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Between the dot-com entrepreneurs and the money mandarins at the Federal Reserve Board, you'd think fiscal policymakers haven't had any role in the long economic expansion. After all, it's fashionable on Wall Street and Main Street to make fun of politicians. Those dolts can't get anything right.
Enough already. Fiscal policy has played an underappreciated yet vital role in nurturing the record growth run. Washington's elected officials helped bring down interest rates and unleash market forces throughout the economy. And, perhaps more important, no matter who wins the race for the Presidency, the news from the campaign trail on the economic front is relatively heartening.
Both Al Gore and George W. Bush seem committed to the fiscal blueprint that has worked so well over the past decade or so. Both are embracing the virtues of a balanced federal budget, debt reduction, deregulation, freer trade, and immigrants. Bush isn't a card-carrying supply-sider, despite his $1.3 trillion tax cut proposal. Nor is Gore a fire-breathing protectionist, notwithstanding his close ties to unions and environmentalists.
VANISHING DEFICIT.
No, the real question is whether either candidate will take bold steps to overhaul the federal tax system -- and permanently hike the economy's long-term performance in the process. "The currently unprecedented fiscal conditions provide policymakers with a wide range of options to address short- and long-term issues facing government," says Mark M. Zandi, chief economist at Regional Financial Associates.
The balanced federal budget is a remarkable feat. Remember the projections in the 1980s of $300 billion budget deficits as far as the eye could see? As recently as 1997, historian John Steele Gordon, in his book Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt, compared Washington struggling with the budget deficit to a "drunk wrestling with alcoholism." Obviously, he wasn't optimistic that Washington would ever get its free spending ways under control.
Today, the Congressional Budget Office is projecting a cumulative $3.6 trillion surplus over the next decade. The U.S. Treasury estimates it could pay off the national debt by 2013, and it already has started buying back some 30-year government bonds.
FLUSH COFFERS.
To be sure, the surplus figures may be too optimistic, but that's beside the point. It's the dramatic shift in the federal government's finances from a budget deficit and heavy borrower to a budget surplus and loan repayer that contributed to the current low interest rate environment. For instance, during the first half of the 1980s, real 10-year Treasury yields were over 8%, calculates Zandi. As debt growth slowed in the 1990s and began to fall more recently, real Treasury yields declined by one-half.
Two main factors are behind the budget surplus. The first has been pretty much hashed over. The federal government's coffers are flush with higher-than-expected revenues, thanks to the strong economy. Indeed, the Treasury has pocketed a huge stock market capital-gains windfall in recent years, as Americans' realized gains jumped from $117 billion in 1992 to an estimated $521 billion last year (chart). But the second factor is fiscal discipline. Policymakers accepted and largely adhered to unprecedented restraint over spending policies, starting with President Bush and continuing during the Clinton Administration.
Washington policymakers also contributed to economic growth by unleashing pent-up market forces in large parts of the economy. The government deregulated many of the economy's commanding industries, from airlines to financial services to telecommunications. The 1993 North American Free Trade Agreement and the 1994 General Agreement on Tariffs & Trade promoted freer trade and open borders. The record flow of immigrants into the country revitalized many metropolitan areas and stocked the high-tech economy with talent.
NOT SO E-Z.
Unfortunately, the nation's tax system, the other major aspect of fiscal policy, has gotten worse over the past decade. Federal tax laws and regulations take up nearly 47,000 pages, and the code books keep getting longer, not shorter. Just imagine, the instructions for the 1040E-Z form consist of over 30 pages. That's easy? The 87-year-old U.S. tax code is needlessly complex, and Washington constantly disrupts investment and savings plans by coming up with new subsidies and rule changes. Depending on the source of their income, individuals in relatively similar economic circumstances can end up paying vastly different amounts of taxes.
What's more, the cost of keeping records and filing tax returns is 10% to 20% of what American families actually pay in taxes, estimates William Gale, senior fellow at the Brookings Institution. That's a lot of money, considering American spend more money per capita in 1999 on taxes ($10,298) than on food ($2,693), clothing ($1,404), and shelter ($5,833) combined, according to the Washington (D.C.)-based Tax Foundation. Indeed, Americans are spending more on federal taxes alone ($7,026) than on any of the other major household budget items.
It doesn't have to be this way. More than two centuries ago, political economist Adam Smith wrote in the Wealth of Nations: "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person." Policymakers can greatly enhance economic efficiency by embracing tax simplification. Streamlining the tax code, flattening out the rate structure, and broadening the tax base would free resources -- and end the traditional tax-season blues. Washington should seize the opportunity offered by the budget surplus to simplify the tax system.
Farrell is contributing economics editor for Business Week. His Sound Money radio commentaries for Minnesota Public Radio are broadcast on Saturdays in 151 markets nationwide
EDITED BY THANE PETERSON
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