Beware the Politician's Abhorrence of a Budget Surplus

If nature abhors a vacuum, politicians equally try to avoid a budget surplus. The United States has not enjoyed one in 40 years. The projected federal surplus is still only a future prospect. Yet, even while the Treasury's red ink continues to flow - albeit at a greatly diminished rate - politicians in both parties are rushing out with ideas to spend the "extra" money.

Sadly, they are ignoring the lessons of fiscal history. First of all, it is much easier to increase government spending than to cut it. The reason is fundamental: Every dollar that the Treasury disburses - be it for salaries, subsidies, procurements, or entitlements - is a dollar of income to somebody. And not many people want to see their incomes diminished.

The second lesson is that a permanent new spending program cannot be adequately financed by a temporary increase in revenues. Yes, the rapid rise in the stock market over the past year has provided the basis for many taxpayers achieving large capital gains, and the Treasury shares the proceeds. But it would be irresponsible to base future budget policy on the optimistic assumption that those stock market gains will continue at the current rate. (Warning: This column does not contain any stock market forecasts, explicit or implicit.)

Let us examine the major suggestions for eliminating those future budget surpluses. One proposal is to devote more federal spending to promoting science and technology, an area that has felt some of the cuts in the military budget. Yet while federal spending for research and development has been curtailed somewhat, private outlays for R&D have risen to the point that the private sector accounts for two-thirds of the national total.

Policymakers can do much to encourage science and technology without spending more government money. Reducing regulatory barriers to innovation would help. So would updating the patent system, especially to ease the burden on modestly financed inventors. Also helpful would be reforming the federal revenue structure to encourage the saving and investment needed to commercialize the new technology resulting from scientific advance (more about tax reform below).

A pinch-penny (or rather pinch-a-few billion) attitude is also appropriate for national defense. The proponents of bigger military budgets are correct when they contend that, despite the end of the cold war, we continue to live in a dangerous world. The nature of the threat to national security has changed - more likely a terrorist attack than a massive ICBM launch - so the Pentagon needs new equipment.

Changes in military priorities, however, do not justify higher levels of defense spending. Rather, the need is to root out the continuing outlays for obsolete cold-war-style equipment and facilities.

Cutting taxes is another way of responding to future budget surpluses. Tax decreases should be combined with future tax reform. Large-scale change in the revenue system will generate losers as well as winners, making it difficult to secure reform. Combining tax reform with tax cuts would mean more winners than losers, increasing the prospects for success in the effort to improve the tax structure. But it will take time before a majority develops in favor of any of the alternatives - a flat tax, a national sales tax, a savings-exempt income tax, etc. The case for patience is compelling.

Meanwhile, husbanding the surplus - by using it to reduce the federal debt - would be a sensible way of approaching the period in the not so distant future when the retiring "baby boomers" put great pressure on Social Security and Medicare. Making those two entitlement systems financially viable will require substantial transitional funding. Thus those surpluses could be put to good use.

A final point: The next recession (whenever it comes) will make academic any discussion of how to deal with those "troublesome" budget surpluses. It takes a college professor to say that.

* Murray Weidenbaum chairs the Center for the Study of American Business at Washington University in St. Louis.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.