Jewish World Review Sept. 29, 2005 / 25 Elul, 5765

Fiscal relief is there, if GOP finds the backbone

By Robert Robb

http://www.JewishWorldReview.com | President Bush and congressional Republicans are in a fiscal pickle of their own making.

At this point, Washingtonian Republicans cannot make a credible claim to be the party of fiscal discipline. For most of Bush's tenure, Republicans have controlled both the executive and legislative branches of government. Yet spending has increased twice as fast as it did under the divided government of the Clinton years.

Republicans excuse this as resulting from the need to response to national emergencies, such as the war on terror and now hurricane disasters. Yet there are fiscal policy choices involved in how to respond even to true national emergencies.

The Iraq war is on pace to cost at least a half a trillion dollars. The increment of security purchased thereby needs to be compared to alternative uses of the money. For the most part, Congress has turned the rest of homeland security spending into just another subventions grabfest.

There are also fiscal choices involved in responding to Katrina and Rita. People can be put back on their feet for a fraction of what Congress is talking about spending on disaster response.

Until the hurricanes, the federal deficit was shrinking and Republicans were preparing to extend Bush's tax cuts. But they have delayed a vote on a permanent elimination or reduction of the estate tax and on extending the lower tax rates on investment income. Some members are openly speculating about postponing an extension of the Bush tax cuts even longer, and perhaps even allowing some of them to elapse.

Discussions about the deficit suffer from the fact that the federal government does not have a separate capital budget. It makes sense for the federal government to debt finance major physical plant and equipment that will be used for decades. That's not burdening future generations with our bills; it's spreading the cost out over generations that will benefit from the asset. It's also economically more productive, since it allows capital to be deployed elsewhere that would be tied up in government under pure cash financing of major physical facilities and equipment.

According to the Office of Management and Budget, the federal government is spending over $180 billion this year on such assets. The federal deficit for this year is estimated at about $330 billion. That means that even if the federal government's finances were being soundly managed, it might very well be borrowing at least half of what it is currently floating in debt.

Borrowing for current operating expenses should be avoided, which requires cutting spending. House conservatives, spearheaded in part by Arizona Congressman Jeff Flake and operating through the Republican Study Committee, have produced a list of possible spending cuts called "Operation Offset." It's an eye-opener.

The list totals nearly a trillion dollars in savings over 10 years. A couple of cuts involve fundamental changes in major federal programs, such as delaying the implementation of the Medicare drug benefit or converting Medicaid into a block grant and then capping the federal contribution.

But most of the money comes from controlling subventions to state and local governments for things that should be a local responsibility anyway, reducing corporate welfare, and trimming or eliminating programs that most Americans have never heard of.

From the study, about $700 billion in federal spending could be eliminated over the next 10 years, and most Americans would never know the difference. And that's without making fundamental changes in entitlement programs — a longer-term fiscal necessity.

Yet congressional Republican leaders are claiming that meaningful savings are impossible.

The tax rates put into effect by the Bush cuts cannot credibly be claimed to be insufficient to adequately fund a fiscally responsible government.

Federal tax receipts increased last year by over 5 percent and are on pace to increase by about 14 percent this year.

The tax cut extensions being delayed are important to private sector capital investment, which has been a primary driver of the recent economic recovery and expansion. As Alan Greenspan has noted, the markets are currently assuming these cuts will be extended. It will have a chilling effect on investment, and a deleterious effect on the economy, if the sense develops that Republicans may flinch.

At the national level, Republicans have lost any claim to be the party of less spending. But, until now, they could still claim to be the party that better understands the interrelationships between taxes, investment and economic growth.

If Republican spending indiscipline ends up jeopardizing growth-oriented tax policies, Republicans will deserve to lose control of the national government.