Clinton’s contract with GOP

As Congress and the administration quibble over the details of their May accord on the budget, it is all too easy to lose track of the historic transformation unfolding in Washington. The president’s bold rhetoric to the contrary, May’s deal represents an almost complete capitulation to conservative Republican principles and portends a major change in domestic policy. Zero deficits are fine under certain circumstances, but how we get there is at least as important as the destination.

The budgetary accord is based on two principles: the desirability of zero deficits by 2002 and the need for drastic slashes in capital gains and estate taxes. Almost all economists would accept the notion that deficit reduction is desirable in a rapidly expanding economy. It is also easier to achieve, as taxes on growing income and profit flows yield more revenues and government expenditures for various forms of income support decline.

Nonetheless, if moving toward a balanced budget is now desirable, why must we rely so heavily on program cuts to achieve this end? Wouldn’t we be better off with some tax increases or at least holding the line on taxes during this upswing of the business cycle? The current budgetary accord projects that in 2002, federal expenditures and revenues will both come in at 18.9 percent of GDP. Doug Henwood reports in the July issue of The Progressive Magazine that if these numbers hold, “the U.S. government will have cut its share of GDP (gross domestic product) by more than 4 percentage points since 1985, the biggest peacetime shift in the history of reliable numbers.”

Before we cheer too loudly for the waning of big government, we should take a closer look at the implications of these reductions. In order to achieve its austere targets, the budget slashes expenditures for nonmilitary public capital to levels not seen since the early 1960s. Medicare takes one of the biggest hits in the new budget, with projected reductions of about $50 billion over the next five years.

Even in the area of education, progressives have few reasons to cheer. Education tax credits proposed by the Administration will do more for the well off. Modest increases in Pell grants to low income students are welcome, but these are tiny compared to the degree of educational inequality that has emerged in recent years. Henwood reports recent studies showing that the richest quarter of the population is ten times more likely to receive a college education than the poorest quarter. In 1979, the figure was four times.

We are told that these expenditure reductions are needed so that we can have zero deficits and still be able to fund tax cuts at the same time. Unfortunately, reductions in capital gains and estate taxes will provide almost half of their projected benefits to the top 5 percent of the population. The logic behind this policy is that reductions in capital gains and estate taxes will encourage new business investment. Yet even if changes in tax laws do stimulate more saving and investment, most of the investment will take the form of dollars being pumped into the stock market. Prices of existing shares will be driven higher, and their current holders will become more wealthy. Nonetheless, almost none of that new money will find its way into productive expenditures on new plant and equipment. In any case, far too much of the profits retained and money raised by corporations in the last fifteen years has gone to unproductive mergers and acquisitions. Capital gains tax reduction will only further fuel the casino economy’s drive to corner markets and reap speculative profits. Tax write-offs impoverishing the government for such private purposes are counterproductive– even to the long run health of the private sector.

Economic growth in a modern economy requires a robust public sector. Modern economies need healthy social infrastructures– educated workers, efficient communication and transportation systems, and basic research. The private sector is ill equipped to provide these because no individual firm can count on capturing the return on its investment in these areas. Unfortunately, the new fiscal orthodoxy leaves ever less room for investment in this infrastructure. State governments, already competing for businesses and the wealthy, find it even harder to raise the needed revenues except through regressive taxes. Politicians cannot long follow that route.

Economic growth also tends to stagnate when incomes of the great mass of citizens fail to keep pace with profits and productive capacity. Reductions in public sector job programs, attacks on unions, and further tax favoritism for the wealthy promise to make an already inegalitarian income structure even worse. These changes have deleterious implications for the level of effective consumer demand.

Predictions in economics and politics are dangerous matters, but I will offer one here. Even if we do reach zero deficits in 2002, we will be unable to enjoy the political tranquillity and stable economic growth we are currently being promised. The faddish delight in gutting the public sector and pampering the rich is both a moral atrocity and an economic disaster.

John Buell is a political economist who lives in Southwest Harbor.