TCS Daily

Trust Funds on Empty

By W. James Antle - October 4, 2004 12:00 AM

Peter Peterson is not one to give up easily. He remains a resolute green-eyeshade Republican -- the kind that believes balanced budgets are beautiful and austerity is not a dirty word -- even though this particular form of fiscal conservatism has been in decline for decades. Similarly, for the last twenty years the financier and former Nixon Secretary of Commerce has been warning that unless the nation's largest entitlement programs are reformed, Americans are headed toward the fiscal equivalent of a train wreck. But official Washington has so far failed to heed his counsel.

If anything, the political climate has strayed further from fiscal rectitude. Both parties support big new spending proposals; both voted to add an expensive new prescription drug benefit to Medicare; both have done little to rein in excessive levels of federal spending or confront the budget deficit. Undaunted, Peterson has stepped once more into the breach with Running on Empty, a tough indictment of the profligacy practiced by Democrats and Republicans alike.

This book comes at an important time. The dates when Medicare and Social Security are projected to be insolvent draw closer, yet sweeping reforms remain off the table. These two programs already account for 40 percent of federal expenditures; as some 70 million baby boomers approach retirement by 2030, spending on both is likely to explode. Unless the programs are brought into line with demographic reality, entitlement spending will consume the entire budget, taxes will rise by a third or more, benefits will need to be cut steeply or deficits will rise out of control -- most likely, some combination of each.

While the consequences of inaction are great, so are the incentives for political inertia. Any politician who proposes anything particularly daring as a solution will be mercilessly attacked and will almost surely face the wrath of angry retirees who vote in large numbers. From their perspective, then, it is far better to simply stick future generations with the bill or hope that some Congress deals with the issue.

Thus, while the problems described in Running on Empty are not in dispute, the policy prescriptions ultimately run up against the same brick wall as those advanced in Peterson's previous book on the subject: he is asking politicians to risk reelection here and now to solve a problem that won't materialize until after most of them have safely left office. It's no wonder that few politicians consistently champion responsible spending.

The size of the annual federal budget deficit concerns Peterson, but unlike many budget hawks he doesn't make a fetish out of that number. He distinguishes between chronic deficit spending and year-to-year fluctuations in the government's balance sheet. Medicare and Social Security's total unfunded liabilities dwarf both the deficit and the national debt, and Peterson understands that this is a graver fiscal problem.

His book is not without problems, however. He fingers "tax cut radicals" as a culprit in the nation's deteriorating public finances second only to our unrealistic entitlement IOUs. It's true that some economic conservatives believe that all tax cuts are created equal, distorting supply-side theory from a realistic assessment of how marginal tax rates affect incentives into a borrow-and-spend faith that tax cuts almost necessarily pay for themselves in the long run. But Peterson often doesn't distinguish among different types of tax cuts either and tends to be unrealistically static in his revenue assumptions.

In several places, Peterson implies that marginal tax rate cuts under Ronald Reagan and George W. Bush will result in permanent revenue losses. Does he really wish to argue that if tax rates were at their pre-Reagan levels -- in 1981 the top marginal rate was 70 percent top marginal rate, described by the author himself as "wasteful and inefficient," while it has been below 40 percent ever since -- economic growth and revenues would be higher today?

Peterson also chides "tax cut fundamentalists" for claiming that the Reagan tax cuts belatedly caused the late 1990s economic boom some 16 years after the fact. This is a misrepresentation of their argument. What these economic conservatives actually maintain, with considerable evidence on their side, is that the Reagan-era changes in marginal tax rates and regulation represented a fundamental, pro-market shift in fiscal policy that improved the long-term growth trend of the U.S. economy. Since the policies Peterson maligns (admittedly with qualifications) as voodoo economics were implemented, we have experienced fairly consistent GDP growth interrupted only by two brief, historically minor recessions.

Running on Empty also represents a slight move away from one of Peterson's most promising recommendations for curbing our entitlement spending. In the past he has proposed cutting all such programs on a means-tested basis. He has since had second thoughts about this, for one good reason (that such a policy would punish wealth creation and thrift) and one bad (that this would confirm the truth that Social Security and Medicare are really welfare programs). Peterson does, however, propose some sound alternative cost-saving measures.

Peterson does best when he suggests reforms that would reduce retirement spending and worst when he tries to wonkishly second-guess free markets. (He at one point defends health care rationing by saying, "politicians will say this is rationing. I say it's living within our means.) He never considers that the federal government has grown beyond its competence.

Nevertheless, Peterson paints a deservedly dire picture of our current fiscal situation and is right in his attack on both parties' spending appetites. If even a few members of our political class are shifted away from crass self-interest toward serious forward-thinking as a result of this book, Running on Empty will have more than served its purpose.

W. James Antle III is an assistant editor of The American Conservative.


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