The surplus surprise
Some TV commentators sniffed something about a "rosy scenario" when President Clinton raised his projection for the federal budget surplus last week by a gigantic $1.3 trillion over the next decade. But not Fred Ross or Greg Valliere, analysts with Schwab Washington Research Group.Skip to next paragraph
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"The numbers are still too pessimistic ... very cautious, very conservative," says Mr. Valliere.
Skeptics may take pause. But Mr. Ross has been far more right in his predictions of surpluses in recent years than the official bean counters - the Congressional Budget Office (CB0) and the White House's Office of Management and Budget (OMB). So his optimism must be taken seriously.
In early February, Mr. Clinton's budget put the surplus at $167 billion (for fiscal year 2000, ending Sept. 30). On March 10, the CBO predicted $179 billion. Last week Clinton said the surplus will be $211 billion.
Ross forecasts a surplus of $240 billion to $250 billion this year and $300 billion next year. Wow! This horn of plenty should give the White House and the Republicans in Congress lots of space for arguments over what to do with this largess.
Mr. Valliere charges that the CBO and OMB have "artificially depressed" their projections of budget surpluses: "They think they are doing the country a favor."
The agencies don't want to tempt weak politicians to be extravagant in new spending or tax cuts by putting too much money before them, like a plate of candy before a toddler.
Maybe so. Or maybe their economic models forecasting revenue and spending aren't working well. In any case, the Republican leadership in Congress has been displeased at the failure of CBO experts to get it right. A bigger surplus projection would help justify tax cuts, such as proposed by presidential candidate George W. Bush. So the CBO has taken to adding arbitrarily tens of billions to the surplus.
Last week the CBO got some justification for this fudge factor. The Internal Revenue Service noted that capital gains taxation revenues were up an amazing 22 percent to $424.3 billion in 1998 from 1997. It confirmed a suspicion that the bubbling stock market has blessed Uncle Sam as well as investors.
Income-tax receipts from salaries and wages were up a more modest, yet still handsome, 7.1 percent to $3.9 trillion in 1998. That seems to be continuing - revenues have been growing close to an 8 percent annual rate so far this year, notes Valliere.
Outlays this year are growing at a mere 4 percent annual rate.
Ross doesn't dare predict the budget beyond 2001. It's too risky. What happens to revenues if the stock market tanks or the economy slows? Will Congress step up spending decidedly? How big a tax cut will pass?
But if the present pattern continues, the entire federal debt owned by the public could disappear even faster than the 2012 date stated by Clinton.
For economists, the arrival of huge surpluses is a surprise. "Even more remarkable" than the massive deficits of the 1980s, notes Benjamin Friedman, a Harvard University economist.
In those days, economists and foreign officials talked much about the "twin deficits." The huge US international payments deficit was often blamed on the federal budget deficit. Foreigners were having to finance that US budget deficit. The implication was that if the budget deficit disappeared, the trade deficit would also shrink away. It didn't happen. The budget deficit became a surplus. Yet the international trade deficit has worsened.
Economists can explain this second deficit. Americans aren't saving enough. Foreigners like to invest in the US, propping up the value of the dollar and discouraging exports. But few economists in the '80s would have predicted today's huge international deficits that make the US a bigger and bigger debtor.
Who knows, maybe somehow that trade deficit will fade in the years ahead. There are no signs yet, though.
*David R. Francis is senior economics correspondent of the Monitor.
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