America's Fiscal Constitution (55 page)

T
HE
2000 P
RESIDENTIAL
C
AMPAIGN

Texas Governor George W. Bush became the early front-runner for the Republican presidential nomination in 2000. Many Americans respected his parents, whose circle of friends provided a solid fundraising base. The younger Bush had demonstrated the ability to appeal to a broad range of voters in his two gubernatorial elections. He intrigued Republicans, who yearned for a winner.

Bush’s presidential campaign tried to mimic the economic themes of Reagan’s presidency. For that purpose, he could not rely on his budget record as governor of Texas. State budgets when Bush was governor had balanced largely as a result of a flood of revenues from a strong economy. In 1997 Bush—over the opposition of the chairman of the state’s Republican Party—backed the unsuccessful push of the Democratic-led Texas House of Representatives to expand the tax base in order to fund the future educational needs of the state’s growing population of young people.

Bush’s brilliant campaign strategist, Karl Rove, carefully built a national organization, while the other leading candidates—Senator John McCain of Arizona and wealthy publisher Steve Forbes—concentrated on a handful of early primary states. Forbes grounded his campaign on a plan to reduce tax rates and focused on the Iowa caucuses that chose the first delegates. McCain had alienated many of his party’s leaders on issues such as campaign finance reform, the taxation of tobacco, and the use of budgetary earmarks by Republican colleagues. But McCain soared in the polls after winning the New Hampshire primary.

Grover Norquist and his allied groups helped reverse McCain’s momentum after the senator’s New Hampshire primary victory. Norquist and Washington-based conservative advocacy groups loathed McCain
and vice versa. Bush courted the antitax activists by condemning his father’s 1990 budget agreement and promising to reduce personal income tax rates to a maximum rate of 28 percent and provide a new tax credit for each dependent child.
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The Texas governor estimated that his plan would cost $1.6 billion over ten years and could be funded out of surpluses. Norquist’s coalition played a critical role in turning the tide toward Bush in South Carolina, after which the Forbes and McCain campaigns collapsed.

Throughout 2000 Bush maintained only a slight lead in the polls over the Democratic presidential nominee, Vice President Al Gore. Gore refused to treat Social Security reserves as a surplus and vowed to use any federal funds surplus to increase Medicare reserves, expand Medicare coverage for prescription drugs, and reduce taxes for middle-income Americans. Bush also endorsed an expansion to include Medicare coverage of prescription drugs and attacked Gore late in the campaign for failing to do so as vice president during the Clinton administration. Gore, in turn, challenged Bush to pledge not to count Social Security and Medicare trust fund reserves when determining whether the budget balanced after a tax cut. Bush avoided making that commitment.

A heated presidential campaign was a poor forum for explaining the complexities of federal accounting. Gore tried to simplify the issue by calling for revenues from Social Security and Medicare to be placed in a “lockbox.” He repeated the “lockbox” metaphor so often that it became fodder for late-night television comedy. Federal law had long prevented the diversion of trust fund balances; the “lockbox” concept was simply meant to illustrate that trust fund revenues and spending should be separated from the remainder of the budget.

Gore won the popular vote but lost in the Electoral College vote following a dispute over the election’s outcome in Florida. As a result, Bush could hardly claim a mandate to abandon traditional fiscal policies.

By 2000 federal leaders had succeeded in restoring the “pay as you go” budget planning that served as a principal pillar of the American Fiscal Tradition. They accomplished that goal in part by restraining the growth in federal spending. From fiscal year 1991 through 2001, federal funds spending had grown by only $377 billion, while national income grew by $4.3 trillion.
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Presidents George H. W Bush and Bill Clinton and congressional leaders in both parties could take justifiable pride in that accomplishment.

Bush’s inauguration marked only the first time in thirty-eight years when Republicans had control of the White House and both houses of Congress. The last time that happened—in 1953—President Eisenhower had used the opportunity to balance the budget by slashing military spending and delaying a tax cut. In January 2001 few expected that in the next four years federal funds spending would rise by over half a trillion dollars, absorb a quarter of all growth in the economy, and be paid for by an unprecedented level of borrowing from foreign creditors.

17

T
HE
T
RADITION
C
OLLAPSES

2001–2006: Years when deficits exceeded debt service = 5 (2002–2006, debt without principled limits)

G
EORGE
W. B
USH AND
C
ONGRESS
B
ORROW

While the world watched the noisy courtoom battle over the outcome of the 2000 election, no one seemed to notice that the surplus quietly vanished. The federal funds budget had just balanced at the end of fiscal year 2000, which ended only weeks before the election. Spending in the fiscal year that began October 1, 2000, was scheduled to rise only modestly, but income tax revenues from capital gains declined with the sharp drop in the value of technology-related stocks. That fact did not stop the Congressional Budget Office from projecting an even larger surplus for the next ten years than had been shown in its forecast a year earlier. That surplus consisted primarily of Social Security reserves being accumulated in advance of the retirement of Baby Boomers.
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Budget projections extending beyond ten years showed a sharp increase in federal spending and deficits once Baby Boomers began to retire and become eligible for Medicare, beginning in 2010.

President George W. Bush outlined his budget priorities in his first State of the Union address, delivered on February 27, 2001. He decried the country’s “unprecedented amount of public debt” and invoked traditional values: “We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years.” The president vowed to set aside $1 trillion “as a contingency
fund for emergencies or additional spending needs.” After quoting Yogi Berra—“When you come to a fork in the road, take it”—he asked for tax cuts. Those tax cuts, he said, were needed to deplete the projected surplus: “The growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged and on their behalf, I am here to ask for a refund.”
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His speechwriter worried about public reaction to this request in light of polls that showed that voters did not place a high priority on tax relief, a which had been a centerpiece of Bush’s presidential campaign.

The administration’s budget proposal for the next fiscal year, beginning on October 1, 2001, reflected the ambivalence of Bush’s “fork in the road” quip. The revenue projections assumed strong economic growth, but the budget materials urged prompt action on the proposed tax cut in order to stimulate the economy. The written budget referred to a $231 billion surplus in fiscal year 2002 and an “unprecedented $1.4 billion reserve.”
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The tables near the end of the budget document, however, showed that debt would rise by almost $300 billion during the next few fiscal years.
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Where, then, would the trillions of dollars for debt reduction and the contingency reserve come from?

There were other problems with the math. The White House budget proposal noted that the $2 trillion target represented “the maximum amount of deficit reduction possible over ten years.”
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Treasury Secretary Paul O’Neill, a former corporate CEO who had been a budget professional in the Nixon and Ford administrations, pointed out that there was no such $2 trillion maximum and that nothing prevented a greater reduction in debt.

The White House did not identify the spending cuts required to achieve ambitious targets for debt reduction. The president’s budget included a 4 percent rise in outlays not governed by legal formulas. That rate of growth was greater than the average during the Clinton administration, but modest compared to the increase proposed in Bush’s later budgets. Bush administration officials brushed aside questions on the math. Chief of Staff Andrew Card characterized the estimates of a surplus before the tax cuts as “very conservative,” while administration spokesman Ari Fleischer added that the government was “awash in surplus money.”
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The claims of a large existing surplus were difficult to corroborate or challenge because the federal budget no longer conformed to Thomas Jefferson’s standard of being clear and intelligible. For several years before
Bush’s inauguration, President Clinton, Federal Reserve Chairman Alan Greenspan, and Senator Kent Conrad had highlighted the need to remove trust funds when considering the balance of federal spending and revenues. President Bush and Congress did not heed those warnings in 2001. Greenspan later remarked that, at the time, “little value was placed on rigorous economic policy debate or the weighing of long-term consequences.”
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The House Ways and Means Committee approved legislation that slashed tax rates even before Congress passed a budget resolution that set a ceiling on spending for the following fiscal year, 2002. Democratic congressional leaders countered with a plan to reduce taxes by an amount less than Bush had proposed, but still by far more than the Republican tax bill that Democrats had opposed—and Clinton had vetoed—two years earlier. At least half of the Senate favored some mechanism for making tax cuts more dependent on achieving of budget milestones. Under strong pressure from the White House, the Senate in May voted 50–49 to reject that approach.

That summer Congress approved the Economic Growth and Tax Relief Act of 2001, which cut taxes regardless of the level of federal spending and tax revenues. Out of forty-nine Democrats in the Senate, twelve voted for Bush’s tax cut, while seven did not vote or voted “present.” Only two Republican members in either chamber, Senators John McCain of Arizona and Lincoln Chafee of Rhode Island, voted against the bill. Sponsors of the act reduced its estimated impact on long-term deficits by setting a December 31, 2010, date for the tax cuts to expire. The Congressional Budget Office estimated that the bill would result in a “net decrease in the budget surplus” of $1.35 trillion over ten years.
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However, a surplus in the federal funds budget no longer existed when the tax cut was enacted.

Four years earlier, in May 1997, the CBO released a special report when monthly tax receipts were higher than projected just months before. In May 2001 the CBO and the White House remained silent as they watched tax collections fall short of estimates. Benjamin Franklin, in arguing that denial and deception tend to accompany debt, once said “lying rides upon debt’s back.”
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For at least the first eight months of 2001, Franklin’s rider assumed the form of misleading budget projections. President Bush’s fiscal year 2002 budget assumed that in fiscal year 2001, already well underway, the federal government would collect $1.073 trillion in personal income taxes and $213 billion in corporate taxes.
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By at least early summer the administration knew that tax collections would not reach those levels. The
White House and leaders in Congress did not publicize the severe revenue shortfall until the end of the fiscal year. In fiscal year 2001 the federal government received $994 billion in personal income taxes and $151 billion in corporate income taxes.
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A large public corporation would have faced fraud suits from shareholders if it waited until the end of a fiscal year to disclose that its revenues had dropped more than 10 percent from public estimates it repeated throughout the fiscal year.

Without “pay as you go” budget planning, this massive change in current and expected federal revenues had no apparent effect on any tax or spending legislation. According to one senior White House staff member, the president’s first six months in office had been drafted in advance in the same manner that a “smart head coach” would “script the first dozen plays of a football game.”
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The surplus had been like having a lead on the scoreboard at the beginning of the game; the game plan did not change when that presumed lead disappeared.

By August 2001, after final passage of the tax bill, the CBO lowered its estimate of a surplus in the unified, ten-year budget by $2.2 trillion and projected a federal funds deficit of more than half a trillion dollars from fiscal 2001 through fiscal 2008.
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The size of this drop is highlighted by the fact that
all
personal income taxes paid in 2001 and 2002 would not exceed $2.2 trillion.
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At a press conference on August 24, 2001, Bush explained his administration’s budget policy: “We have the tax relief plan, which is important for fiscal stimulus, coupled with Social Security being off limits except for—except for emergency. That now provides a . . . fiscal straightjacket for Congress.”
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He described the straightjacket—the end of the surplus—as “incredibly positive news” and a tool for “fiscal sanity.”
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Prior generations of fiscal conservatives had viewed presidential vetoes and the onerous requirement of taxation to back new spending as straightjackets on the growth of government. For six years Bush failed to veto a single spending bill.