Clinton’s Got a Wise Plan for Surplus

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

February 2, 1999

The American people are being summoned to a debate of enormous national significance. No, not about whether the president should be convicted by the Senate. The really important debate concerns what the nation should do with the surprising and quite extraordinary budgetary windfall generated by America’s booming economy and stock market. We are so numbed by large numbers that the once-in-a-generation significance of prospective surpluses of nearly $5 trillion over the next fifteen years is hard to appreciate. That sum is more than half the annual production of the American economy and one-third larger than all federal government debt in the hands of the public. The prospect of huge surpluses for a nation whose public sector has been just scraping by for the last quarter century is quite intoxicating. To be sure, a run of really bad economic fortune could end these hopes. But prospects are so good that a recession of less-than-major proportions is unlikely entirely to erase these surpluses.

The big question is how to use these surpluses. Viewers of President Clinton’s State of the Union Address may not have noticed that he presented a rather abstemious program. One has to be a bit of a budgetary detective to discover this fact, because he seemed to portray a Christmas tree of goodies for every conceivable group. In fact, he called on the nation to save most of the budget surpluses that loom in our nation’s economic future.

At the same time, his Republican critics have been calling for sizeable tax cuts, which would underwrite increased personal consumption, and some of his Democratic supporters have been calling for increased government spending on long-neglected domestic priorities. The president rejected both of those options.

Virtually every elected official?Republican and Democratic?agrees that the United States should save more than it now does. And they also understand that federal budget surpluses add to national saving. Surpluses enable the federal government to buy back bonds held by the public. Those purchases, in turn, release funds for investment in buildings, equipment, and inventories. And more investment means increased economic growth.

Unfortunately, everyone also agrees that budget surpluses produce Congressional fiscal incontinence. Republicans, and not a few Democrats, ache to cut taxes. Democrats, and not a few Republicans, have lengthy lists of government spending programs they would like to fatten up. While Republican and Democratic tax cuts tend to flow into different pockets and Republican and Democratic spending priorities tend to favor different groups, the prospect of large budget surpluses has a remarkable capacity to produce coalitions large enough to both cut tax cuts and boost spending. The result, most observers fear, is that budget surpluses would evaporate and national saving would remain depressed.

The remarkable feature of the program President Clinton announced in his 1999 State of the Union Address is that it would simultaneously increase national saving, raise economic growth, and improve the financial condition of the two largest and most popular government programs, Social Security and Medicare. Here is how.

The largest component is the transfer of bonds to Social Security and Medicare, the two largest and most popular domestic programs of the federal government. This transfer would total about $3.5 billion over the next fifteen years, an amount equal to more than three-quarters of the projected unified budget surpluses. These transfers would go about half way to closing the projected long-term deficit in Social Security and would extend the financial viability of Medicare hospital benefits for several years. Although benefits under neither Social Security nor Medicare are particularly generous, revenues and accumulated reserves are smaller than promised benefits. The reason is that early beneficiaries in both programs received benefits far greater than the taxes paid on their behalf could have justified. The transfer of bonds now to Social Security and Medicare would offset the resulting gap.

About $500 billion would go to help create new savings accounts for American workers and to match individual contributions to these accounts. Such accounts could be of particular value to low and moderate wage workers most of whom now save almost nothing voluntarily. In addition to providing a nest egg for retirement, such accounts could support the purchase of a first home, help pay for the college education of children, defray the costs of a major illness, or underwrite the start of a small business.

The common characteristic of all three of these measures is that they would not support current consumption. Instead, they entail saving, which will support investment today and consumption in the future.

The president’s program also would allocate an amount equal to approximately 12 percent of projected budget surpluses for tax cuts or for increases in so-called “discretionary” spending of the federal government, including national defense and domestic activities. Only this piece of the program would boost current individual or collective consumption.

The contrast between the president’s program and that of the “cut taxes or boost government spending” advocates could not be more stark. Poised at the portal of a new millennium, the United States government has at its disposal extra resources of almost unimaginable size beyond those it expected to have available. Should the nation those resources now or save them? If it saves them, should it do so in a way that will boost national production for ourselves and our children and helps support basic pensions and health care for decades? These questions are fundamental and large. It is hard to imagine questions better suited to resolution by the electorate of a mature democracy. If not settled this year, they well merit center stage in the year 2000 presidential election.