Economics: Budgets Are Stubborn Things

Many people who believe in freedom, and who see George Bush and Michael Dukakis as the only real choices for president, plan to stay home this November rather than bothering to vote for the lesser of two evils. I understand that temptation. But I plan to resist it. On economic policy, there is much more than a dime's worth of difference between Dukakis and Bush.

Consider taxes. Dukakis has said that he would raise taxes only as a last resort. Bush has promised no new taxes, period. I'm not so naive as to believe either promise. After all, even though Ronald Reagan vowed in 1984 not to raise taxes, that is exactly what he did in 1987. But let's apply the same degree of skepticism to both Bush and Dukakis, and let's look at some evidence.

Early in the campaign, Michael Dukakis said that the worst mistake of the Reagan administration was its 1981 tax cut. In his own state, Dukakis opposed Proposition 2½, the 1980 law that limited Massachusetts property taxes to 2.5 percent of assessed value. Does this sound like someone who would raise taxes only as a last resort?

And anyway, what does it mean that you would raise taxes only as a last resort? After first trying to do what? To cut Social Security? To shut down government spending for two weeks while you call Congress's bluff? To pass a balanced budget amendment? Can you imagine Michael Dukakis doing any of these things?

Bush's record on taxes is harder to uncover. He was such a good soldier for Reagan that he never staked out an independent position on taxes. So you can't say much about his credibility on that issue. Instead, we have to retreat to common sense. Which candidate is more likely to raise taxes: one who vows not to or one who refuses to make such a vow?

On domestic spending, neither candidate has specified particular cuts he would make. But I can't think of a single domestic spending program that Dukakis proposes to trim, let alone abolish. Bush, for his part, has laid out an admittedly vague "flexible freeze." He would not touch Social Security, would allow defense spending to increase with inflation, and would balance the budget by 1993 by cutting other domestic spending. Unfortunately, the only way Bush can promise a balanced budget by 1993 is with unrealistic projections.

According to the Congressional Budget Office, if Bush does what he proposes with defense and Social Security, and if most domestic programs increase with inflation while Medicare and farm price supports continue as in current law, the budget deficit in 1993 would be $139 billion. This means that Bush would have to squeeze $139 billion out of Medicare, farm price supports, interest on the government debt, and other domestic spending. He projects $66 billion less in interest payments, but only by assuming that long-term interest rates in 1993 will be 4.5 percent—almost 3 percent below the CBO's prediction. This seems wildly optimistic. The CBO's number is probably much closer to the mark. The other $73 billion in Bush's deficit reductions comes from the $543 billion that is not Social Security, defense, or interest. That's a 13 percent cut.

Moreover, all of these calculations assume that Bush will neither increase spending on any other programs above the level assumed by current law nor introduce any new spending programs. Clearly, that is doable. Can George Bush do it? I don't know, but I wouldn't bet a dollar on it if you gave me 20 to 1 odds. A better bet is that the deficit could be decreased from the currently projected $139 billion to about $100 billion.

And that's not bad. Remember that that $100 billion would be in 1993 dollars and that the federal debt held by the public would be about $2.5 trillion by the start of 1993. Assuming an inflation rate of 4 percent, the real value of the debt owed by the feds at the beginning of 1993 would erode by 4 percent by the end, or by $100 billion. Which means that Bush could still run a deficit of $100 billion and keep the federal debt from rising in real terms. And he could do it without any tax increases.

Still not excited about Bush? Consider the alternative. Michael Dukakis and cousin Olympia assure us that he is frugal because he uses the same 25-year-old snow blower. But I don't give a damn how he spends his money—that's his business. What matters is how he spends our money. Even in the unusually promise-free Democratic platform, it is not hard to find tens of billions of added spending per year. If Dukakis plans, for example, to introduce government provision of long-term health care, as the platform hints, the price tag would be about $28 billion per year, according to Republican Rep. Harris Fawell (Ill.).

Although Dukakis complains about deficits, he is strangely silent about the increases in government spending that (absent "last resort" tax increases) cause deficits. For good reason. Even the liberal New Republic acknowledges that in his last six years as governor, Dukakis increased state spending by 73 percent. Compare this to the 47 percent increase in federal spending under Reagan and the approximately 58 percent increase in spending by state and local governments over the same time period.

And although Dukakis brags about balancing 10 state budgets, what he doesn't tell us is that by the same way of counting, Ronald Reagan has balanced 7 federal budgets in a row. Balancing a budget in Massachusetts simply means making sure that expenditures do not exceed revenues, where you include borrowed funds as revenues. Every dollar Ronald Reagan spent was either taxed or borrowed too. What's the alternative: knocking off a bank? The simple fact is that when Dukakis became governor in 1982, the Massachusetts debt was $5.1 billion and that it is projected to stand at about $10.2 billion in 1989.

But spending and taxes aren't the only economic policies that can end up hamstringing an economy. Constrained by large deficits, Dukakis would probably do what he has done in Massachusetts: regulate employers. We can't come up with federal funds to support laid-off workers? That's all right. Let's make businesses pay severance pay when they close down a plant or lay off workers—this is the essence of the "plant closing" law that Congress recently passed and Reagan failed to veto. Would national health insurance cost hundreds of billions per year? Too bad. We can make businesses provide health insurance for every employee—this is what Dukakis did earlier this year in Massachusetts. If Dukakis becomes president, look for the Europeanization of the American labor force.

I'll admit that I find morally repugnant such Bush positions as harsh penalties against those who peacefully sell drugs to willing buyers. But am I voting for Bush? Hell yes.

Contributing Editor David R. Henderson, formerly a senior economist with President Reagan's Council of Economic Advisers, writes frequently for Fortune.