of the budget, or $212 billion ~ so that slashing all
of them would make only a dent in the federal deficit.
WHAT CAUSED THE DEFICIT?
Conservatives would have us believe that it was an orgy of
spending by Democratic Congresses, particularly on income
transfer programs to aid low-income households, that
caused the budget to come unglued. This is false. From
fiscal 1980 through 1995 federal spending grew by 39% in
real terms (adjusted for inflation). This may sound like a
lot, but the economy grew faster, as the Gross Domestic
Product (GDP) rose 43%. Thus, spending fell as a fraction
of GDP, decreasing its economic burden, contradicting
conservative claims.
The problem has been on the revenue side. Due to the
Reagan tax cuts, during the 1980s tax collections fell far
behind spending, creating the massive deficit. The Clinton
administration has begun to reverse this trend, raising
income tax rates on the wealthy. As a result, the CBO
projects 1995 revenues at a level 42% above those in 1980,
a growth rate faster than that for spending. If this trend
continues, over time the deficit will fall relative to the
GDP. But due to the excesses of the Reagan-Bush era, the
accumulated federal debt is now above 70% of the GDP, its
highest level since the early 1950s.
As most workers realize, Social Security and other payroll
taxes have increased in recent years, growing from 5.8% of
GDP in 1980 to 6.9% in 1995. What fell was income taxes,
which today make up a smaller percentage of federal
revenues, and of GDP, than they did in 1980. If individual
and corporate income taxes had not been cut, but instead
still accounted for the same fraction of GDP today as they
did in 1980 (8.9% and 2.4% respectively), the federal
government would have another $70 billion in annual
revenues ~ eliminating more than a third of the deficit.
Suppose one argues, nevertheless, that federal spending
should be cut. The third column of the table shows which
spending types have grown and shrunk since 1980. Many of
the categories which the Republicans view as pork waiting
to be cut have already fallen drastically, including
energy (-73%); natural resources and the
environment(-15%); community and regional development
(-56%); education, training, employment, and social
services (-9%); and ~general government~ (-44%).
The biggest spending increases have been in net interest
($116 billion, due to the Reagan-Bush tax cuts), Medicare
($97 billion), health ($80 billion), and Social Security
($117 bllion). Leaving out health (which includes
Medicaid), and adding the $23 billion rise in defense, we
have an increase of $352 billion in the spending
categories that the Republicans were initially not
inclined to fiddle with. Everything else in the federal
budget combined, including Medicaid and all
poverty-related programs, rose by only $70 billion
(adjusted for inflation) from 1980 through the present.
Military spending has fallen substantially from its peak
levels under Ronald Reagan, but remains higher than it was
when Reagan took office. Anxious to upstage the
Republicans, in his State of the Union address Bill
Clinton called for adding billions of dollars to current
spending levels. There is no excuse for such wastefulness
in a world where the United States has no enemies of
military consequence. As of 1993, the U.S. military budget
was greater than that of the next ten highest spenders
combined, all of whom are U.S. allies (if one includes
Russia, whose budget is now only one-tenth of ours).
Cutting the military in half would come close to
eliminating the deficit, while still leaving us with more
than three times the defense budget of Japan, our closest
competitor.
Clinton~s original campaign document, ~A Vision of Change
for America,~ was right in arguing that eliminating the
deficit would mean increasing taxes and halting the
unchecked escalation of health care spending (see
~Clinton~s Weak Vision,~ Dollars & Sense, April 1992). One
way of addressing the latter is to control wasteful costs
~ by slashing the administrative burdens of a system run
by insurance companies; eliminating unnecessary and
inefficient medical practices; and controlling physician
salaries. All this could be accomplished by sensible
health care reform, reducing the power of insurance
companies and doctors. But since the Republicans are
opposed to reforms that interfere with the prerogatives of
privileged groups, who contribute heavily to their
campaigns, we will see none emanating from the new
Congress. Instead, we will see increased pressure to save
money by denying all Americans, but especially the
unemployed, low-wage workers, and the poor, the medical
care they need.
Since Medicare is politically untouchable, the primary
pressure will be on Medicaid. It is true that Medicaid
costs more than doubled, rising $53 billion, from 1980
through 1992. This was due, however, not to particular
inefficiencies of government-financed health programs, but
rather to two factors that cannot be fixed by simple
budget-cutting. The first is increased poverty, and
extensions of Medicaid coverage to the near-poor, which
have caused the number of Medicaid recipients to rise 44%
during these years. The second is rapid cost increases for
health care in general. In fact, Medicaid costs per person
served rose 66% from 1980 to 1993, slightly slower than
the 75% rise for the entire health care system.
Because Medicaid reimbursement rates are already low
compared to those for Medicare or private insurance, poor
families have great difficulty finding doctors who will
treat them. Edie Rasell, a physician and economist with
the Economic Policy Institute, argues that ~since payment
rates cannot be reduced, and the potential for improved
efficiency is small, budget cuts will mean severe
reductions in the quality of care provided.~
With his health care reform package having failed, and the
Democrats having lost control of Congress, Clinton~s 1996
budget proposal is an effort at stonewalling the
Republicans. The President calls for a gradual phase-in of
tax and budget cuts, neither becoming meaningful until
fiscal 1997, shortly before he stands for reelection
(assuming the Democrats do not find a new candidate). But
even by the year 2000, his spending cuts would only be 3%
of the budget, reducing the deficit from its current $193
billion to $166 billion (in 1995 dollars).
Clinton~s "middle-class tax cut" is only 0.2% of the
budget in 1996, rising to 1% in the year 2000, a
relatively insignificant change. While the benefits would
be more progressively distributed than those in the
Contract with America, the middle class label is nly
accurate if ~middle~ means those in the top half, or
perhaps the top third, of the income distribution. About
45% of American households have incomes below $30,000, and
they would get an average benefit of $19 a year. The 20%
of households with incomes between $30,000 and $50,000
would get $175 each. Meanwhile, the 25% of households with
incomes between $50,000 and $100,000 would gain by $358
each.
Bill Clinton~s responses to the Democrats~ Congressional
losses are no more than half-hearted attempts to coopt the
right~s issues. But the economic policies of his first two
years were an effort to reverse 12 years of irresponsible
leadership from Ronald Reagan and George Bush. Newt
Gingrich, Robert Dole and company would return us to those
days, in which tax cuts and military spending generated
prosperity for some, while the federal debt quadrupled.
Perhaps we will find out in 1996 whether the electorate
has learned its lesson.
Resources: "The Budget Outlook," Congressional Budget
Office, 1994; Budget of the United States Government:
Historical Tables, Fiscal Year 1995, Office of Management
and Budget; "The New Fiscal Agenda: What Will it Mean and
How Will it be Accomplished?," Center on Budget and Policy
Priorities, January 1995.
SIDEBAR
Should the Budget Be Balanced?
Ever since the Great Depression of the 1930s, and the
theories of British economist John Maynard Keynes, running
budget deficits has been a primary method for stimulating
economies that have high unemployment rates. In theory,
the budget should return to balance or surplus during boom
times. The Reagan administration discredited this notion,
cutting taxes to such a degree that the United States
would face perpetually high deficits, regardless of how
hot the economy was.
But the answer is not a balanced-budget amendment, unless
one wants to prevent the federal government from
combatting recessions. Worse yet, under such an amendment,
the federal government would be forced to make recessions
worse. When the economy slows down, income and Social
Security tax revenues drop, due to falling wages and
profits. Meanwhile, costs for some programs, such as
unemployment compensation, rise.
These changes automatically put the federal budget into
deficit, even if a balanced budget had been planned at the
beginning of the fiscal year. If a constitutional
amendment requires the government to balance spending and
revenues at the end of the year (not just in the original
plan), then the White House would be forced to cut
spending or raise tax rates, thereby slowing the economy
down, just at the time when it is most in need of
stimulus.
One argument used by conservatives in favor of balancing
the federal budget is that each of the 50 states manages
to equalize its own revenues and spending. There are
several flaws with this idea, as the Center on Budget and
Policy Priorities points out. First, it is precisely
because states are unable to counter recessions that the
federal government must have the power to do so. Second,
many states require that a balanced budget be planned for,
but not that it actually be achieved at year-end. Third,
most states have separate budgets for operating and
capital expenses, with borrowing allowed for capital
investments such as roads, bridges, and schools (just as
households borrow for home mortgages and car purchases).
At present, the U.S. government has no separate capital
budget, making the deficit appear worse than it really is.
In fact, the Clinton administration claims that in fiscal
1995 federal investment spending will be $235 billion
(almost half of it for the military), exceeding the
deficit.
Resources: "The Balanced Budget Constitutional Amendment,"
Center on Budget and Policy Priorities, January 9, 1995.
