Starving the beast?

by Ed Muir
 

Officials in the White House and Congress are claiming that improvements in our economic outlook are a result of President Bush’s tax cuts. But I wonder, will they take responsibility for the long-term cost of these cuts?

At the start of 2001, the federal government forecast a $5.6 trillion surplus over the 10 years from 2002 to 2011. Now the nation is likely to run deficits exceeding $3.5 trillion over this same period, a swing of $9 trillion. Federal tax cuts contribute more to this deficit than the cost of all other spending increases combined, including the occupation of Iraq. The securities and investment firm Goldman Sachs calls the nation’s long-term budget outlook “terrible, far worse than the official projections suggest.”

Although recent reports claim that the states’ fiscal crisis is over, a look at the data reveals that the crisis is perhaps bottoming out, but states are still reporting budget gaps of about $40 billion for next year. While this is about half what states were reporting last year, it is still a long way from perfect.

Since the start of the crisis, real state per capita spending is down 5 percent, meaning that many services have already been cut. Yet states have new burdens in education, healthcare and homeland security. If mounting federal deficits mean that the federal government will be unable to meet its commitments, states may still go from the frying pan into the fire. After all, federal funding for programs such as Medicaid and Title I supplies more than $300 billion in state and local dollars each year. More than 27 percent of state general fund revenues come from federal aid.

Moreover, this $9 trillion shift has not been all that effective an economic stimulus. In part this is because the tax cuts have been skewed to the wealthiest among us: questionable social policy and a laughable economic policy. For 60 percent of the population, the most recent tax cut distributes less than $100 per year. Those Americans with incomes over $1 million a year (about the wealthiest 1 percent of us) will receive more than $20,000 a year over the next four years. Because those with higher incomes are likely to already have what they need, they are less likely to put new money into circulation. That is why some economists have argued for a tax cut geared toward working families who do have unmet needs.

Using this logic, a Congressional Budget Office study noted “tax cuts that are targeted toward lower-income households are likely to … be more cost-effective and have more bang for the buck than those concentrated among higher-income households.” Retail sales provide a case in point. High-end stores like Saks had increases in sales in the second half of 2003, while Wal-Mart and other discount retailers—which serve the bulk of the population—suffered slow sales.

Despite the tax cuts, the economy is still 2 million jobs behind where it was when the administration came into office. In December, the economy created 1,000 new jobs. This is 305,000 jobs fewer than the total the Bush administration said its tax cuts would create each month. Inefficient stimulus is to blame. The ballooning of the federal deficit means that the Treasury will pay higher interest rates on its bonds to compete with other investments. Interest rates across the board will rise in response. Economists, including Nobel Prize winner George Akerloff, worry that the net result will be an economic contraction.

Scarier still are the arguments that this is all part of some master plan by Republicans to “starve the beast” of government. In this scenario, the administration is  making deficits so big and so unmanageable as to force a dramatic decrease in the size of government. The federal government would then no longer have funds for state and local programs like Title I or Medicaid. Even Social Security could be scaled back.

Now, it’s common for any administration to be accused of all manner of half-baked, insidious plots. What is really scary about these arguments is that they are being advanced not by opponents of the administration but by its supporters. In magazines like the National Review and on the Wall Street Journal Web site, conservatives like Stephen Moore and Gary Becker are praising the administration’s fiscal irresponsibility precisely because it is likely to create a fiscal train wreck for us and for our children.

Ed Muir, an assistant director of AFT research and information services, specializes in state funding and policy. This column is intended to demystify state tax structures and spotlight efforts to achieve tax reform--an activity high on the agenda of labor and our state federations. Send comments to emuir@aft.org.

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