The Incredible Shrinking Surplus

The joys of learning to live with less


For all the angst it's causing President George W. Bush and Beltway budget makers, there's some good–and plenty of entertainment–to be found in the shrinking surplus. Consider that in the face of a projected $176 billion federal surplus for next the fiscal year—the second largest in half a century—politicians are convinced that they are broke. If we're lucky, this will strangle plans for increased spending on such things as the Department of Education, the Department of Defense, and the Department of Agriculture.

This isn't to say it's an ideal situation. In a perfect world, politicians would not regressively overcharge American workers for their promised retirement system—a.k.a. the Social Security surplus—in order to fund other government pursuits. They certainly wouldn't worry about relatively small short-term fluctuations in revenues. They would agree on a level of government, fund it with the least distorting tax system possible, and let surpluses and deficits cancel themselves out over time. If the government found itself running sustained surpluses, it would return the extra money to taxpayers with across-the-board tax cuts. In other words, in the current context, the debate would focus on the next tax cut, not on loss of government revenue.

But that's not the world in which we live. Bush worked hard to lock in our tax cut early. Smart move, since pols will surely spend whatever money they think they have in their coffers. And that includes the president: With the economy projected to grow less than 3 percent next year, Bush requested a 4 percent increase in domestic spending. Then he quickly agreed to 6 percent. So there's little doubt that without the tax cut, shrinking projected revenues, and the desire to save Social Security surpluses, Congress would have gone on a spending spree: After all, throwing $18 billion at defense and $16 billion at the Department of Education, not to mention billions more for farmers and free drugs for senior citizens, adds up.

Perhaps the most intriguing element of the surplus spectacle is this: The Democrats have morphed from the party of tax-and-spend to the party of tax-and-hoard. They're beside themselves with glee that reduced revenues make impossible Bush's promise of tax cuts, no dipping into the Social Security surplus, and a bigger build-up of defense and education. Indeed, they're so delirious that they are making absurd commitments of their own. "We have to dig ourselves out of this deficit hole [Bush] has created," Senate Majority Leader Thomas Daschle (D-S.D.) told The Wall Street Journal. "He's cooked a stew that's going to be very hard for us to choke down," Senate Budget Committee chairman Kent Conrad (D-N.D.) told The New York Times.

While Daschle's metaphor is strained–how do you dig yourself out of a hole?–his intent is clear: The surplus needs to stay a surplus. More thoughtful Democrats and liberals–those looking past the next news, if not election, cycle–are already airing concerns about the new tack Congressional Democrats are taking.

"The whole way of thinking is a long term trap for Democrats," writes Robert Kuttner, co-editor of the liberal American Prospect, in the Washington Post. "Budget politics now equate austerity with virtue. Defending the surplus is good; spending it is bad."

Former Secretary of Labor Robert Reich took to editorial page of the Wall Street Journal to fret about the Democrat's reversal on the virtues of deficit spending. "Pious pronouncements about the importance of fiscal rectitude are putting Democrats in the absurd position of saying—as Richard Gephardt did last week—that they're willing to cut spending on education, health care, and other programs for the poor and working families in order to avoid dipping into the Social Security surplus," writes Reich, who understands that Daschle's excavation effort means both higher taxes and lower government spending than anyone wants. "The cynical totem of fiscal orthodoxy has nothing whatever to do with the goals Democrats have fought for for almost a century."

Indeed, Democratic leaders and their economists would be hard pressed to explain how their new fiscal orthodoxy helps the economy. One can say this much, however: Giving the excess Social Security taxes that American workers send to Washington to bond holders may not be perfect. But it's certainly better than forking it over to bureaucrats at the Department of Education.