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A Budget Finale Minus The Hysterics


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A BUDGET FINALE MINUS THE HYSTERICS

Enough with the budget debate! The Republican Congress is about to send the Democratic President a reconciliation bill that he is sure to veto. Great outrage will be expressed at the calumny and treachery of each side. The specter of a terrible default on the national debt will be raised. Please. Spare us the posturing.

The truth is, the budget "crisis" is over. Clinton has lurched strongly over to the Republican side, accepting among other things a budget that balances in seven years, not nine, and a fat middle-class tax cut. Both sides are so close they could do a deal tomorrow over a nice working lunch, instead of a theatrical Thanksgiving "summit." The Sturm und Drang is simply the parties' posturing for the 1996 Presidential campaign.

Here's how to do a budget compromise without the hysterics. Medicare: Republicans want to cut $270 billion over seven years. Clinton wants to cut only $140 billion. Both already agree on the key elements: to reduce what the government pays to doctors and hospitals, motivate seniors to shift to private HMOs, and increase copayments for individuals. The Congressional Budget Office believes that these three programs will save $185 billion--a perfect compromise figure.

Taxes: Both sides agree on a $500 per child tax credit, even though boosting consumption rather than investment isn't very good tax policy. Senate Republicans have already dropped the eligibility level from $200,000 to $110,000. Clinton wants the eligibility set at $75,000. Split the difference. The Democrats want to retain the Earned Income Tax Credit, and the Senate Republicans want to exclude half of all capital gains from tax. Both are good policies. With just a little wiggling, both sides can be accommodated.

Spending: Here, basic differences remain. Clinton wants to preserve government programs to develop new technologies, encourage government service through AmeriCorps, and increase job skills by spending on training and education. Republicans don't, on philosophical grounds. But the programs cost relatively little--$10 billion over seven years, within $12 trillion of budgets. Giving in on this would be a small price for the Republicans to pay for Clinton's budget move from nine years to seven.

A legitimate way to grease the slide toward compromise is to bring the inflation and economic assumptions behind the budgets into reality. The White House has a slightly higher growth rate built into its budget, generating a lot more revenue for the government. Given all the productivity growth of the past few years, shifting the assumption a bit higher is economically reasonable. It would be equally legitimate to recast the consumer price index and cut it by about 1/2% to reflect the true underlying inflation rate in the U.S. That would also boost revenues and cut spending, paving the way for a deal.

All this could be done quickly and efficiently. That would allow politicians to address the next budget issue: The budget deal is being structured so that the tough cuts in spending are backloaded to later in the decade. This will make the agreement vulnerable to political pressures in 1997 and 1998--should there be a recession. At that time, will the nation's politicians stand firm?


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