WASHINGTON -- A show trial will be conducted Thursday by the Senate Budget Committee. The prosecutor is the committee's new Democratic chairman, Sen. Kent Conrad of North Dakota. The defendant in the dock is Mitch Daniels, Office of Management and Budget (OMB) director.
As in all show trials, the verdict is a foregone conclusion: Daniels is guilty of promoting President Bush's policies that have reduced the budget surplus to a mere $200 billion for the current fiscal year. The penalty is less clear, apart from hoped-for political ruin visited upon the Republicans in the 2002 elections. Implicitly, Conrad wants to impose higher taxes on a shaky economy.
For a senior and respected Democratic senator to propose such a return to the self-destructive economics of Herbert Hoover offers Daniels an opportunity. Taunts by Conrad and his allies all too frequently have been met by the White House with mealy-mouthed approbation of constructing fiscal lock-boxes. Returning to Washington from a brief holiday at home in Indianapolis, Daniels late last week convened an urgent strategy session to devise a positive defense of Bush fiscal policy. That should not be difficult, considering the nature of the indictment.
A former North Dakota state tax commissioner, Conrad for years has preached an antique fiscal conservatism that is militantly opposed to tax reduction. His call to protect the vaporous, largely imaginary Social Security trust fund for years evoked mostly eye-rolling in the Senate. But the elimination of the federal budget deficit gained Conrad bipartisan acolytes for "locking up" funds to finance Social Security and even Medicare.
The statement by National Economics Adviser Lawrence Lindsey anticipating a surplus reduced $65 billion from roughly $265 billion to $200 billion was seized upon by Conrad as a calamity. Last Tuesday, while his fellow senators were enjoying the Fourth of July recess, Conrad announced the Budget Committee hearing putting Daniels in the dock. "I do believe," said Conrad, "they have an affirmative obligation to come up with spending cuts or new revenue to prevent us from raiding the Medicare and Social Security trust funds."
Two days later, a White House meeting presided over by Daniels reviewed the facts. Even with the slightly reduced surplus, there is sufficient revenue to cover Social Security. Medicare never has been self-financed but long has needed $25 billion a year from general funds. Since there is no chance for additional "spending cuts" in a budget that even now is considered parsimonious in Congress, Bush is being faced with demands for "new revenue" in the midst of an industrial recession, sluggish investment and rising joblessness.
While the reduced surplus is the product of an economic slowdown that began last summer, the congressional front-loading of the tax cut into lower income brackets further reduces the surplus for the current fiscal year. Finally, Conrad has informed Defense Secretary Donald Rumsfeld that he also has an "affirmative obligation" to pay for the $18 billion requested in supplemental defense spending -- another indication that only higher taxes can satisfy the budget chairman.
The White House problem is that many rank-and-file Republicans agree with Conrad and are deeply concerned about his attacks. Rep. Jim Nussle of Iowa, the new chairman of the House Budget Committee, is a staunch Republican conservative but makes a private confession: Given a choice between "protecting" Medicare and adding Defense spending, he would choose Medicare. What's more, Nussle estimates that some 180 Republican House members would join him.
"I guess that we're all non-Keynesians now," comments one administration policymaker, putting a reverse twist on Richard Nixon's famous pronouncement of three decades ago. At the Budget Committee hearing, Daniels will have a chance to describe the lunacy of higher taxes in the face of what is still a large and sustained surplus.
To what end? To Bush policymakers, a larger surplus merely means more payments to U.S. Treasury bondholders. Robert Rubin, grand architect of Clinton budget policy, saw the budget surplus as a mechanism for reducing long-term interest rates. But those rates today are extraordinarily low. "How could we possibly be more Rubinesque?" asks a Bush adviser. That's a good question for Kent Conrad's show trial to seriously ponder.