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Supply Side: Don't Know Much
About History…
The Wall Street Journal
By Stephen Moore
June 12, 2006
Back in 1982, President Reagan got snookered
into a grand bipartisan deficit reduction deal known as the
Tax Equity and Fiscal Responsibility Act. He "reluctantly"
agreed to what was then one of the largest tax increases in
American history -- only because he was assured there would
be $3 of federal spending cuts for every dollar of higher
taxes. For the remainder of his presidency, whenever new taxes
were proposed, the Gipper huffed: "I'm still waiting
for those $3 of spending cuts the Democrats promised me."
Like moths attracted to a bug zapper, the White House and
many congressional Republicans now want to negotiate a blockbuster
budget deal to tackle the stampeding cost of entitlements.
Meanwhile, Democrats and left-leaning think tanks are already
laying the groundwork to build a Washington tax-hike consensus.
As Robert Rubin, the Democrat's economic guru and one of the
architects of the 1993 Clinton tax hike, recently said of
the proposed commission, "It only makes sense substantively,
in my judgment, to get together around this if everything
is on the table, including the tax cuts."
Republicans are sounding receptive. Asked about entitlement
reform at a meeting with a group of journalists a few weeks
ago, the president's chief economic advisor, Al Hubbard, told
a group of reporters that everything can be "on the table"
-- an unmistakable code phrase for saying new taxes won't
be ruled out. Last week the legislation introduced by Virginia's
Republican Rep. Frank Wolf to create the commission explicitly
allows for "tax policy changes."
The rules of Mr. Wolf's commission would require Congress
to vote up or down on the entire package of recommendations
-- meaning that any tax increases would be imbedded like a
computer virus into the final deal. Few Democrats in Congress
have spoken publicly in favor of the commission other than
Tennessee's John Tanner; on the other hand, Mr. Wolf's Senate
sponsor, George Voinovich, is very much in favor of higher
taxes.
* * *
Some conservative leaders are starting to feel
paranoid. Former Speaker of the House Newt Gingrich, a front
row participant in several such events in the past, calls
bipartisan budget deals a "a functional invitation to
raise taxes" and notes that "the end result is spending
cuts always prove to be phony and government always grows
bigger."
One case in point was the 1983 commission to close the Social
Security funding gap, which "fixed" the financing
crisis by scheduling a series of economically damaging payroll
tax increases while dismissing personal retirement accounts.
The head of that commission was Alan Greenspan, who some are
touting as the ideal chairman of this one.
The White House is understandably concerned by the multitrillion
dollar funding gap in the old-age entitlement programs. According
to the latest projections by the Congressional Budget Office,
if we leave Social Security and Medicare spending on auto-pilot,
federal expenditures will climb inexorably from 21% of national
output today to 30% in 2030 and then 37% by 2050.
Would Democrats cooperate in curtailing these runaway costs?
Earlier this year, when the Republicans enacted microscopic
cuts of 1% off the double-digit growth rate of mandatory spending
programs, the Senate Democratic Policy Committee screamed
that Republicans were ripping gaping holes in the social safety
net by slashing "key programs that help mothers provide
basic needs for their children . . . bring aid to widows and
orphans and provide Social Security death benefits for families
who need assistance in order to bury their loved ones with
dignity."
Meanwhile, Mr. Bush has already proposed a series of measures
to fix the finances of entitlement programs. Last year, he
proposed reducing the long-term liabilities of Social Security
by hundreds of billions of dollars through a combination of
shifting to voluntary personal accounts and cutting the growth
rate of future benefits for upper-income retirees. This year
he proposed massive changes to the financing of medical care
through a shift in payments from conventional third-party
health insurance to health savings accounts. The Democrats
lined up solidly against both plans.
Stuart Butler, an economist at the conservative Heritage Foundation,
says that budget experts at liberal think tanks like the Brookings
Institution and the Urban Institute know that something must
be done. "Most liberals," he says, "are now
aware of the fiscal reality that relentlessly rising middle-class
entitlement costs will eventually deplete the last drop of
available funding for every other program in the budget they
care about, from the Department of Education, to programs
for needy children, to low-income housing assistance."
Perhaps they are; but does anyone imagine that this dawning
perception -- of a mass government program famine -- will
accomplish anything other than persuade Democrats that tax
increases are instrumental to liberalism's very survival?
If the White House is concerned with Mr. Bush's legacy, it
might ponder a meltdown of his one unarguable domestic policy
triumph. "This compromise gambit," warns budget
expert Peter Ferrara of the Free Enterprise Fund, "could
lead to an effective reversal of the Bush tax cuts. If federal
spending is slated to rise to 35% of GDP, where is a political
compromise with the liberals going to leave taxes and spending?
Probably even above the all-time high 25% of GDP."
* * *
Herein lies the dead-end of raising revenues
to cover runaway costs. Tax increases anywhere near 25% of
GDP would cripple the rate of economic growth and slow the
rate of capital accumulation and the build-up of national
wealth -- leaving future generations worse off.
Reflecting what has become the mantra of the entitlement Chicken
Littles, David Walker, head of the Government Accountability
Office, states that there is "no way we can grow our
way out of the entitlement funding crisis." Not so.
Just in the three years since the Bush capital gains and dividend
tax cuts, the net worth of American households has soared
by more than $12 trillion -- and asset growth of that magnitude
makes the imposing long term debts all the more manageable.
If productivity, GDP and asset values continue to grow over
the next 25 years at the pace they have over the past quarter
century, the economy will be twice as large, and our net wealth
will be well over $100 trillion. The Republicans' best strategy
to get there is by maintaining pro-growth economic policies
while pressing the case for sweeping, market-based reforms
for Social Security and Medicare that are attractive to the
younger and ever-expanding owner-society voter base. And the
first step in that strategy is to remain resolute in its opposition
to new taxes.
For 25 years, virtually every bipartisan budget deal has meant
higher taxes, higher spending and political carnage for the
GOP. The most notorious of these budget deals, forged at Andrews
Air Force Base in 1990, led George H.W. Bush to repudiate
his "read my lips, no new taxes" pledge, and to
lose his presidency to Bill Clinton. Republicans forget this
lesson of history at their own peril.
Mr. Moore is senior economics writer and a member of The
Wall Street Journal's editorial board.
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