The Surplus: Cheer and Fear

The Washington Post, Tuesday, October 13, 1998; Page A15

At a time when Americans are whining about impeachment, worried about an economic slowdown and cranky about politicians in general, they should be celebrating a genuine, historic achievement in Washington: a budget surplus.

As I write, Congress and the president are still struggling to pass a budget for the fiscal year that started two weeks ago, but for the one that just ended, the federal government took in more money than it spent for the first time since 1969.

The final pennies haven't all been counted, but the Congressional Budget Office now estimates the ultimate figure will be $71 billion. That's the largest surplus in dollar terms in history and the largest as a percentage of GDP since 1957.

As recently as January, the CBO was projecting annual deficits in 1998, 1999 and 2000. Now it estimates that surpluses in those years will total $230 billion, and through 2008, they'll total $1.5 trillion. That's quite a change. In 1992, the deficit hit a record $290 billion, and as recently as 1994, it was $203 billion.

It's understandable that, in a White House ceremony featuring an arena-style digital display that flashed the surplus figure, President Clinton was "eager to claim credit" and "in no mood to share credit," as the Associated Press put it.

Speaker Newt Gingrich, was more generous—and more accurate—when he apportioned credit this way: 5 percent to Clinton, 5 percent to Congress and 90 percent to "working, tax-paying Americans."

This is a good time to look back and analyze where the surprise surplus came from—and why it could be a danger as well as a boon.

There are three reasons for the surplus:

(1) Spending restraint. In 1992, Washington spent $1.38 trillion; in 1998, it spent $1.65 trillion. That's an increase of 25 percent, or more than inflation plus population growth. Despite all the talk of "cuts," there really haven't been any on the domestic side, except in welfare. Restraint, yes; reductions, no.

(2) Defense cuts. Spending on defense has been reduced from a peak of $295 billion in 1989 to just $255 billion in 1998. In real, after-inflation terms, spending is down by three-eighths. This reduction is our "peace dividend" for defeating communism. Or we can think of the deficits of the 1980s, in large part, as an investment in military spending that is now paying off. If the Berlin Wall had not come down, and defense spending had risen by just 3 percent a year, the deficit in 1998 would have been $60 billion.

(3) Revenue flood. In 1992, the Treasury collected $1.09 trillion, or $4,300 per person, in taxes; in 1998, it collected $1.72 trillion, or $6,300. That's an increase of 58 percent, or 8 percent a year—at time when inflation rose just 16 percent, or 2.5 percent a year. Think of it this way: If revenues had risen at 5 percent annually—or twice the rate of inflation—then 1998 would have seen a deficit of $190 billion instead of a surplus of $71 billion.

The main source of this tidal wave of revenues has been a tremendous boost in individual income tax collections. In 1998 alone, they rose 12.5 percent over the previous year. Why? Well, a strong economy means more people working, higher salaries, more capital gains from stocks.

When Ronald Reagan and Jack Kemp said that we could grow out way out of the deficit, they were ridiculed—but they turned out to be right.

But it's also fair to say that Republicans who squawked that Clinton's modest tax increases would significantly slow the economy were wrong. They underestimated the the ability of their own constituents to work hard, take risks and manage their businesses well.

What next?

At least as important as a surplus or deficit is how much the government is spending and raising. For example, it is healthier to spend $1 trillion and run a $200 billion deficit than it is to spend $2 trillion and run a $100 billion surplus. Spending rose by 3.0 percent in 1998—or double the rate of inflation—and tax revenues are now the highest percentage of GDP since World War II.

The deficit put a cap on spending. The surplus could take it off. Congress and the president talk about "reserving" the surplus for Social Security but the truth is that they are starting to spend again, in ways that recall the days before the deficit was recognized as a real problem.

First, there was the massive highway bill. Next, it was education (like roads, a state function). Then, late in September, the president submitted a series of "emergency" spending requests totaling $17.8 billion, to be spent on Bosnia, relief for farmers and more. Worse, there is virtually no talk of scaling back programs.

We are on the verge of a new spending explosion—both on domestic welfare and on defense. The only solution is a tax cut, which would deprive politicians of the cash they so dearly love to spend. A surplus is a wonderful achievement, but it is also a danger. It inevitably leads to a larger, more voracious and intrusive government.

Also, there's a moral dimension. In running a surplus, Washington is overcharging taxpayers. If the government costs $6,200 per person to run, then it should not be collecting $6,300—unless the extra $100 is pledged to debt reduction. But such promises are impossible for politicians to keep. That's why tax cuts, so blithely abandoned this year, are the answer.

Finally, there is the economy itself. Tax cuts, coupled with reductions in interest rates by the Fed, will give the recovery, now in its eighth year, a second wind. If not, then a recession will tilt the precarious fiscal balance back toward deficits again.