Last night President George W. Bush outlined his economic plan to Congress. True to form, his address was likable and consistent. The economic plan Bush submitted to Congress today, "A Blueprint for New Beginnings," (Adobe Acrobat Reader required) reads just like the president's address. It's faithful both to the broad themes and specific promises of his campaign. (Compare the new budget to the budget blueprint released by the Bush campaign last fall here.) (Adobe Acrobat Reader required.) The new blueprint goes further, explicitly addressing most of the objections and concerns that have slowed the political momentum for Bush's tax cut.
It was easy for Bush's number-crunchers to craft a plan that lived up to his campaign promises. Since Bush announced his tax cut in December 1999, the Congressional Budget Office revised its surplus projection four times. When Bush first proposed his $1.6 trillion tax cut, the CBO was projecting that the surplus, excluding Social Security revenues, was only about $200 billion over 10 years. Four forecasts later, the CBO raised this projection to $3.1 trillion, a number White House forecasters agree with. But even with this additional wiggle room, an examination of the blueprint' s fine print—and even more important, the missing print—makes clear that Bush can't keep his campaign promises and balance the books.
Bush's "Magic Asterisk"
To calm the concern that his tax cut will crowd out other popular government programs, in his speech Bush highlighted major increases in areas like education, Medicare, and Social Security. While the Democrats propose to devote one-third of the projected surplus to spending increases, Bush matched them by devoting one-third of his address to investments in priorities. But his numbers don't match the words. Take two examples:
1) In his speech, Bush said, "We increase spending next year for Social Security and Medicare, and other entitlement programs, by $81 billion." But under current law—without Bush's proposals—spending on these programs is projected to rise by $68 billion. All Bush is proposing is to add $13 billion for Medicare prescription drugs—enough to pay an average of only $250 per Medicare beneficiary for drug coverage.
2) Bush also touted his increase in nonentitlement spending, saying "We've increased spending for discretionary programs by a very responsible 4 percent, above the rate of inflation." But for very technical reasons, the CBO estimates that government spending will need to increase by 4.4 percent in 2002 to pay for inflationary increases. Bush's spending will actually fall short of the amount needed for inflation.
When President Reagan submitted his first economic plan to Congress, it was filled with pages and pages of details of the programs that would be cut. Bush, however, only provides details about his proposed spending increases. The reductions are relegated to a footnote in Table S-4, "The final distribution of offsets has yet to be determined." The so-called "magic asterisk" was a common technique for solving deficits in the bad old days. What is worrisome is that even with a projected surplus of $5.6 trillion, Bush still needs about $230 billion in "magic asterisk" savings.
Bush's Overtapped Federal Reserve
The Bushies have recently added a new selling point to their budget: After paying for all their promises, they claim to set aside a prudent $1 trillion in a "contingency fund" to address unforeseen expenses. In the new budget, the $1 trillion reserve has actually shrunk to $842 billion. And even this overstates the resources set aside. This reserve would only cover about $675 billion of additional spending—with the remainder paying the higher interest bill that resulted from this spending.
Not quite the promised trillion dollars, but this substantial sum is still a great answer to any question. What if the budget forecasts are off? The reserve. Where is the money for missile defense? The reserve. How about Social Security? The reserve. And so on. The challenge comes when you have to answer all of these questions simultaneously.
If the promised—but unspecified—$230 billion in cuts are not realized, then these will have to come out of the reserve. Any increase in programs like air traffic control and education to keep pace with population growth would take another $100 billion-plus out of the reserve. In addition, the Bushies' tax reform cuts some corners to save money. For example, not changing the Alternative Minimum Tax would eventually cheat more than 25 million families out of their promised tax cuts, according to Congress' Joint Tax Committee. Restoring this tax cut and fixing other tax issues would take another $300 billion. There goes the reserve, without spending a dime on missile defense, farm payments, the more generous prescription drug benefit that Congress is clamoring for, or the retroactive tax cuts endorsed by Bush.
And this is just the small change. The big stuff comes when you examine 1) Medicare and 2) Social Security individual accounts.
The Medicare Unlockbox
In its first major legislative action this year, the House voted 407-2 to create a Medicare lockbox that would require the government to use excess Medicare payroll tax receipts to pay down the debt rather than using the money to pay for tax cuts or spending increases. According to the Office of Management and Budget's new estimates, complying with the commitment in this legislation would take a $526 billion chunk out of the reserve.
Remarkably, under legislation passed by the House, President Bush can't send his new budget blueprint to Congress because it bans the president from submitting a budget that uses the Medicare surplus for anything other than debt reduction.
If the Senate passes the lockbox—which it did with only one dissenting vote last year—then more than half of the reserve will be gone.
Third Way on Social Security?
Social Security individual accounts pose an even bigger problem for Bush's ledger. Bush has consistently avoided specifics on the cost of his proposal, the source of its funding, or any future benefit cuts. His budget document maintains that streak. While the Bush budget is filled with prose about the benefits of individual accounts, a reader who only perused the tables would have no idea that Bush supports partially privatizing Social Security—it is simply not reflected in the numbers.
Last night Bush outlined a third way on Social Security: "Without reform, this country will one day awaken to a stark choice: Either a drastic rise in payroll taxes or a radical cut in retirement benefits. There is a better way. This spring I will form a presidential commission to reform Social Security." Only a bold leader could pass off a commission as a "better way."
There is nothing wrong with deferring decisions and details until later, but Bush's economists didn't leave any money for the commission to work with. Since the existing Social Security surplus is already being used to pay benefits for current and future retirees, to divert some of this surplus into individual accounts without bankrupting Social Security earlier requires either benefit cuts or tax increases.
To avoid these unpalatable options will require more money, which is the route taken by most congressional plans to partially privatize Social Security. But there is no set-aside for Social Security reform in Bush's blueprint. The commission will be forced to compete for the $6 billion reserve with all of the other costs that have been deferred and unmentioned in this budget.
A Blueprint That Defers
Bush argues that we should do as much debt reduction as possible. Sounds responsible. But in Bush's case, this is actually an argument that the government must dissipate at least $3.5 trillion of the surplus—which he proposes to do through new spending, tax cuts, and Social Security individual accounts.
Here's why it's not responsible. Over the next decade, the projected surplus totals $5.6 trillion. Bush's economists reckon that paying back all of the debt that comes due between today and 2011 would cost about $2 trillion. They invoke Alan Greenspan to argue that paying back any more debt would require buying Treasury bonds from their holders before they come due, a potentially costly step. Since $2 trillion is the maximum amount of the surplus that can be used for debt reduction, and Bush has rejected allowing the government to use any additional surplus to buy stocks and corporate bonds, it follows that the government must spend the remaining roughly $3.5 trillion.
There are, however, several flaws in the Bush numbers. If you are willing to allow the government to use some of its surplus to buy stocks and bonds that could be sold in 20 or 30 years to pay the baby boomers' bills, then there is no limit on how much money could be set aside today. Also, by managing its finances well, the Treasury could probably manage to pay off at least $2.5 trillion of debt over the next decade. Furthermore, when the promises listed in Bush's budget numbers are combined with the additional costs discussed above, so much of the surplus is spent that the problem of paying off too much debt is deferred for at least a decade—without even spending any money on Social Security individual accounts.
The problem of paying off the debt is the only long-run challenge that is squarely addressed in Bush's budget blueprint. But it is the only long-run challenge that America can afford to delay addressing. Budget forecasts are amazingly fickle. We can wait five years to find out if there is a serious risk of paying off the debt. But other long-range needs and challenges—like adequate spending on core government functions and Social Security solvency—are predictable and, in Bush's blueprint, largely deferred.