Thank you for the opportunity to testify before you this morning. As you know, I testify as a Republican—I have served in senior political positions in Ronald Reagan’s White House and George H.W. Bush’s Treasury Department, and as executive director of the Joint Economic Committee, a cosponsor of this hearing. However, I do not represent the Republican Party or any organization with which I may be associated. I am here speaking only for myself.
I testify as someone who is very disenchanted with his party’s fiscal policy since 2001. Unlike the other witnesses, I am less concerned about the deficit per se or about the size of the tax cuts enacted over the last five years. Rather, what really bothers me is the increase in spending and expansion of government that my party has been responsible for.
I used to believe that the Republican Party was the party of small government. That’s why I became a Republican. I don’t believe that the federal government has the right to one penny more than absolutely necessary to fulfill its essential functions as spelled out in the Constitution. I think government is over-intrusive and could do what it has to do far more efficiently and at lower cost, which means with lower taxes.
Therefore, it bothers me a great deal when Republicans initiate new entitlement programs, massively expand pork-barrel spending, and show the most callous disregard for fiscal integrity. Not too many years ago, Ronald Reagan vetoed a politically popular highway bill because it contained 157 pork-barrel projects. The latest bill contained at least 5,000. Yet President Bush signed this $295 billion bill into law, despite having promised repeatedly to veto a bill larger than $256 billion.
For the life of me, I cannot understand why President Bush seems so incapable of using his veto pen. His father knew how to veto bills. He vetoed 29 of them in his four years in office. But in his first four-plus years, this President Bush has vetoed nothing. He is the first president since John Quincy Adams to serve a full term without vetoing anything. Curiously, Adams is also the only other son of a former president to become president—and his father, John Adams, didn’t veto anything, either.
When I complain about this to the White House, they tell me that it is very hard to veto bills when your party controls both Congress and the White House. But this explanation is simply implausible. Franklin D. Roosevelt had huge Democratic majorities, yet vetoed a record 372 bills. John F. Kennedy, Lyndon Johnson and Jimmy Carter also had large majorities of Democrats, yet Kennedy vetoed 12 bills during his short presidency, Johnson vetoed 16, and Carter vetoed 13.
I won’t bore this committee with numbers. You know them as well as I do. Suffice it to say that our fiscal situation is dire and growing worse by the day. My principal concern, however, is not with today’s deficits—even if they are swollen by Katrina and Rita-related emergency spending. What worries me is the retirement of the baby boom, the first of which turns 62 in 2008. I’m not saying that we are close to driving off a fiscal cliff, but clearly the implications of this event have not impacted on policymakers in any way whatsoever.
I have struggled with a way to illustrate the consequences of an aging population and its effect on the budget. This is the best I have been able to do. Social Security’s unfunded liability comes to 1.2 percent of GDP in perpetuity (1.4 percent without the trust fund)—about what is raised by the corporate income tax—according to that program’s actuaries. The comparable number for Medicare is 7.1 percent of GDP—about what is raised by the individual income tax. And remember that these figures are for the unfunded portion of these programs, so they are over and above payroll taxes.
The chilling conclusion, therefore, is that virtually 100 percent of all federal taxes, on a present value basis, do nothing but pay for Social Security and Medicare. Unless there are plans to abolish the rest of the federal government, large tax increases are inevitable.
Let me be clear that I am no advocate of higher taxes. I’m the one who drafted the Kemp-Roth bill back in the 1970’s and I have spent most of my career looking for ways to cut tax levels and tax rates. But that was predicated on an assumption those supporting tax cuts also wanted to downsize government. I never saw tax cuts as a substitute for spending cuts, but more as sugar to make the medicine go down. My ultimate goal was to reduce both taxes and spending.
Unfortunately, few in my party seem to share this philosophy any longer. For many, tax cuts have become a substitute for spending cuts. It truly amazes me how often I hear people on my side talk about cutting taxes as if this is the only thing necessary to downsize government. They seem genuinely oblivious to the fact that the burden of government is largely determined by the level of spending, not taxes. Nor do they understand that in the long-run, all spending must be paid for one way or another. Increasing spending today, therefore, absolutely guarantees that taxes will have to be raised in the future.
I am often criticized by friends on my side of the aisle for implicitly endorsing tax increases. I do no such thing. I am simply adding two and two and getting four while my friends seem to think there is some way of only getting three.
They also criticize me for implicitly abandoning the fight to cut spending and downside government. Again, I plead innocent. It is not I who has abandoned the fight, but my party. I don’t need to remind anyone here that the biggest spending increases in recent years passed Congresses with Republican majorities largely without Democratic votes. Nor do I need to remind anyone here that during the Clinton years we not only went from budget deficits to budget surpluses, but did so to a large extent by cutting spending—something my conservative friends seldom acknowledge.
Here’s the basic accounting. Defense spending fell by 1.4 percent of GDP between 1993 and 2000, and domestic discretionary spending fell from 3.8 percent to 3.3 percent. Even spending on entitlements fell for temporary demographic reasons, from 10.2 percent of GDP to 9.8 percent. Finally, interest on the debt fell, largely because of falling interest rates, from three percent of GDP to 2.3 percent. The result was an overall decline in spending of three percent of GDP, from 21.4 percent to 18.4 percent, the lowest level since 1966, before the Great Society geared up.
On the revenue side, individual income taxes rose by 2.5 percent of GDP, mainly as the result of rising incomes that pushed people up into higher tax brackets and higher capital gains taxes from the booming stock market. Corporate income taxes and payroll taxes added another 0.8 percent, for a total revenue increase of 3.3 percent of GDP. Thus lower spending and higher revenues constituted a fiscal turnaround of 6.3 percent of GDP, which explains how a deficit of 3.9 percent of GDP in 1993 became a budget surplus of 2.4 percent by 2000.
I don’t give President Clinton full credit for this performance. I think most of the credit goes to gridlock. Mr. Clinton wouldn’t support the Republican Congress’s spending and it wouldn’t support his. So for a blessed six years, government effectively was on automatic pilot. Sadly, unified government has led to an utter lack of restraint by my party that is simply inexcusable. It is extremely dismaying for me to hear House Majority Leader Tom Delay say that there is no fat in the budget and that Republicans have cut it to the bone. This is, quite frankly, ludicrous. My real fear, however, is that he may actually believe it.
I remain convinced that given the total lack of fiscal responsibility demonstrated by the Republican Party that very large tax increases are inevitable. I believe that the fiscal hole is now so large that it is unrealistic to think that we can just tinker with the tax system, as we did so often in the 1980’s, and raise enough revenue to pay for spending commitments that have been made. And under the circumstances, I have no faith whatsoever that spending will be significantly restrained—at least not by my side. They would first have to admit error and beg for forgiveness from people like me, something I don’t expect to be forthcoming any time soon.
Therefore, like it or not, we must travel the same route taken by the Europeans, who long before us made peace with the welfare state and tried to figure out how to pay for it with the least negative impact on economic growth and incentives. They all imposed a broad-based consumption tax called the value-added tax as an add-on tax to all the others. I think it is only a matter of time before we are forced to do the same thing and the longer we wait the more painful it will be when it is finally done. Unfortunately, we are more than likely going to have to be forced into it by a financial crisis of some sort. It would be better to avoid that cost and deal with our fiscal situation rationally. But I see no leadership on either side that would allow that to happen.
I don’t know when, where or how a financial crisis will develop. I only know that trends that can’t continue don’t. Since it is unlikely that the vast fiscal imbalance will be resolved with a whimper, it becomes a certainty that it will end with a bang. Among the areas ripe for triggering a crisis are a popping of the housing bubble, a crash of the dollar, a mistake by some big hedge fund, excessive tightening by the Fed and others too numerous to mention. It will take extraordinary luck and skill to avoid every boulder in the stream and I have little confidence that this administration has the personnel to even give us a fighting chance. There are too many Michael Browns at senior levels of the government today and too few Bob Rubins or Alan Greenspans.
Contrary to popular belief, I don’t think the American people are a bunch of children who only want hand-outs from the government and will only reward the party that promises them something for nothing. Experience and academic research confirm that they are more likely to support the candidate who treats the public purse with prudence and trust and not as a piggy bank to be routinely broken on a whim. In short, I think there is a political market for the party and the candidate who speaks honestly about the nature of the fiscal crisis that is looming. The payoff may not be immediate and the public trust has to be earned by more than just rhetoric. But if, as I believe, some event will eventually change the political landscape, voters will remember who spoke the truth and who mouthed the platitudes.
It’s dirty work, but someone has to do it. Since my party won’t do it, yours is going to have to. If it’s done right, your party will gain at the expense of mine and you will deserve the benefits and my party will deserve the electorate’s disdain.
