September 16, 2004
It's the Deficit, Stupid!
Any presidential candidate laying out an economic plan has, ideally, two goals. The first is to outline sound policy. The second, and more pressing goal, is to get elected. John Kerry's op-ed in Wednesday's Wall Street Journal, describing his economic agenda, does a pretty good job of navigating between those two aims. But as with any campaign promise, it helps to cut past the rhetoric and ask: what would John Kerry's agenda actually look like? To answer this question, we need to look at Kerry's larger-than-life predecessor: Bill Clinton.
Kerry, naturally enough, didn't propose anything wild and crazy in his Journal piece, but merely reiterated his campaign-trail promises. He plans, as ever, to repeal the 2001 and 2003 tax cuts for the 2 percent of the population making over $200,000 a year, while making permanent the tax cuts for everyone else. To help stem the (admittedly weak) tide of outsourcing, Kerry would eliminate those tax code provisions that give incentives for companies to ship workers overseas, and he would offer tax credits to firms that hire new workers. To help pare down the budget deficit, he would put caps on discretionary spending and institute new "pay-as-you-go" rules that would require Congress to raise taxes or cut other spending in order to pay for any new programs.
On the domestic front, meanwhile, Kerry would offer tax credits to subsidize child care, health care, and college. His ambitious health care plan would help pay for the most catastrophic health care bills. He would also pursue drug re-importation, pursue minor malpractice reform, and reduce the restrictions that hinder generic drugs from coming to the market. Finally, he would help invest in new technologies such as alternative energies, stem cell research, and broadband.
Those are the proposals in a nutshell. Taken together they aim to increase employment, lower health care costs, and restore some semblance of fiscal sanity. And in theory, they probably would. But that doesn't mean his plans will brush up against both Congress and fiscal reality and remain intact.
As Fred Bergsten noted recently in The Economist, America's yawning budget deficit, set to hit $1 trillion by 2010, poses a major challenge to the global economy. Kerry has mostly kept mum on the issue, mainly because deficit reduction just doesn't make for a compelling campaign theme. Yet studies have repeatedly shown that Kerry's proposals don't add up. The sum total of Kerry's health care plan (anywhere from $650 billion to $1.5 trillion, depending on whether those promised "savings" materialize), education plan ($200 billion), middle-class tax cuts ($400 billion), and other initiatives, is staggering -- $2 trillion by some counts. And Kerry, like President Bush, has yet to factor in the inevitable increases in defense and military spending. So the question lingers: Is Kerry going to put us even further in red ink?
Kerry defenders can make several responses here. The first, as pointed out by Mike Allen in the Washington Post, is that Bush's campaign promises are even more expensive -- totaling some $3 trillion. But this defense, while true, does Kerry little good if he ever gets to office.
A more reasonable response -- and one with some predictive value -- is to note that Kerry's key economic advisers -- including Robert Rubin, Gene Sperling, and Roger Altman -- all made their names as deficit hawks in the Clinton administration. History, then, may tell us what Kerry will do. Recall that when Bill Clinton first took office in 1993, his initial economic stimulus plan focused on infrastructure spending to promote job creation, a Kerryesque proposal on which Clinton had campaigned. But the bill was promptly filibustered by Bob Dole and the Senate Republicans. Robert Rubin then helped Clinton craft a deficit-reduction package that raised taxes, cut spending, and won over centrist Democrats in the Senate. By reducing the deficit, Rubin planned to free up capital for private investment. And it worked: though economists may differ on exactly how much the 1993 bill contributed to the productivity boom and record-low unemployment in the ensuing decade, Rubin's plan certainly did a good deal to help pave the way.
Expect something similar if John Kerry comes to office. The Republican-dominated Congress will scream bloody murder if Kerry tries to boost spending too far. He will probably get one "big" spending proposal through Congress -- most likely his health care plan, which fixes anomalies in the private insurance system and will help control the onslaught of rising premiums. After that, however, Kerry will likely need to adhere to "pay-as-you-go" rules that require tax increases and spending cuts to pay for any further spending increases. Just as Bill Clinton pushed deficit reduction to draw support from the "Blue Dog" Democrats in the Senate, Kerry will need to advocate fiscal conservatism to win over moderate Senate Republicans like John McCain and Olympia Snowe. It's the only way he'll be able to get anything done.
Given all this, it is highly likely that, in the face of mounting deficits and necessary spending for homeland security and education, Kerry will have to renege on his proposal to keep the tax cuts for 98 percent of the population. Conservative Republicans will no doubt raise hell. In 1993, during the debate over Clinton's Economic Stimulus and Deficit Reduction Plan, Newt Gingrich claimed that "the tax increases will lead to a recession and will actually increase the deficit." Phil Gramm claimed that "hundreds of thousands of Americans will lose their jobs." But they were wrong then, and they will be wrong this time around. Furthermore, Kerry will likely enjoy the support of Alan Greenspan, who over a decade ago backed Clinton's plan.
Liberals may not like this turn of events -- just as they despised Clinton's turn towards fiscal rectitude -- but Kerry has little choice, and a repeat of 1990s would hardly be the worst thing in the world. (As liberal economist Jared Bernstein notes, poverty and wage inequality tumbled during the Clinton years.) But this doesn't mean progressives should give Kerry a free pass. For starters, Kerry needs to be more honest about his proposed spending cuts. One of the most insidious of his proposals is his pledge to impose spending caps so that "discretionary spending… does not grow faster than inflation." The problem with this is that if you want to keep domestic spending at a "stable" level, it has to rise with both inflation and population growth. If you cap, say, housing vouchers at the rate of inflation, and the population rises, then by definition you've cut housing vouchers.
At a larger level, Kerry needs to realize that discretionary spending contributes very little to the deficit, as the Center for Budget and Policy Priorities has shown. The biggest threats to long-term fiscal stability are our entitlement programs, especially Medicare and Social Security, which are ill-prepared for the impending Baby Boomer retirement. In March 2004, the Social Security and Medicare trustees calculated that the government's benefit liabilities amount to roughly $74 trillion over the long run -- clearly an unsustainable course.
Of the two programs, Social Security is the easier problem by far. The Congressional Budget Office recently estimated that the program won't become insolvent until roughly 2052. Furthermore, Congress could cure the program's budget problems by simply indexing benefits to inflation, rather than wages -- ensuring that payroll taxes will grow faster than benefit payouts. (Peter Gale and Peter Orszag recently proposed in Boston Review another solution, using a modest combination of payroll tax hikes and benefit cuts.) Medicare, on the other hand, is a far more daunting challenge: in order to move the program into solvency, the government will have to implement serious cost-containment measures.
Will Kerry have the political courage to face up to these problems? Past experience is again instructive. Clinton appointed two commissions to look into the problem -- the Kerrey-Danforth Commission on Entitlement and Tax Reform, and the Breaux Commission on the Future of Medicare. Both commissions fell apart because of infighting over policy recommendations, and Clinton eventually ignored their findings, afraid to antagonize the elderly voters who form a powerful voting constituency. Kerry will need a good deal more courage and integrity to face up to these problems. He literally cannot afford to fail.
None of these issues, of course, get talked about on the campaign trail. Kerry has an election to win, and he certainly won't succeed by bringing up tax hikes and entitlement cuts. But if the example of Bill Clinton serves as a guide, Kerry's economic agenda will look very different from the rosy promises he makes on the campaign trail.