During the Civil War, the federal debt expanded about 40 times, from $65 million in 1860 to $2.7 billion–a phenomenal figure at the time–in 1865. But after the war, Americans strove to pay down the immense debt. For the next 28 years, the federal government ran budget surpluses. By 1894, when the next deficit materialized, the debt had dropped to about $1 billion. One foreign diplomat observed that Americans believed “that debt was always and everywhere an evil; (and) that it was a `good thing’ to work off the mortgage, even if it involved working very hard.”
No one is working very hard these days. The federal government is expected to run its first budget surplus this year since 1969–and only the second since 1960. Yet the president and Congress are busily crafting new spending commitments and tax cuts, while professing not to be endangering the surpluses. Congress’ budget talk is now of the “surplus” surplus. Taxes have exceeded projections; so the surplus may be bigger than expected. Therefore, the extra surplus can be diverted to something else without reducing the real “surplus.” Got it?
We could do a lot worse (and probably will) than emulate 19th-Century precepts. Common sense and basic fairness suggest that the best use for the emerging surpluses is to pay down the federal debt. Between 1960 and 1997, the federal debt held by the public rose from $237 billion to nearly $3.8 trillion. Over the same period, interest payments on the debt increased from about 6 percent of federal spending to more than 15 percent. Today’s taxpayers are paying for yesterday’s government.
This is unfair to younger taxpayers–the wrongly maligned Generation X–and will be more unfair to future taxpayers. It is also a poor way to prepare for the next century. By now, everyone knows that the aging Baby Boom will create huge pressures for higher government spending and taxes. Already Social Security and Medicare (health insurance for the elderly) constitute almost 35 percent of the federal budget.
“Privatizing” Social Security cannot avoid the collision between tomorrow’s taxpayers and retirees; it is too late for new investment to cover much of the Baby Boom’s retirement costs. As spending on the elderly rises, taxes will increase or other government spending (from the FBI to health research) will fall. Or deficits will reappear. One way to soften the collision is to trim future retirement benefits. The elderly are wealthier and healthier now than in 1935 and 1965 when Social Security and Medicare were created. Retirement ages should be gradually raised; the more affluent should be treated less generously.
But the collision could also be cushioned by chipping away at the government’s debt service. The surpluses would be used to retire maturing Treasury bonds, bills and notes. Although only a fraction of the $3.8 trillion debt might be repaid, the remaining indebtedness would decline in relation to our national income, which would presumably continue to increase. The Congressional Budget Office projects that modest surpluses could reduce debt service almost by half in a decade, to 8 percent of federal spending by 2008.
Although the logic is simple, it is mostly missing from the budget debate. Much of the blame lies with President Clinton, who said one thing and did another. In his State of the Union address in January, Clinton loudly proclaimed that we should “reserve 100 percent of the surplus–that’s every penny of any surplus–until we have taken all the necessary measures to strengthen the Social Security system for the 21st Century.” But Clinton also proposed new programs that actually sliced into prospective surpluses. When the CBO examined Clinton’s budget, it concluded that the new programs would shave estimated budget surpluses by $43 billion over five years.
It is no secret that many Republicans have played the same game, with different details. Congress’ new highway bill is described by all but its most zealous advocates as a model of pork-barrel spending. It exceeds congressional spending limits for transportation, though its supporters claim–like Clinton–that they can finance it with other spending cuts. And when tax revenues exceeded forecasts, House Speaker Newt Gingrich suggested some of the windfall go to tax cuts. The details of these proposals are less important than their common spirit, which is to hijack the surpluses for political advantage.
All this reminds us that the sudden surpluses are not the result of newfound budgetary discipline by Congress and the president. They stem from three converging bits of good fortune: the end of the Cold War, which has cut military spending; an unexpected slowdown in health spending; and the booming economy that has produced an unpredicted surge in taxes. The prudent thing would be to wait and see whether these favorable trends continue. But that would require more self-restraint than either the president or Congress seems to have. Perhaps they will blunder into large surpluses; but it won’t be from trying.