Archive [April 1999]

I’m going to expose tor you one of the biggest scams ever perpetrated on people of this country. It’s time to stop living in a dream world. It is time to stop falling for the notion that we have a surplus — one we are told amounts to nearly two trillion dollars over the next ten or 15 years.

In reality, we are nowhere near a surplus. It is only with a trick — an accounting gimmick. We are making a huge and lethal mistake if we start making policy decisions based on this gimmick. It may not affect you or me if we do what the current crop of leadership in Washington wants to do, but it will affect your kids, and most assuredly your grandkids.

Congress today is still operating under spending caps that tightly limit how much money can be allocated to our military and to most domestic programs. These caps will be far tighter for the budget year starting this October than they ever have been before. Both Democrats and Republicans support spending increases — for the Pentagon, for education, and for many other things. Both parties say there is no realistic way to avoid shattering the caps or resetting them at higher levels.

But I am telling you that if they destroy these caps, every bit of discipline and hard work for the past ten years, the achievements of fiscal restraint that have led us to where we are at present, will be destroyed.

Dow Jones’ distinguished financial weekly Barron’s reports: When measured by proper accounting techniques, the federal government actually ran a deficit of $29.9 billion for its most recent fiscal year. For the current year, the deficit will widen to $41.7 billion.”

You arrive at those figures simply — by not counting Social Security receipts. The gimmick both Republicans and Democrats are relying on is taking Social Security receipts and adding it to the general fund. Only when you do that do you get a surplus.

Why can’t you do that? The reason you can’t, my friends, is because that Social Security money has to be paid out in the future. It is already spent; it just hasn’t been distributed yet. So you can’t take it and spend it for something else first.

You’re spending it twice, in other words, if you say that we’ve got a budget surplus. You’re giving it to the Social Security recipients on the one hand, and then you’re adding it to the general fund on the other. And you can’t do that. Not possible. And yet we are.

As Thomas Sowell writes: “Some things are so obvious that, if you have to explain them, you can’t explain them … There is no surplus. The government is still spending more than it receives in taxes. It covers the difference by spending money from the Social Security trust fund, using accounting gimmicks to create the appearance of a surplus.”

When did this scam begin? Fiscal year 1969. Lyndon Baines Johnson wanted to report a surplus for his last full budget year in office, to mask the severe deficits he was running up to solve all of humanity’s problems with his massive Great Society programs, and to fund the Vietnam War. So he took Social Security revenues and added them to the general fund and — voilà! — he got a surplus. We’ve been doing it ever since.

To liberals, LBJ is still a hero, but in fact his successors in the White House have gotten a lot of blame for his fiscal recklessness. The “Unified Budgets” produced deficits so huge that the surpluses in the Social Security “trust fund” couldn’t cover them up anymore. But that didn’t stop Washington from continuing the accounting trick.

There were attempts made to return to honest accounting — in 1983, with the Greenspan Social Security Reform Commission; in 1985, with the Gramm-Rudman Act; and in the Budget Enforcement Act of 1990. But politicians of every stripe continued to lump in Social Security with the general budget in all their sound bites. Because it made them, as incumbents, look better.

Remember Rep. Bob Livingston, the Republican who ousted Newt Gingrich as Speaker of the House after Republicans lost seats in the congressional elections? Speaker-to-be Livingston pledged as his No. 1 objective, his No. 1 legislative priority, both on ABC’s “This Week” with Sam and Cokie and in an interview with The Limbaugh Letter, that the first thing he would do would be to take Social Security off-budget, where it belongs. It was called the Social Security Trust Funds Protection Act. He was going to stop co-mingling the funds. We were finally going to stop lying to ourselves about future Social Security obligations. We were going to stop lying to ourselves about our general fiscal status.

I will suggest to you, my readers, that Mr. Livingston may be gone, in part, because of this. True, the White House Special Assistant to the President for Pornography, Larry Flynt, dug up dirt on Livingston. But was it because the Democrats had a scorched-earth policy? Was it a case of, “Every time you go after Clinton, we’ll nail another one of your guys”? That’s what everybody thought. And maybe it was. But I am leaving open the possibility that Bob Livingston was targeted precisely because he was going to make ending this scam his No. 1 legislative priority.

Had he become Speaker and succeeded in bringing truth back into budgeting, Bill Clinton would not have a fiscal legacy. This surplus that isn’t — this smoke-and-mirrors accounting gimmick — is what the Perjurer-in-Chief is trying to portray as his legacy.

Liberals have a gleeful retort to the facts I have just laid bare for you. They say, “Aha! If there’s really a budget deficit of $9.3 billion, rather than the surpluses everybody is talking about, then we can’t have those tax cuts you conservatives want.”

Oh, yes, we can — and we should — have deep tax cuts. Recent history proves that tax cuts, if done properly, stimulate tremendous growth in the economy and generate all sorts of revenue into the coffers of the U.S. Treasury. It’s time to start shouting from the rooftops that tax cuts can and should be an important part of the “fix” to this problem. Naturally, tax cuts are precisely what the President and the Democratic Party oppose.

American Skandia Chief Economist Lawrence Kudlow and Cato Institute Director of Fiscal Policy Studies Stephen Moore recently sent a memo to the congressional leadership entitled “Out of the Social Security Trap.” In it, they note what so many Republicans find it so difficult to realize:

We are now in the 17th year of the Reagan-Greenspan expansion. Over this period economic growth has grown in real terms by half, which is roughly the equivalent of adding to the US. economy another California, Washington, Oregon, Arizona, and Texas. Policymakers need to understand why we have had this record-long prosperity. The growth has been propelled by low tax rates, an end to inflation, victory in the Cold War deregulation in transportation, financial services, energy, and telecommunications, expansion of free trade, and a high tech-led productivity revolution. These policies are the essence of Reaganomics.

Over the past 17 years the U.S. has been in recession a mere nine months … Some $10-$15 trillion in new wealth has been created. Yet year after year most economists have wrongly predicted an end to the boom. This was particularly true last year when almost all economists predicted a dramatic slowdown or a recession due to the Asian flu. Instead the economy grew by 4 percent.

But Kudlow and Moore go on to make a chilling warning to Republicans about the risks of continuing their timidity. “In the 1970s,” they remind the GOP leadership, “the combination of accelerating inflation, rising tax rates, and regulatory overload torpedoed the economy and created a decade of stagnation and falling real incomes. Republicans are supposed to be the tax-cutting party, but where’s the evidence?” They note that “over the past five years the tax burden has been creeping up by a half a percentage point of GDP per year — from 17.8 percent in 1993 to a projected 21 percent in 1999.”

And here’s the scary part: “Over the course of the past 30 years, a tax-to-GDP ratio of more than 20 percent has typically sounded a Code Blue warning of recession. In 1969 taxes hit 20 percent of GDP and the next year the economy screeched to a halt. From 1978 to 1981 the tax burden ratcheted up from 18 to 20 percent of GDP. thanks mostly to inflationary bracket creep. The economy collapsed.” Kudlow and Moore note that “today’s federal tax burden is now higher than in the stagflationary Carter years.”

There haven’t been any tax increases lately, so then why are tax burdens rising? The answer is the graduated income tax, causing taxes to rise faster than GDP. “Hence, by not cutting taxes aggressively, congressional Republicans have through their inaction allowed the tax burden to swell.”

No one should expect Federal Reserve Chairman Alan Greenspan to save the day by lowering our already rock-bottom interest rates, either, Kudlow and Moore warn. Because “there is not much further adrenaline that Alan Greenspan can pump into the economy. To keep the economy growing, tax cuts may be necessary.

Now, I hate to burst any of your bubbles out there, but I’ve got to tell you that both parties are disingenuous when it comes to these issues. They’re both using these mythical surpluses as the rationale for their plans to lift the spending caps. Bill Clinton is saying “No, you don’t get your money back, because we’ve got to save Social Security first.” He doesn’t say that his Social Security proposal increases the government’s total (public- and government-held) debt sixfold — adding $30 trillion in interest-generated commitments over the next 55 years.

Still, he is succeeding in framing the debate as tax cuts versus claims of “saving” Social Security. In fact, the debate ought to be tax cuts versus spending cuts. Spending has to be dealt with. We simply cannot continue to spend the money we are spending, using this accounting gimmick that allows us to lie to ourselves that we’ve got all these surpluses. That is simply a way for people in Washington, without any guilt whatsoever, to tell you that we can spend all this newfound money on saving Social Security and on education. It is portrayed as making investments in your kids for education, when in fact it is the height of irresponsibility.

In the corporate world, counting money that is not there and then spending it, is illegal. Company officers who get caught doing that are fired on the spot. Many end up going to jail. But Congress’ whole culture is based on spending money that isn’t there. Washington lawmakers have a long tradition of doing just that. The House of Representatives’ bank routinely lets Members write checks for money they didn’t have. Those practices would have continued, except for the fact that Congress was caught, and the American people figured out what was happening. We all understand that you can’t spend money you don’t have.

And in the midst of all this, the Republicans are trying to sell their tax cut plan. But playing along with this fraud about surpluses isn’t going to secure any tax cut that’s worth a rat’s rear end. I have to tell you that I am stunned that the Republicans are going along with this giant scam. But I know why. It’s because the Republicans are still shell-shocked by what happened to them in the budget fight of 1995. They still haven’t gotten over the government shutdown. And so rather than take a stand on the principles of fiscal conservatism they’re supposed to hold, rather than tell Americans the bad news — as I’m doing here — instead they’re all saying, “Hey, I won’t be here in five or ten or twenty years. I’ll be outta here. And in the meantime, I want the good vibes. I want to collect the votes, and I want to be one of the people taking credit for that legacy of Bill Clinton’s. So yeah, I’ll tell the people what they want to hear.”

Real leadership from an elected official, somebody with power, somebody who’s on a budget committee somewhere, somebody running for President perhaps, would be to tell the American people the truth: that there is no surplus, that we are not anywhere close to having surpluses, because of our future obligations for Social Security.

Look at what’s happening demographically in the country. You’ve got people retiring at basically the same age as always, often even a little earlier. But they’re living much healthier and longer lives. That means they’ll be receiving Social Security checks much longer. It isn’t popular to say this, but the retirement age really ought to be bumped up. I know full well that anyone who proposes that today is going to be voted out of office before they even hold the election. Gone! But increasing the retirement age is what ought to happen.

In addition, there are fewer young people entering the workforce. And you’ve got fewer young people entering the workforce who have sufficient education to generate enough income to allow them to absorb a high tax rate. Today, every Social Security recipient’s benefits are handled by the payroll taxes of four people. We are fast heading for the day where one beneficiary will depend upon the government taxing only two people. Which means their taxes will have to be at least doubled, just to maintain current Social Security benefits in the future.

You want numbers? Daniel Mitchell of the Heritage Foundation explains: “Thanks largely to the upcoming retirement of the baby boom generation, Social Security benefit payments soon will exceed payroll tax revenues. Beginning in about a dozen years, these annual cash-cow deficits will begin to climb rapidly, soaring to $100 billion in 2015 and $500 billion in 2025. Defenders of the current system claim that these huge shortfalls are not a cause for concern because money in the Social Security Trust fund can be used to finance all promised benefits until 2032.”

Even more staggering is Mitchell’s long term assessment of the system: “If Social Security were a private pension company, it would be forced to declare bankruptcy. Promised benefits exceed projected revenues over the next 75 years by an astounding 520 trillion — and that is after adjusting for inflation.”

When today’s first graders enter the workforce in 2015, according to Cato Institute Social Security analyst Carrie Lips, “Social Security revenue will not be enough to pay all legislated benefits. At that time, the Social Security Administration will have to redeem bonds by pulling $42 billion from general revenue. By 2035 Social Security will require $786 billion from general revenue — almost twice what the government spends on Social Security today. From whom will the government get that additional revenue? from the taxpayer, of course.”

If this current way of governing that infects both political parties continues and solidifies — this cowardly governing by polls and focus groups — then there will come a day of reckoning. If public policy continues to be carried out for years wearing rose-tinted spectacles, it will no longer be possible to give everyone what they think they want. And when that day comes, when the bill comes due, those same people who always got what they thought they wanted will be fit to be tied. And what they will do then, rather than fork over the money, is anybody’s guess.

Sadly, all of this illustrates just how woefully inept economics and history education is in this country. With an educated population, these gimmicks would never be allowed to prevail. The public would stand up and righteously, indignantly demand a stop to this fraud. But they don’t, because they hear the word “surpluses” and they think, “Great! Let’s keep spending!”

But you, my friends, do not succumb to that tempting impulse. Under my able guidance, you look behind what you are being told by those you have placed in high office. You want the truth, even if it’s tough news, because like the great previous generations of those who have lived in this country, you can handle the truth. And you can do what the truth demands of you.