Democrats are making much of the decline in the fiscal year 2001 surplus from the $281 billion estimated in February to $158 billion. They would like the American people to believe that this decline is due solely to the enactment of George W. Bush's tax cut. Indeed, Congressman John Spratt of South Carolina, ranking Democrat on the House Budget Committee, headlined his analysis of last week's Mid-Session Budget Review this way: "New White House Forecast Confirms Bush Tax Cut Wipes Out Surplus."
Democrats also want people to believe that Social Security benefits are somehow threatened by the fact that the unified budget surplus is just $1 billion greater than the Social Security surplus. And they attribute this only to accounting gimmickry.
As I often do when budget numbers are confusing, I looked to the historical record. I examined every presidential budget since 1997, the first year in which it contained estimates for FY2001. At that time, President Bill Clinton expected a budget DEFICIT of $193 billion this year. He continued to forecast a deficit for 2001 as late as February 1997.
Through June of last year, the Clinton administration forecasted very modest surpluses for 2001. Last year's Mid-Session Review put it at $44 billion. It was not until January of this year that Mr. Clinton predicted a large surplus. In his last budget, he put it at $256 billion, subsequently upped to $281 billion by the incoming Bush administration.
I think it is important to put these figures into historical perspective. Instead of writing about the 44 percent decline in the surplus since February, for example, the press could just as easily say that there has been a 360 percent INCREASE in the surplus over the past year. This would put a very different face on the issue of what has caused the decline in the surplus, since last year's Mid-Session estimate included no tax cut.
The question of how tax cuts affect budget estimates is also illuminated by the historical record. In early 1997, before passage of the 1997 tax cut, the White House saw a budget surplus in 2001 of $108 billion. After passage of the tax cut that year, it lowered its estimate to just $7 billion, reflecting its belief that tax cuts only lower revenues, without having any "supply-side" effects.
Just a few months later, however, the Clinton administration raised its surplus estimate for 2001 to $28 billion, then to $83 billion, and then again to $134 billion. In short, between February 1997 and February 1999, the Clinton administration RAISED its surplus estimate for 2001 despite passage of a large tax cut. As Democrats always do, this remarkable fiscal turnaround was attributed to factors completely unrelated to the tax cut. Growth just became faster all by itself, and revenues would have been even larger had the tax cut not been enacted, they maintain.
I suspect that a similar turnaround is going to occur in coming years. Future budget surpluses are far more likely to be larger than those of current forecasts. The Office of Management and Budget is, in fact, using very conservative assumptions about future revenue growth. And when the economy rebounds, revenues are going to flood the Treasury. After all, if we can run a $158 billion surplus in the middle of a sharp economic slowdown, imagine what we could do if the economy were growing even modestly?
In any case, the argument that the tax cut is responsible for the decline in the surplus is utterly disingenuous. It is perfectly obvious to all honest budget analysts that the vast bulk of the lower revenues is due to a slower-than-expected growth. Moreover, Democrats seldom bother to mention that their alternative tax cut would have reduced revenues more this year. Indeed, their principal argument against the Bush tax cut was that it was not large enough in the short-run.
In truth, the main problem with the Bush tax cut is that its least stimulative element, the rebate, took effect immediately, while the marginal tax rate reductions, which are strongly stimulative, come only in the distant future. Sadly, the administration continues to trumpet the rebate as the key to economic recovery, despite growing evidence to the contrary. Numerous polls show that little of the rebate will be spent in the short-run, meaning that its stimulative impact is almost nil. This has been the experience of all such rebates, both at the state and national level.
Democrats are likely to have more success frightening seniors about Social Security. But here, the real blame lies with Republicans, who were first to make a fetish out of the Social Security surplus, in a vain effort to paint Democrats as anti-Social Security. It was a stupid idea, which I said at the time. If they end up suffering politically for "invading" the surplus, even though it is a matter of no economic or budgetary importance, they have no one to blame but themselves.