Budgets in Wonderland

Robert D. Reischauer
Robert Reischauer Headshot
Robert D. Reischauer Distinguished Institute Fellow; President Emeritus - Urban Institute

October 10, 1996

“We can pay for our tax cut and have money left over by taking just 5 cents out of a dollar.” So goes Bob Dole’s recent explanation of how he would offset the huge revenue loss of his tax cuts and balance the budget. But this explanation isn’t worth a wooden nickel, because the spending cuts that he has identified as making up that 5 cents are either incredible, deceptively characterized or flat-out irresponsible. Strong words? You be the judge.

Topping the incredible category is the $32 billion that Dole’s plan saves by terminating the non-defense programs of the Energy Department. This will be quite a challenge considering that the department would spend only $27 billion over the next six years if it maintained these programs at their current levels. But the job is even tougher than these numbers suggest, because Dole’s cuts are on top of the several billion dollars the Congressional Budget Resolution already plans to lop from the Energy Department’s budget.

Cutting $32 billion from a spending total that is less than $27 billion may be impossible in a fourth-grade arithmetic class, but in the Alice in Wonderland world of federal budgeting, anything is technically feasible. To accomplish such a new math miracle, however, the candidate must be willing to sell the assets of the Energy Department, a feat fraught with political hazards. Already, Dole has ruled out selling the national laboratories at Sandia and Los Alamos (while campaigning in—you guessed it—New Mexico). And certainly the senator who fought hard for energy independence in the 1970s and ’80s wouldn’t sell at a loss the oil in the strategic petroleum reserve.

The only remaining assets of significance, the dams and other facilities of the power-marketing authorities, could bring in a bundle if they were sold without encumbrances restricting the price at which a private owner could sell their power. But the congressional delegations from the Pacific Northwest and other areas that benefit from this low-priced electricity would fight that to the death.

In the deceptively characterized category is the $90 billion Dole promises to save over six years from a 10 percent across-the-board cut in federal administrative overhead. Who could be against a few less paper clips, a curb on government travel or shrinking those bloated front-office bureaucracies? But cutting true administrative functions by 10 percent would generate only a tiny fraction of this amount. For a 10 percent cut to save $90 billion, the government would have to spend $150 billion annually on administrative overhead. In fact, total spending on all federal activities except defense, interest payments, entitlement programs, grants to states and capital purchases amounts to only about $150 billion. It is gross misrepresentation to characterize all of this balance, which includes compensation for nearly all civilian federal workers, as administrative overhead. Does the Dole campaign really look upon the paychecks of the VA nurse, federal prison guard, FBI agent, Border Patrol officer, air-traffic controller and park service firefighter as administrative expenses?

The irresponsible category is made up of the proposals that would generate one-time additions to federal receipts. One of these is the $34 billion the plan optimistically anticipates obtaining by auctioning additional portions of the radio spectrum for digital TV, personal communications devices and other applications. Another is the 2002 spurt in capital gains taxes that will be paid by those eager to take advantage of the proposal to index gains starting in 2001. The taxes that would be paid on IRA balances rolled over into Dole’s new American Dream Savings Accounts—liberalized IRAs whose tax-free withdrawals would reduce future tax receipts—are yet another ephemeral addition to revenues.

Using transitory receipts to pay for permanent tax cuts is both misleading and reckless. Misleading because the public isn’t being told that additional painful spending cuts will be required after 2002, when these momentary deficit-reduction measures vanish. Reckless because when the full effects of capital gains indexing and the expanded IRA option are felt after 2002, the revenue loss from the tax cuts could grow, significantly ballooning the deficit.

To his credit, Dole has raised the issues that should be the central focus of the presidential campaign—namely, what services and transfers should the federal government provide and what level of taxation are we willing to bear to pay for these benefits? To have a meaningful debate on these issues, however, politicians must stop promising a future in which Americans can have it all: lower taxes and all of the services and entitlements they want.

The choices on the spending side of the balance sheet must be laid out with the same specificity as those on the tax side. Dole hasn’t done this. His plan describes with precision 18 ways taxes will be cut. But when it comes to listing the specific programs that would be abolished to both balance the budget and pay for the tax cuts, the plan is both incomplete and unrealistic.

By 2002, federal civilian discretionary spending would be reduced about 35 percent below current levels if, as Dole proposes, his cuts were added to those of the Republican budget resolution. As a share of the economy, this portion of government would be scaled back to the levels of the early 1950s. What specific programs would we forgo? Would we eliminate mass transit aid, space exploration, environmental cleanups, rental assistance, grants for postsecondary education, feeding assistance targeted on the elderly, pregnant women and children, Head Start and the myriad of other programs that didn’t exist back then? Or would we reach balance another way—by cutting Medicare, veterans’ compensation, guaranteed student loans and other entitlement programs, which, as Dole said, “sooner or later, you’ve got to put . . . on the table.”?

Of course, President Clinton hasn’t exactly set the standard for virtue on this front either. While promising to balance the budget by 2002, he has showered the voters with a bewildering number of small initiatives that are as focused as a convention balloon drop. His spending cuts are only a bit more clearly specified than Dole’s. And he too has dipped deeply into the well of one-shot expediencies—spectrum auctions, asset sales and tax cuts that disappear after 2000. The best that can be said about the president’s proposal is that, being smaller than Dole’s, it is less risky.