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Jewish World Review Nov. 2, 2000 / 3 Mar-Cheshvan, 5761

Amity Shlaes

Amity Shlaes
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Time to turn off big government's autopilot

George W Bush's willingness to privatise Social Security may be the best chance of reducing spending -- BOTH AL GORE and George W Bush are spending the crucial last days of the US presidential race campaigning against big government. Mr Bush swears he will shrink the government. So does Mr Gore, who has committed to cutting federal spending to the smallest share of the economy in 50 years.

But living up to these promises would be a feat. Back in 1950, the year to which Mr Gore must be referring, revenues were 14.4 per cent of gross domestic product. Since then, through Republican presidencies and Democratic ones, that proportion has increased inexorably, so that today the federal government takes in more than 20 per cent of GDP. A big blob of a budget may seem simpler to cut. But not in America's case. Indeed, with every year that passes the budget becomes harder to trim.

This is so not merely because fat-and-happy Americans have grown accustomed to their entitlements. The main obstacle to cutbacks lies in a seemingly marginal aspect of US budget law itself. Call it the autopilot problem.

This problem starts because the law divides spending programmes into two classes. The first class is mandatory entitlement programmes, including Social Security, the public pension plan and Medicare, the retiree health programme. The mandatories need no renewing. This alone practically guarantees their survival. Of course, lawmakers could make entitlements annually renewable. But that would require a challenging rewrite of the budget law, as well as the political courage to admit the possibility of future programme cuts. And Washington is not the Capital of Courage. It is the Capital of Inertia.

The second category is discretionary spending, which includes projects such as defence. Discretionary programmes live a perilous life. They must be renewed each autumn, or they vanish. Defence, for example, got whacked as soon as the cold war ended.

Still, the overall mandatory-discretionary ratio might remain constant but for an additional detail: the chief mandatories feature inbuilt growth formulae. In the case of Social Security, demography causes part of the trouble - like continental Europe, the US will face unsustainable obligations when its baby-boomers retire. And the pension system makes things worse by pegging the base pension payment of new retirees to real increases in average US wages, rather than to inflation, as in Britain. Medicare grows because it remains, in spite of reforms, an open-ended programme. The more retired people there are, and the more treatments, the more Washington pays.

C Eugene Steuerle, a scholar of the autopilot and a senior fellow at the Urban Institute, points out that it took lawmakers an embarrassingly long period to become aware of this trend. Why? Because, as recently as the early 1960s, Congress still enjoyed considerable leeway. Two-thirds of its tax take, excluding interest, fell into the discretionary category. Today that relationship has reversed, with two-thirds of the budget going to the mandatories. A few decades hence, eight out of 10 federal dollars will be committed - and so on, towards zero.

So where does that leave the candidates' promises to slay big government? Mr Steuerle recommends periodic review of all legislation: no more holy mandatories. Neither candidate has taken up this cause - a telling omission. But what about trying to cut the government on the revenue side? Both candidates advocate tax cuts, the classic method for shrinking government. But Mr Gore's cuts are targeted for social purposes, not for revenue or macroeconomic effects. They would not change the autopilot. Mr Bush's cuts are bigger and he says they will yield smaller government and higher growth. But because Mr Bush is probably right on the second point, he may be wrong on the first one. In the US experience, tax cuts have often generated both growth and revenue. The 1990s capital gains rate cut, for example, helped the government to move into surplus. Mr Bush's cuts may have the same effect, providing fresh revenue streams for entitlements.

Another way to shrink government is to take on the entitlements themselves. Mr Gore does tackle Social Security: he wants to patch up the old programme. This may work in the short run but it does not defuse the demographic time-bomb. And a "reformed" Social Security programme makes it even less likely that Congress will tackle the autopilot, leaving Mr Gore little room on the discretionary side to make good on his radical small government promise. Mr Bush, by contrast, wants to privatise a share of the pension plan by allowing workers to direct some Social Security payments into individual accounts.

In the long run privatisation could alleviate the autopilot problem. It resets the underlying entitlement formula: government would owe less to retirees, who would have their own private pensions as compensation. The change will work only if voters accept smaller public pensions in future, something they were never ready to do before. Even Ronald Reagan did not dare to rewrite Social Security. But America may be ready for change: more than half of citizens hold stocks, an enormous increase since the Reagan years.

If voters want to know which candidate is the bigger Small Government man, they must look beyond the last-minute pledges. The answer is probably Mr Bush, if only because he has taken on the Social Security issue. Mr Bush's critics argue that he is only marginally more of a cutter than Mr Gore. But then, as the incremental increases of the autopilot problem show, what happens on the margin can make a difference.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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