Another hot potato

["Ian Murray" <seamus2001@xxxxxxxx>]

[NYT]
SEP 06, 2001
Debating Politics of the Surplus
By RICHARD W. STEVENSON

WASHINGTON, Sept. 5 - For all the partisan fighting over the
disappearing federal budget surplus, Republicans and Democrats are in
lock step on one issue: the desirability of sticking to their promises
not to use any money intended for Social Security to pay for other
programs.

The reality is that meeting that goal for the next few years will be
difficult if not impossible, especially if the economy does not perk
up. Recognizing that they are headed toward breaking their promises,
both parties are putting strategies in place to minimize any political
penalty - and to make sure they are not seen as being the first to
violate that benchmark for fiscal responsibility.

Democrats are doing their best to blame President Bush and his tax
cut.

The administration is trying to shift the focus from the budget to the
economy, saying that the tax cut was essential to averting a recession
and that the revenue shortfall is largely a result of a slowdown that
started a year ago under President Bill Clinton.

But in their relentless focus on the politics of the surplus,
Democrats and Republicans alike have been almost silent on the
question of whether maintaining a fiscal policy that was developed in
a period of boomlike prosperity and rising surpluses still makes
economic sense.

In a sharp slowdown that is still threatening to become something
worse, good economics could end up conflicting with political
imperatives.

The issue is being debated behind the scenes in Washington, and among
economists. And the debate is likely to get far more intense if the
economy does not recover in coming months.

Textbook economics suggests that a government should seek to stimulate
a weakened or contracting economy through some combination of lower
taxes and higher spending. It was just that theory that led Congress
and the administration to send rebate checks this summer to people who
pay income taxes, putting $38 billion into the hands of consumers.

But the tax cut was formulated when Washington had a surplus to play
with outside of Social Security. For the next few years, the only
surplus will come almost exclusively from Social Security, money that
the two parties agree should be used only to reduce the national debt.

If the economy remained weak, Congress and the administration would
find themselves not only in a squeeze on spending but constrained from
giving the economy another boost through further tax cuts.

If they took their commitment to maintaining the Social Security
surplus literally, they could even find it forcing them to raise taxes
and cut spending as the economy weakened - the opposite of what
economic theory says would be the correct response.

Even some backers of the Social Security commitment say there is sure
to be a re-examination of the issue.

"It's a complicated question," said Robert E. Rubin, who as treasury
secretary in the Clinton administration as much as anyone created the
policy of leaving the Social Security surplus untouched.

Mr. Rubin said he was not ready to rethink the policy. But he said
that if there was going to be a debate, it should encompass the
broader issue of shoring up the long-term fiscal outlook, which he
said was badly undermined by Mr. Bush's 10-year, $1.35 trillion tax
cut.

"The economically sound thing to do is debate it in the context of
fixing the long term," Mr. Rubin said in an interview. "The
re-establishment of a sound fiscal position was central to the good
things that happened in the eight years through 2000, and it's
critically important going forward."

In economic terms, analysts said, spending part of the Social Security
surplus - projected by the administration to be $171 billion next
year - would do no discernible harm in the short run.

"There's no economic consequence to a modest use of the surplus," said
Thomas Gallagher, a political analyst with the International Strategy
and Investment Group, an investment-advisory firm.

Should the economy remain weak and Congress and the administration
stick to their policy of not touching the Social Security surplus, it
could deprive the government of an important economic tool, leaving
the Federal Reserve without much additional help from fiscal policy.

Mr. Gallagher said, "To the extent we may be into a post-bubble
economy characterized by weak demand for a period of time, where an
active policy of fiscal stimulus would be appropriate, sticking to
this doctrine would appear to preclude that."

Spending part of the Social Security surplus would not by itself have
any immediate effect on the government's ability to pay Social
Security benefits.

But both parties have made much of their commitment to paying off the
national debt, a goal that would be attained more slowly, at best, if
Washington returned to a regular policy of spending part of the Social
Security surplus.

And by their own slogans - promising to prevent "raids" on the Social
Security and Medicare trust funds - Democrats and Republicans have
left at least some voters with the impression that their retirement
benefits could be at risk right away if fiscal discipline erodes.

A case can be made that the economy has benefited, and will continue
to benefit, from showing financial markets and investors around the
world that the United States government can keep its finances in
order.

As a result, both parties are convinced there could be a heavy
political price to pay if they are judged to have put other priorities
ahead of the health of the old-age programs.

"Social Security trumps everything else, except the economy," said
Frank Luntz, a Republican pollster. "Candidates better have a darned
good reason - and it better be a dire reason - for messing with the
so- called trust fund."

While Republican members of Congress remain fixated on not dipping
into the Social Security surplus, Mr. Bush is taking a more flexible
stance. He has dodged questions about whether he would veto spending
bills that required use of the Social Security money. And he has
spoken of how his promise not to use the Social Security surplus for
general purposes would be withdrawn in the case of war or recession.

Administration officials have not defined what they would consider a
recession, but have hinted that it would not necessarily have to mean
the classic definition of two consecutive quarters in which the
economy contracted.

Democrats do not have a clear strategy either. They are trying to
force Mr. Bush to say how he would pay for his proposal for more
military spending, and how the budget could accommodate bipartisan
calls for more spending on education and the creation of a
prescription drug benefit for the elderly, without dipping into Social
Security.

Beyond that, though, they have done little more than hint that they
might want to revisit Mr. Bush's tax cut, to scale back or eliminate
some provisions that are scheduled to take effect in coming years.
That course, though, has obvious political and economic problems.

"This is not simply business as usual," said Representative John M.
Spratt Jr. of South Carolina, the senior Democrat on the House Budget
Committee. "We've got a problem. And if the economy gets any worse,
then we've got an even bigger problem."