1996 Ad

AFTER hiding behind the mantra "Show me the details," the Clinton Administration now faces a moment of truth. Both the Domenici budget in the Senate and the stronger, tax-cutting Kasich budget in the House provide details of what it would take to reach balance by 2002. The President, whose own budget left deficits at nearly $300 billion as far as the eye could see, looked at the Republican budget and blinked. He told a news conference: "I don't want to jump off the deep end on Medicare cuts . . . to pay for huge tax cuts which we cannot afford and which mostly go to upper-income people."

This is the same tired rhetoric that failed the White House so badly last November. Americans are not interested in class warfare or fear-mongering; they want relief from excessive government. And the Kasich budget shows that a determined effort can include both spending restraint and tax cuts. By slowing the growth of entitlements and eliminating scores of unnecessary programs and agencies, the Kasich budget lowers the spending baseline by roughly $1.4 trillion over seven years, with tax cuts estimated (on a static basis) to lower revenues by roughly $350 billion. However, revenues would still grow by a 4.3 per cent annual rate, while spending would rise at a 2.5 per cent annual rate. That is, contrary to Democratic disinformation, "deep cuts" in key programs are merely smaller increases. Thus, while the House plan lowers Medicare by $282 billion and Medicaid by $198 billion from the levels forecast by the Congressional Budget Office (plus savings of $117 billion in welfare and retirement, $73 billion in the education, training, employment and social services functions, and $22 billion in transportation), each of these would rise by at least the projected inflation rate, and in the case of Medicare would rise by about 6 per cent a year.

On taxes, major changes contributing to economic growth, such as lower capital-gains rates with indexing, liberalized depreciation write-offs, an end to the AMT, expanded IRAs, and a higher estate-tax deduction, would raise revenues by moving the meager CBO estimate of 2.2 per cent yearly growth to at least 3 per cent, in line with average U.S. performance since World War II. By using CBO figures, the House has probably underestimated the revenue line by as much as $225 billion. But at least critics will have to concede that the numbers are honest (if static).

Many commentators believe the House version moves too slowly in the early years, where spending savings average only $83 billion in 1996 - 1997, but grow to a $366 billion saving in 2001 - 2002. As a share of GDP, spending drops from 21.8 per cent in 1995 to 20.2 per cent in 1998, a drop of only 0.5 per cent of GDP per year.

This is why the argument advanced by White House chief economist Laura Tyson, "that it exposes the macro-economy to considerable downside risk. . . that might cause or exacerbate a recession" is sheer poppycock. As even a good Keynesian should admit, reducing the so-called demand-side stimulus each year by less than 1 per cent of the overall economy is a small drop in a large pond.

On Medicare, no one has criticized White House intransigence more than former Clinton OMB Senior advisor Matthew Miller. Writing in the New York Times, he reminded Leon Panetta, who had earlier argued that Republican proposals would "make Medicare a second-class health care system," that in 1993 the Clintons argued for "control of the growth of Medicare and Medicaid spending in the long-term and thereby supplement the deficit reduction in this economic program." Miller notes that yearly savings in health proposed this year by Republicans are virtually identical to Clinton policies unveiled two years ago. "It is hard to understand how a goal the Administration considered reasonable only two years ago can seem unthinkably draconian today . . .It will not rally much support by hypocritically attacking cutbacks in Medicare and Medicaid or by resisting the idea of balancing the budget altogether."

However, not everyone in the White House agrees with President Clinton. A close friend of the President, who agreed to speak to me on condition of anonymity, reveals there is a White House faction which believes in a compromise with the Republicans, if the President is to have any chance of re-election next year. "Clinton's polls, after a bump from Oklahoma City, have already started slipping," this source said. "He must get in the game and compromise on taxes and Medicare if he is to have any political standing. He can then bask in the afterglow of Republican achievement. Perhaps voters next year will stay with both a Republican Congress and a Democratic President that can get important things done, but without going to extremes." But the majority faction, my source tells me, still believes that total opposition to the Republicans is the key to regaining Congress and keeping the White House. Though the sides are not yet entirely clear, it seems that the liberal left Hillary - Harold Ickes group wants confrontation, including Leon Panetta at least for now, while Treasury Secretary Robert Rubin leans toward a deal. OMB Director Alice Rivlin is a prospective compromiser, as is Tyson, though publicly they are taking a hard line.