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[Economy-Foreign/Domestic, 1989-1990]
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[Economy-Foreign/Domestic, 1989-1990]
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Records of the White House Office of Speechwriting (George H. W. Bush Administration)
Tony Snow Subject Files
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George H.W. Bush Presidential Records
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Speechwriting, White House Office of
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Snow, Tony, Files
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Subject File, 1988-1993
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13894
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13894-003
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[Economy-Foreign/Domestic, 1989-1990]
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18
29
2
2
OUNC
Memo From the Public Affairs Council
March 27, 1989
To:
Clark Ervin
From:
Ray Hoewing
President, Public Affairs Council
Notes
The Presidents's speech should:
Challenge business - make CEO'S uncomfortable (that is, have
a hard "edge" -- a not "smoke-and-mirrors" tone).
Confront the undeniable -- business commitment to its communities
has lagged in recent years for understandable, but no longer
sufficient, reasons (competitive pressures, etc.).
Seek business involvement not because it is in the public interest
(though that too) but mainly because it is in business' self-interest.
Make clear the Bush program will go beyond publicity, awards,
"P.R.".
Suggest that the emphasis will not only be to stimulate more
business involvement but to provide models/yardsticks/case
studies of effective involvement.
Note that -- despite many instances of laudable business activity - -
many business firms have yet to become engaged.
Some other suggestions/pointers/speech lines:
Short-run profitability cannot be the only criterion for business
in a society where cities are rampant with drugs, a public
school system often fails to educate and hundreds of thousands
are homeless.
The speech must go beyond exhortation. (For example: "Next
month I will be assembling a group of chief executive officers
"
"Because this Administration is giving top priority to winning
1255 Twenty Third Street, N.W., Suite 750 Washington, D.C. 20037 1-202/872-1790
- 2 -
the war against drugs and in restoring our public education
system to its previous standards of excellence, I have appointed
two task forces of business people to spearhead business efforts
to address these critical issues").
Business must apply hard-headed business principles to its
social involvement -- for example, researching needs, establishing
objectives, measuring results. Mere "activity", no matter
how well intentioned, is not sufficient.
Business must become more actively and intelligently involved,
not because we wish it would, but because it will not survive
as viable, profitable enterprises over the long haul in a society
that is failing.
We must learn what business is doing that is truly making a
difference and then find ways to help replicate widely.
A few examples of business efforts which have made a difference
(and which have been clearly documented) should be considered
for mentioning.
Perceptions and realities to keep in mind:
Remember that most serious and knowledgeable people in business
(at both CEO and "program manager" level) view Reagan PSI as
essentially a public relations effort doing little harm but
also not much good.
Therefore, the President should convey that the program he
is undertaking will be qualitatively and substantively different
than Reagan PSI efforts.
K
A real risk or danger: leaving the impression that the President
views private sector programs as the way to "off load" the
responsibilities for social programs (thus replaying the near-fatal
impressions created by Reagan's people in 1981-82).
One key word is "partnership" (but speak to this point: many
business people have concluded that government means by partnership,
"Business, you put up the money. Government will define and
control the agenda and the program.").
Beware of excessive poor mouthing. While business supports
fiscal integrity, it wants to know that the Federal Government
is not some pitiable, penniless giant but rather is committed
to finding/diverting additional government resources when they
are indisputably required.
- 3 -
CEOs, particularly, will be looking for evidence that the President
understands and accepts that in a democracy government is accountable
for social progress and business cannot and must not pre-empt
decision-making which properly belongs to political leadership.
Acknowledge in no uncertain terms that under the most optimistic
scenario about social problems the public sector is by far
and away the "heavy" compared to the private sector (excellent
summary statistics and exposition of this point have come recently
from Brian O'Connell of Independent Sector)
Tax Foundation
Vol. 34, No. 6 June 1990
Features
New Paper Traces
Budget Process
History of Budget
Reform: Two Views
Summits in the '80s
Start from
Pattern of Deficit Reduction
Scratch with a
Sbows Negotiations Ineffective
Legislative
Overhaul
A new Tax Foundation analysis of budget
summits during the 1980s entitled A Decade of
FRONT
The nation's bud-
Budget Summitry leaves little room for opti-
get process has
broken down to
the point that most
Change in Deficit: Post-Summit Years
Americans, if they
vs. Years with No Prior-Year Summit
understood it,
Cong. Christopher
would regard it as a
Cox (R-CA)
Post-Summit
FY83
national joke. But it is
80
Years
no laughing matter.
As a freshman congressman, I was struck
60
right away by the utter incomprehensibility of
the budget process. Virtually no member of
40
Congress- let alone the public-even reads
FY85
FY90e
the huge spending bills we adopt. Moreover,
20
FY86
the typical year-end, catch-all spending bill is
$Bil.
FY88
too long, too complex, and too tardy to expect
0
the President even to read it before he must
FY89
sign it into law.
-20
FY84
On my first day in Congress, then Speaker
40
Honesty Is the
- 60
Best Budget Policy
Years with
No Prior-Year
When I talk about the
Tax Foundation
80
Summit
FY87
budget process, I do so
e First six months comparison of FY1989 and FY1990.
as a member of the
Source: Tax Foundation.
New Analysis
Budget Committee who
of Budget
cannot wait to finish
IN THIS ISSUE
Summits
1
mism that the current talks between the Presi-
serving his last year on
"Front
dent and Congress will lead to deficit reduc-
it. The budget process
Congressman
Burner"
is so flawed that it has
1
tion. It points out that the FY1991 budget
Marty Russo (D-IL)
become a fraud. It is a
Tax & Budget
summit is the fifth time in nine years the White
sham, and one of the
Conference
3
House and Congress have conducted special
most important reasons we have the fiscal
President's
negotiations for this purpose, but the budget
woes we do today is that the Budget Commit-
Message
5
deficit has averaged well over $160 billion
tee, along with the Administration and the rest
each year during this period.
Pittsburgh &
of Congress, has been sliding by the problems
In the first six months of the current fiscal
for the last nine years.
Washington
year, the deficit exceeded $150 billion in spite
I hope that as a result of the current
Briefings on
Budget Issues
6
of a full-year target of $100 billion. In light of
budget summit, if nothing else is done, the
these results, summits convened to lower
summiteers will be honest about the problem
New Research
deficits may have done more harm than good.
and honest about the solution. I for one do not
Fellow
6
See Budget Summit on page 5
See Russo on page 2, col. 3
2
Tax Features June 1990
Cox from page 1
ceilings, it would take a two-thirds
Russo from page 1
Jim Wright declared that he was going
vote. But even then, the President could
favor any new taxes as a solution to the
to violate the law. This may shock most
use enhanced rescission authority -
mounting deficits. I think we can handle
Americans, but in fact it is routine
them by dealing with the spending side
business in Washington. You see,
of the ledger, with cuts in both military
Speaker Wright promised to pass all of
"My proposal calls for
and non-defense spending.
that year's spending bills by August. In
Congress to enact, on or
I think the American public is pre-
fact the law requires final action on
pared to make sacrifices if we will tell
these bills by June 15th.
before May 1, a simplified
them once and for all exactly what the
Ordinarily it might seem brazen for
budget that would fit on
problem is and exactly how we intend
a newly elected congressman to at-
one page. This binding
to solve it. It ought to be a bold ap-
tempt to refashion what the system has
proach that will attack the problem
'budget law,' once passed
been producing for a long time. But the
over a five year period. The citizens
frustration with the way the budget
by Congress and signed by
understand that there is a serious prob-
process has disintegrated is growing to
the President, would set
lem. Of course, they are very cynical
today because every time we need to
the point that now a fresh approach
legal ceilings on spending
meet a Gramm-Rudman target, we
may be just what is needed.
For that reason, I will soon be intro-
in 19 major categories.
manufacture'a way by asset
These are legal limits, not
sales, payday shifts, and faulty assump-
ducing a total rewrite of the 1974
tions. This is done by both the Admini-
Congressional Budget Act. My proposal
'guidelines'; Congress
stration and the Congress. After we do
calls for Congress to enact, on or before
would not be free to
all that, we say we have met the target.
May 1, a simplified budget that would
Then as soon as we get into the next
fit on one page. This binding "budget
violate them or ignore
fiscal year, CBO comes out with a
law," once passed by Congress and
them when it seemed
budget that says we didn't hit the target
signed by the President, would set legal
convenient."
- the deficit is not really $100 billion-
ceilings on spending in 19 major cate-
it is really $161 billion. We have been
gories. These are legal limits, not "guide-
doing that now for the five years that I
lines"; Congress would not be free to
have been on the Budget Committee.
violate them or ignore them when it
"line item reduction" if you will - to
So, either we change the process and
seemed convenient.
bring these super majority-approved
get honest, or we ought to get rid of the
budget busters back down to the totals
budget process.
originally agreed upon by the Con-
gress.
"As a freshman
Finally, if the Congress and the
congressman, I was struck
"I for one do not favor any
President fail to do anything at all, an
right away by the utter
automatic continuing resolution would
new taxes as a solution to
incomprehensibility of the
fund the government at last year's lev-
the mounting deficits."
els - thereby insuring we don't face
budget process. Virtually
the dilemma of shutting down the gov-
no member of Congress -
ernment or signing a massive, last-
minute, catch-all spending bill. The
I-think the summit is a rare oppor-
let alone the public -
prospect of no change whatever in last
tunity for the Congress to work with the
even reads the huge
year's spending would also provide an
President - if he is prepared to make
enormous incentive for both Republi-
the tough decisions necessary to deal
spending bills we adopt."
with the massive problem. The prob-
cans and Democrats to get to work on
lem has many components: The eco-
a real budget.
nomic assumptions are $22 billion off;
Until that budget is in place, it
The Gramm-Rudman-Hollings tar-
Medicare and Medicaid costs are going
would be out of order for the House or
gets were aimed at addressing our
up; there is a shortfall in FDIC premi-
Senate to consider any spending legis-
gargantuan annual deficits, and they
ums; and the cost of food stamps is
lation in subcommittee, committee or
have helped. But they do not go to the
going up. The Administration knew of
on the floor. Once the budget is adopted,
heart of the problem, which is an un-
these problems before it sent its budget
Congress could authorize expenditures
disciplined, runaway budget process.
to Congress. But the biggest hit we are
by majority vote, provided we stayed
It is time to harness this wild ani-
going to take is the S&L bailout. That is
within the ceilings. To break one of the
mal. My bill will be ready for submis-
anywhere between $50 and $100 bil-
sion this session. Soon we will discover
lion this year alone. So if you take the
Christopber Cox, a Republican from
whether Congress is serious about its
California's 40tb District, began service in
responsibilities to the taxpayer, to our
Rep. Marty Russo, a Democrat, bas served
1989 and is Co-Chairman of the House
economy, and to future generations of
the 3rd District of Illinois since 1975. He
Republican Research Committee's Budget
serves on the Ways and Means and Budget
Americans.
Reform Task Force.
Committees, and is Deputy Majority Whip.
Tax Features June 1990
5
Budget Summit from page 1
Talk Is Expensive
Globalization of Economy Makes
Throughout the 1980s the White
House and Congress have generally
U.S. Tax Policy Seem Parochial
been locked in a budgetary stalemate,
impeding any significant deficit reduc-
tions. The high-level budget talks held
in 1982, 1984, 1985, 1987 and 1989 all
reduction (see figure on page 1). For
example, in FY1984, the deficit dropped
$23 billion when spending growth was
held to 5.4 percent - half the rate of
PRESIDENT'S MESSAGE
Muscovites must be getting used to the golden
arches of McDonalds on Pushkin Square. Since
opening on January 31 of this year, the Moscow
fell far short of their stated goals.
McDonalds has done more business than any
Ironically, the fiscal years that were
McDonalds in the world the nearly 1,000
not preceded by budget summits actu-
Soviet employees there are serving up nearly
ally resulted in the most real deficit
50,000 meals a day. Canada's Olympia & York
has unveiled plans to extend Moscow's interna-
Wayne Gable
tional trade center, and Skanska, a Swedish
developer, has joined with five Hungarian state agencies in Budapest's
revenue growth for that same year.
first joint venture office development.
Again with no summit agreement in
The news is filled with such stories of burgeoning investment op-
force, FY1987 spending grew only 1.4
portunities abroad: Eastern Europe, Mexico, the Pacific rim, and even
percent and the budget deficit fell a
the Soviet Union are opening up. In the past decade, the growth in
record $71.5 billion. Conversely, the
world trade has far outstripped the growth rate in domestic demand
fallout in fiscal years with negotiated
for goods and services. So the watchwords are competitiveness and
deficit reductions was higher taxes and
globalization - how will U.S. firms match up head to head with
higher deficits.
foreign-based companies in the world marketplace? Some pundits are
Historical Overview
pessimistic, citing high-tech manufacturing prowess in Japan and the
The analysis begins by showing
proximity of West Germany to Eastern Europe as reasons that companies
how the well-intentioned negotiations
based there will prosper.
of 1982 and 1984 went awry, conclud-
We at the Tax Foundation are urging policymakers in Washington to
ing, "Any plan that promises to balance
realize that U.S. tax policy is a critical component of competitiveness, one
today's tax hike with tomorrow's spend-
that can have a dramatic impact on the fortunes of U.S. firms. Tax
ing cuts is unsound. Taxes once en-
Foundation members have made clear in a survey taken earlier this year
acted into the code are collected, but
that they want more research done on the taxation of U.S. firms doing
long-term spending cuts demand con-
business abroad. Consequently, the Tax Foundation's new senior research
stant discipline."
Congress vented its frustration with
fellow Dr. Anthony Billings (see page 6) will initiate a multi-year project
the deficit by passing the Gramm-
on the subject, exploring how various tax provisions help or hinder U.S.
Rudman-Hollings law in 1985, but a
competitiveness.
budget accord reached earlier in the
We must remember that international competitiveness depends not
year with the President fared no better
only on the innovation of U.S. firms but also on their ability to operate
than in 1982 and 1984. In fact, the
abroad without punitive tax laws holding them back. As the record number
deficit reached an all-time high of $221
of Big Macs selling at the Moscow McDonalds reveals, foreigners do want
billion in 1986.
American products. It is up to us to make sure we don't allow an
The October 19 stock market crash
uncompetitive tax policy to prevent American enterprise from taking those
and the looming $23 billion in auto-
products to foreign lands.
matic spending cuts under Gramm-
Rudman-Hollings were the cue for high-
level deficit reduction talks in 1987.
spending cuts mandated by Gramm-
House and Congress. Hopefully, these
After weeks of closed-door negotia-
Rudman's "sequester." The President
new talks will actually result in lower
tions, the 1987 summit emerged with a
and Congress substituted budget sum-
deficits. Only 10 of the last 62 budgets
plan to trim the deficit $76 billion over
mitry for the full sequester, however,
paid their own way without deficit
the next two years. What resulted was
and the result was $6 billion in new
spending, and in none of the last 21
a $5.4 billion increase in the deficit in
taxes and one-time savings gimmicks
years has the budget been balanced.
FY1988 and a FY1989 deficit $11 billion
designed to hit a $99.4 billion FY1990
Unfortunately, judging by recent budget
over the summit target. Also, the Gramm-
deficit target.
summit history, a deficit reduction deal
Rudman-Hollings deficit targets were
rewritten, postponing the promise of a
The Current Negotiations: Will
could be a bad deal for taxpayers.
balanced budget from 1991 to 1993.
History Repeat Itself?
Now Available
During the budgetary stalemate in
In 1990, fears of a slowing econ-
omy and possibly $100 billion in across-
A new Issue Brief entitled A
1989, the President and Congress were
the-board spending cuts have sparked
Decade of Budget Summitry, 4pp.
forced to contemplate across-the-board
deficit negotiations between the White
$10 + $2 p/h.
4
Tax Features June 1990
from the economics of these proposals,
Congressman Bill Frenzel (R-MN)
Study of the States at the Rockefeller In-
McLure stressed the relative ease of
also spoke in its defense, but both he
stitute.
their administration.
and Mr. Miller called the sequester a
These experts testified to increas-
Bernard Shapiro outlined the ma-
"meat-ax approach" to budgeting that
ing tax burden at the state level. With
jor budgetary legislation of the 1980s.
should be avoided.
less federal assistance than in the 1950s
He described ERTA's $750 billion tax
Henry Aaron, senior fellow at the
and '60s, states have been raising reve-
cut over five years as "clearly too
Brookings Institution, argued against
big
but the biggest problem was
Gramm-Rudman as a mere procedural
that it was uncoupled with a spending
distraction from the central issue of
cut." The huge deficits that resulted
what and whom should be taxed.
"The deficit and national
have played a major role in budgetary
"Fiscal Policy in the 1990s" was the
debt are the overriding
and Presidential politics since then.
general theme for the luncheon speaker,
the Honorable Jim Jones, Chairman of
issue this country has to
the American Stock Exchange. Mr. Jones
solve if we are going to
reiterated his long-held belief that "the
have good economic
deficit and national debt are the over-
riding issue this country has to solve if
conditions for decades and
we are going to have good economic
generations to come."
conditions for decades and generations
to come." In the investment area, he
-Jim Jones, Chairman,
argued for a capital gains differential
American Stock Exchange
and would tie that reduction in the rate
to a holding period of at least one year
to promote longer term investing. Also,
nue and may continue to do so at a rate
he would favor initiatives to even out
higher than the increase in personal
the debt vs. equity bias in LBOs.
income.
James Q. Riordan (L), co-cbairman of the
On the spending side, Mr. Jones is
Tax Foundation and chief executive
pushing investment in human capital
The "No New Taxes" Pledge
officer of Bekaert Corporation, talks with
- education and retraining. He sees a
Two politicians and two budget
Larry Wilson, general tax counsel at
Unocal Corporation.
labor shortage coming and insists we
analysts discussed the current budget
must improve our labor pool. Aside
crunch and debated the need for new
And combined with the repeal of in-
from education, infrastructure improve-
revenues. Marty Russo (D-IL) and Chris-
dexing, they have contributed to tax
ments and research and development
topher Cox (R-CA) gave two Capitol
complexity as legislators look for small
are at the top of his list of spending
Hill viewpoints while Norman Ture,
pockets of revenue in the code. Mr.
priorities.
President of the Institute for Research
Shapiro predicted that the budget
on the Economics of Taxation, and
State and Local Taxes
summit in progress would bring a major
Robert Greenstein, Director of the Center
tax bill of at least $15 billion in new
Gordon St. John Gilman, Tax Attor-
for Budget and Policy Priorities, de-
revenue.
ney, Texaco, Inc., moderated the state/
bated the relative importance of the
Fred Goldberg asserted the view
local panel, and after pointing out some
deficit to the economy. The panel was
that much complexity resulted from
particular state-level problems he faces
moderated by Paul Gigot, editor, Wall
perceived abuses of the code. He also
in his role as head of the Dallas Chap-
Street Journal.
sees complexity arising from a well-
ter of the Tax Ex-
intentioned attempt to be equitable that
ecutives Institute,
ends up in a mire of rulings that are
he introduced the
attempts to solve individuals' prob-
panelists. They
lems. He closed with a warning that
were Duane
although some may view repealing the
Parde, Director of
corporate income tax as a good simpli-
the State Legisla-
fication, revenue issues are everpre-
ture and Private
sent, deficits are real, and revenue-
Sector Task Force
neutral proposals are the ones that get
at the American
serious consideration.
Legislative Ex-
change Council;
Gramm-Rudman-Holings
Elliott Dubin, an
The theme of the second panel was
analyst with the
"Gramm-Rudman-Hollings: Save It or
Advisory Council
Scrap It?" James C. Miller, III, Co-Chair-
on Intergovern-
man of the Tax Foundation, defended
mental Relations;
Gramm-Rudman on its record, pointing
and Steven Gold,
Congressman Bill Frenzel (R-MN) is flanked by Henry Aaron,
out that when it has been enforced, the
Director of the
senior fellow in economics at the Brookings Institution, (L) and
James C Miller III, co-chairman of the Tax Foundation and former
deficit has been substantialy reduced.
Center for the
director of the Office of Management and Budget.
Tax Features June 1990
3
worst case scenario, the deficit is $186
billion higher than projected. If you
Tax and Budget Conference Brings
take the best case scenario, it is $86
billion off. It depends on how you
Government and Industry Leaders
calculate the numbers.
So the question is, what do we do
Together During Budget Summit
about it? We just had a meeting with
some of our summiteers. Some of us
The Tax Foundation held a conference
told them that they should be honest,
on tax and budget issues in coopera-
tell us what the problem is, what we
tion with Citizens for a Sound Economy
need to do, and how we need to do it.
Foundation on May 23 in Washington,
And don't come back with payday
DC. Corporate executives, members of
shifts and other budget gimmicks, the
congressional and executive agency
kind of games that have made people
staffs, and of the business press heard
in this country cynical about what comes
presentations from experts in the fields
out of Washington.
of state taxation and tax complexity, as
The Chairman of the Ways and
well as more general discussion of
Means Committee has made it very
public finance from well-known politi-
clear that until he has an agreement
cians and economists.
with the President on what is needed
Senator Phil Gramm (R-TX) began
from his committee, he is not going to
the conference by pointing out that the
offer anything and move it through the
federal budget process was never in-
committee. So, unless and until the
tended to restrain federal spending and
that the budget committee in the House
Senator Pbil Gramm (R-TX), talks with
James W. Netbercott (L), Senior Vice
was originally structured to prevent its
President, The Procter & Gamble
"The summit is a rare
becoming a source of power. The sena-
Company, and a member of the Tax
tor said the Gramm-Rudman-Hollings
Foundation's Policy Council.
opportunity for the
bill was "the only budget reform that
Congress to work with the
was ever aimed at trying to have a real
on the program. It focused on the
President - if he is
impact on the deficit." As to whether it
complexity of tax compliance, featur-
has been effective, he pointed out sev-
ing Glenn White, Director of Taxes at
prepared to make the
eral shortcomings and possible improve-
Dow Chemical; Charles McLure, senior
tough decisions necessary
fellow at the Hoover Institution; Ber-
nard Shapiro, National Director of Tax
to deal with the massive
"The Gramm-Rudman-
Policy, Price Waterhouse; and Fred
problem."
Goldberg, Commissioner of the IRS.
Hollings balanced budget
Glenn White started by citing a
bill was the only budget
much-quoted study by the A.D. Little
President decides he wants revenue as
reform that was ever
Company showing that in 1983, corpo-
part of his solution and works it out
rations in the U.S. spent 2.7 billion
ahead of time, I don't think we will see
aimed at trying to have a
hours calculating tax liabilities, the
the Ways and Means Committee mov-
real impact on the deficit."
normal work product of 1,350,000
ing forward.
people in one year. He decried the Tax
Personally, I think you can do it
-Senator Phil Gramm (R-TX)
Reform Act of 1986 for worsening the
without taxes. It will require a severe hit
situation and gave anecdotal evidence
in the Defense Department, and it will
of his own company's travails in trying
take some hits in the domestic side. For
ments, but cited three developments
to deal with the ever more complex
example, one of the things I would rec-
which prove that overall, the legislation
code.
ommend we do is eliminate plans for
has had a positive impact.
Charles McLure picked out a few
the space station. We don't need to put
First, since the law went into effect,
areas that are sources of complexity-
people out in space when others can't
the deficit has been reduced in real
fringe benefits, low income provisions,
find homes on earth. That can wait.
terms. Second, for twenty years prior to
and anti-shelter provisions like the al-
This year we are giving the Defense
its enactment, federal spending grew
ternative minimum tax - but pointed
Department $295 billion in our budget.
an average of 11 percent annually,
out that the only alternative to com-
Last year they got $296 billion. If you
compared to 3.8 percent after passage.
plexity in these areas is inaccuracy and
can believe David Stockman, there is
Third and most important, federal
distortion of economic decision-mak-
about $30 - $40 billion of waste in the
government has begun to grow more
ing. He outlined instead a more funda-
Defense Department. I will take David
slowly than the private sector.
mental change in corporate taxation
Stockman at his word. We need that
The Burden of Tax Complexity
which, among many changes, would
kind of honesty now if we are to restore
Lee Sheppard, contributing editor
allow "immediate write-off of all pur-
sanity to the budget process and pros-
perity to the nation.
of Tax Notes, moderated the first panel
chases, whether for inventories, inter-
mediate goods, or capital goods." Aside
6
Tax Features June 1990
Briefings in Pittsburgh and Washington
Anthony Billings
Keep Members Attuned to Budget Issues
Joins Foundation
Senior Tax Foundation
Research Staff
staff met Foundation
members and other
Anthony Billings has joined the
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Pittsburgb for a briefing
on the current budget
fellow. An associate professor of ac-
debate. From left to right:
counting at Wayne State University,
Richard Larry, President,
Sarab Scaife Foundation;
Professor Billings' articles have appeared
Wayne Gable, President,
in the Journal of Accountancy and
Tax Foundation; James W.
numerous other professional journals.
Wirth, Senior Vice
He has studied international tax
President & CFO,
Aluminum Company of
problems for Dow Corning and 3M,
America; James C. Miller,
and at the Tax Foundation he will be
III, Co-Cbairman, Tax
undertaking a major study of U.S. taxa-
Foundation; Robert A.
dePalma, Senior Vice
tion of American firms doing business
President & CFO, Rockwell
abroad.
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THE CASE FOR A TAX LIMITATION/BALANCED BUDGET AMENDMENT
STATEMENT OF DR. JEROME ELLIG
DIRECTOR OF PUBLIC POLICY
CITIZENS FOR A SOUND ECONOMY
BEFORE THE
SUBCOMMITTEE ON THE CONSTITUTION
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
JULY 27, 1989
On behalf of Citizens for a Sound Economy's 250,000 members
and supporters, I would like to thank this subcommittee for the
opportunity to share our views on the various balanced budget
amendment proposals offered in the 101st Congress.
Citizens for a Sound Economy is a grassroots citizens'
organization with members in every state and congressional
district. Our members include Americans from all walks of life
-- the family trying to borrow for that first house or a college
education, the employee who needs financing for a car to get to
work, the small entrepreneur seeking backing for a new idea that
could improve the quality of life for millions of fellow
citizens. Tens of thousands of these Americans send in small
contributions to help keep our doors open, out of concern for the
burden that massive federal deficits place upon themselves and
their children.
We know the deficit statistics all too well. The federal
government owes almost $12,000 for every man, woman and child in
America. Every $150 billion deficit obligates the average
taxpayer to pay more than $150 annually in taxes just to meet the
interest payments. Congress will soon find it necessary to raise
the legal limit on the national debt to more than $3 trillion,
and that figure doesn't even include the unfunded liabilities of
programs like Social Security and Medicare.
Citizens for a Sound Economy's members are extremely
concerned about these trends. Let me just share with you a few
of their comments.
Sadie Adamson of Fort Myers, Florida wrote to us earlier
this year, "One rule all my life has been, 'live within your
income. I don't understand a group of supposedly intelligent
congressmen doing otherwise with our national income.' Betty
Woodson of Memphis, Tennessee told us, "I am a housewife. I
don't spend more money than I have
If we are only incurring
debt on the next generation, we are the immoral generation."
Adah Smith of Athena, Michigan writes, "Above everything
else, the budget deficit must be effectively reduced, brought
under control, and legislation should be enacted to prevent such
from ever happening again. No one ever borrowed themselves out
of debt.' Norma Rodriguez of Miami, Florida offers policymakers
the following advice: "Stop playing with the people. A balanced
budget amendment is mandatory. Don't pass the blame to the other
guys."
During the past two years, we've received petitions,
surveys, and letters from nearly 300,000 Americans who favor the
tax limitation/balanced budget amendment. Some of you may have
seen the 160,000 petitions that we displayed on the House side of
the Capitol steps on July 19. Our members are neither economists
nor politicians. They're just ordinary Americans trying to make
ends meet.
2
And their views receive wide support across the country.
Earlier this year, Citizens for a Sound Economy Foundation
released the results of a nationwide poll on tax and budget
issues conducted by the Roper Organization. Some of the results
are summarized in an appendix to this testimony.
Approximately two-thirds of those polled said they favor a
constitutional amendment which would mandate a balanced budget
and limit taxes. This result mirrors those of many other polls,
which have found that Americans favor a balanced budget amendment
by margins of as much as to 6 to 1. But equally interesting were
the Roper poll's results for various subsets of people.
The tax limitation/balanced budget amendment enjoys wide
support among major demographic groups and across the political
spectrum. It's an initiative that knows no gender gaps or
generation gaps, enjoying the support of about two-thirds of
respondents of both sexes and all age groups. Sixty-two percent
of blacks favor a tax limitation/balanced budget amendment. A
solid 67 percent of union members said they favor the amendment,
with only 20 percent opposed. Sixty-four percent of working
women expressed support for the amendment.
It's probably not surprising that 67 percent of those
identifying themselves as conservatives and 65 percent of those
identifying themselves as Republicans favor the tax
limitation/balanced budget amendment. But the idea enjoys
support across the political spectrum. Sixty-one percent of
Democrats and 62 percent of independents said they want the
Constitution amended to limit taxes and require a balanced
federal budget. Sixty-three percent of moderates and 55 percent
of liberals also endorsed the amendment. With such statistics,
it's no surprise that the tax limitation/balanced budget
amendment enjoys bipartisan support.
The American people clearly understand that we need a
constitutional amendment to ensure that the budget is balanced.
The reason is that in a representative democracy like the United
States, a fundamental imbalance biases the political process in
favor of those who seek more federal spending on specific
programs and against the average citizen who has to pay the bill.
As a result, lawmakers who want to balance the budget face an
extremely difficult political challenge, even though their
constituents want a balanced budget.
Every dollar the government spends goes into someone's
pocket, and the beneficiaries of federal spending know who they
are and how they benefit. Each spending program has its own
well-organized constituency with very obvious and compelling
reasons to lobby legislators for more spending on the particular
program. The average taxpayer, on the other hand, does not gain
very much from elimination or cutbacks of one particular program,
3
so he has little reason to spend time and effort fighting the
special interests over each program. As a result, when it comes
time for Congress to make spending decisions, members frequently
hear plenty from advocates of specific programs but little from
opponents.
Government borrowing compounds this problem. While the
average taxpayer may have little incentive to lobby against the
special interests, those who are hurt by government borrowing may
not even know what the government is doing to them. For example,
a family may know that high interest rates put a mortgage for
that first home out of reach, but it may not realize the role
that the $150 billion federal deficit played in pushing up
interest rates in the first place. Similarly, future generations
will pay for debt that the government incurs now, but generations
yet unborn certainly have no way of knowing that now -- or of
influencing the federal government's spending decisions today.
Ultimately, continuing deficits will even limit the
government's ability to satisfy special interests as interest
payments on the national debt consume more and more of the
federal budget. The government will pay about $170 billion in
interest on the national debt in 1989, double the amount it paid
in 1982.
As a result of imbalances in the political process,
lawmakers receive a skewed impression of what the public wants.
Indeed, the real surprise is not that we have $150 billion
deficits, but rather that for most of its history, the United
States managed to avoid chronic peacetime deficits.
The explanation is that for about 150 years, policymakers
took it for granted that deficit spending was irresponsible --
indeed, even immoral. The federal government used deficits not
to avoid paying for its day-to-day operations, but rather to
spread out extremely large expenditures, such as the costs of
fighting a war, over a period of years. Even after World War II
and the Korean War, the federal budget returned to modest
surpluses -- although, unlike the periods after previous wars,
the government made little progress toward reducing the national
debt. Even though there was no constitutional amendment
requiring a balanced budget, policymakers felt obligated to avoid
deficits.
But attitudes toward deficits started to change in the
1930s. Balanced budgets, which had been considered prudent
economic policy, came under attack from, of all places, the
economics profession itself. With the publication of John
Maynard Keynes' General Theory of Employment, Interest, and
Money, a majority economists eventually came to view deficits as
a way to stimulate -- rather than ruin -- the economy. By the
1960s, the change in economists' thinking was pretty much
4
complete. The American people were told that their common sense
concern about federal deficits was misplaced. "Keynesian"
economics became a battering ram for special interests to break
down the door of the public treasury.
Today, the balanced budget amendment's critics continue to
use economic theory as an excuse to attack the amendment.
Arguing that deficits can sometimes help the economy, they say
that a balanced budget amendment is unwise economic policy
because it would tie the government's hands during a recession.
In making such arguments, the critics ignore the fact that
most versions of the amendment do not ban deficits outright; they
merely require a three-fifths vote of Congress to approve any
borrowing. But more importantly, the critics conveniently ignore
the past 20 years of economic research and practical experience
with unconstrained deficits.
We know from experience that huge deficits could not prevent
recessions in the 1970s and 1980s. Moreover, there is no longer
a consensus among economists that deficit spending is sensible
economic policy. Indeed, many prominent economists now advocate
a tax limitation/balanced budget amendment precisely because they
understand that the political process makes policymakers more
eager to adopt spending programs than to search for ways of
paying for them. The absence of external fiscal restraint has
allowed policymakers to triple the national debt in just eight
years, from $908 billion in 1980 to an estimated $3.1 trillion in
1989.
James Buchanan, the 1986 Nobel laureate in economics and a
member of Citizens for a Sound Economy's academic advisory board,
commented several years ago, "Balanced budgets formerly dictated
by moral standards were never explicitly mentioned in formal
constitutional documents. Without such standards, however,
balanced budget constraints must be explicitly chosen, imposed
and enforced."
Similarly, Milton Friedman, the 1976 Nobel prizewinner, has
consistently called for a tax limitation/balanced budget
amendment. He and Rose Friedman have pointed out that the
purpose of the amendment "is to correct the defect in our present
structure under which democratically elected representatives vote
larger expenditures than a majority of voters deem desirable."
The message from the American people is loud and clear; they
want a balanced budget amendment with tax limitation. The
economists who agree with the common sense of the American people
have also made a convincing case. Citizens for a Sound Economy
stands ready to assist this subcommittee in restoring fiscal
sanity by making the tax limitation/balanced budget amendment a
reality.
5
APPENDIX
Results from Citizens for a Sound Economy Foundation Roper Poll
Released: January 25, 1989
Conducted: December 3-10, 1988
Methodology: The Roper Organization conducted personal, in-home
interviews among a nationally representative sample of 1,947
adults, age 18 and over.
Question: Some people have suggested a Constitutional amendment
that would both require a balanced budget and limit the
amount of tax increases Congress could pass, except in
times of national crises. Would you favor or oppose
such an amendment to the Constitution?
Group
%Yes
%No
Total
62
20
Gender
Male
62
23
Female
63
17
Age
Age 18-29
63
22
Age 30-44
63
20
Age 45-59
63
20
Age 60+
61
18
Political Affiliation
Democrats
61
22
Republicans
65
21
Independents
62
17
Political Ideology
Conservatives
67
20
Moderates
63
16
Liberals
55
29
Other Demographic
Blacks
62
22
Working Women
64
17
Union Members
67
20
OFFICE
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF management AND budget
STATE
WASHINGTON, D.C. 20503
THE DIRECTOR
EMBARGOED FOR RELEASE UPON DELIVERY
8:00 p.m. EDT; MAY 1, 1990
KEEPING AMERICA FIRST:
AMERICAN ROMANTICISM AND THE GLOBAL ECONOMY
THE SECOND ANNUAL ALBERT H. GORDON LECTURE
HARVARD UNIVERSITY
DELIVERED BY
RICHARD DARMAN
DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
Thank you very much. As always, it is a pleasure to return
to Harvard. It is a special honor to follow the distinguished
former Chairman of the Federal Reserve, Paul Volcker, and to
present the second annual Gordon Lecture.
I should note at the outset: I realize my choice of topic
has done little to suggest a coherent theme for this lecture
series. Where Paul Volcker delved with delight into the workings
of a floating target zone system for international monetary
policy, a Director of OMB now comes along and proposes to talk
about American Romanticism. I must beg your forgiveness: If you
had a job with an annual cash shortage of 150 billion dollars and
an inherited debt of roughly 3 trillion dollars, I suspect you,
too, might be inclined toward occasional distractions. Be that
as it may, I suggest we might all enjoy this Lecture more if I
spare you a detailed examination of the Federal Budget's 190,000
individual accounts. I will touch on the Budget, and the Volcker
lecture, issue. in due course. But I propose to begin with a bit larger
I. WHITHER THE AMERICAN ROMANCE
The Race Track and the Lorelei
(or America's Decline and the End of History)
In fond memory of my days in the Yard, I put the issue as a
question that could be the title of a freshman Humanities course:
Whither the American Romance?
For the moment, a large part of the answer seems to be
coming from abroad. It is being played out by the
recently-liberated nations of Panama and Nicaragua, and the
newly-pluralistic parliaments of Eastern Europe. There, the
romantic spirit is soaring. It is the same spirit as has shaped
the American Romance: love of freedom, respect for individual
rights, distrust of excessively-centralized authority,
appreciation of markets, hope, optimism, a confident faith in the
future, heroization of risk-taking and the pioneering spirit.
Yet, there is a curious irony: As the American Romantic
spirit expands in foreign lands, it is oddly quiescent here at
home -- especially among the intelligentsia. And while many
Americans lament that the U.S. may be losing its primacy to pro-
growth Japan, anti-growth sentiment is also becoming fashionable.
Confidence in the American pioneering spirit seems mixed, at
best. In some respects, we seem to be becoming a risk-o-phobic
society -- just when many of our historic risks are seen to be
paying off.
This has been an American Century. In World War I,
Americans were not hesitant to exhibit their romantic enthusiasm.
They were "making the world safe for democracy" -- as Americans
would do again in World War II and in the subsequent battles to
expand freedom, opportunity, and market-oriented progress.
Yet now, much of America is strangely subdued. Some of this
is the correct prudence of mature statesmen. Some is a discrete
politeness. But in general, as history seems to be moving
America's way, America is less than fully conscious of its own
continuing primacy. U.S. opinion-leaders seem less than fully
confident of America's vital destiny, its unique capacity to move
the world toward new frontiers in the 21st century.
If one asks where in America's cultural establishment is
there visible representation of American Romanticism, one is
hard-pressed to come up with an answer. The closest I have come
is an exhibition now at the National Museum of American Art: the
collected paintings of America's finest romanticist (and a native
of nearby New Bedford), Albert Ryder.
But though Ryder's work is still alive, it dates from the
nineteenth century. And one wonders: In this time of
pluralism's heroic advance, where is the domestic celebration of
the compelling power and virtue of the American Idea?
The cynicism and self-flagellation of the Vietnam and
Watergate eras have passed. But the America-is-in-decline school
is now intellectually fashionable. The fashion may have reached
a peak with Paul Kennedy's recent best-seller, The Rise and Fall
of the Great Powers. Yet it lingers with the likes of Mead's
Moral Splendor: The American Empire in Transition (popularized in
Harper's as "On the Road to Ruin") and Krugman's The Age of
Diminishing Expectations (popularized in the Washington Post as
"We're No. 3 -- So What?").
This defeatism remains current in the popular mind with the
misguided conventional wisdom that "Japan is Number One. "
Indeed, a recent cover of The Economist provides a pathetic
commentary on the erosion of America's once-supremely-confident
self-concept. It features a decrepit, hobbled Uncle Sam with
this reminder as a caption: "Yes, you are the superpower."
The only romantic American counterpoint of note is
Fukayama's naive neo-Hegelian suggestion: that liberal Western
ideology is now so evidently -- and inevitably -- triumphant that
we are the fortunate witnesses to "the End of History."
2
One might try to fit these competing images of America's
historical condition -- the defeatist and the naive -- within
romantic frames. In doing so, one might recall two Ryder
pictures. The America-in-decline school might be represented by
"The Race Track," also known as "Death on a Pale Horse. II In it,
a solitary white horse runs the wrong way on a deserted
racetrack, with a ghostly skeletal reaper as its grim rider.
The end-of-History school might be represented by "The Lorelei"
-- the golden-haired maiden whose seductive siren song would
distract naive sailors from attention to the whirlpool ahead.
Unfortunately, these images are not exactly uplifting.
Indeed, it would be rather depressing if, in fact, the choice
were between an eerie race with death and a complacent drift
toward the whirlpool.
But, of course, the choice is not so bleak. America's range
of possibility -- like Ryder's range of imagery -- is more
hopeful and encouraging than the limited choice between The Race
Track and The Lorelei. The problem is that realistic and
romantically powerful images of hope have not yet been
satisfactorily framed to define the American future.
II. THE STRUGGLE FOR "GLOBAL MANAGEMENT"
of Growth and Greenery
(or Neo-Luddites: Making the World Safe for Green Vegetables)
The problem is also that there are romantically powerful
counter-images -- advanced by some who are opposed to the
American Romantic Spirit. I have in mind one recent example:
the picture of a simple, bucolic, blue-green planet -- untainted
by competitive industrial advance, unmarked by "artificial"
boundaries of competing nation-states. This is an alluring
romantic image. It has understandable general appeal -- and was
seen everywhere on Earth Day. But the natural appeal of such a
romantic symbol may lend itself to abuse if its operational
significance is determined by anti-growth activists seeking to
lead the mass of so-called "greens.' Indeed, the currently
fashionable green romance could turn rather blue if it is not
advanced in a way that is consistent with the American Romance.
Let me be clear: I do not mean to criticize the majority of
self-styled greens. Nor do I criticize most environmentalists.
My wife and children are environmentalists. The President is an
environmentalist. Republicans and Democrats are
environmentalists. Jane Fonda and the National Association of
Manufacturers, Magic Johnson and Danny DeVito, Candice Bergen and
The Golden Girls, Bugs Bunny and the cast of Cheers are all
environmentalists.
3
Increasingly, we are all environmentalists. And in many
respects, that is an important advance. In the main,
environmentalism is benign and well-intended. Indeed, it would
be irrational and ultimately self-defeating not to promote the
efficient use of resources; to address legitimate needs for clean
air, clean water, and a healthy biosphere; and to respect
reasonably balanced aesthetic interests in natural preservation.
There is a problem, however, in the very success of
legitimate environmentalism. Because so many people are
self-proclaimed "environmentalists," the label is no longer a
meaningful defining characteristic. It is a green mask under
which different faces of politico-economic ideology can hide.
And now that East-West conflict is in decline, the green mask is
one under which competing ideologies will continue their global
struggle.
From this perspective, one might identify two
distinguishable faces of environmentalism: pro-growth,
market-oriented, and pluralistic environmentalism, on the one
hand -- a face consistent with the American Romance; and, on the
other hand, anti-growth, command-and-control, centralistic
environmentalism. The environment can and should be protected
within a pluralistic, market-and-growth-oriented framework. But
environmental interests should not be used as a false pretext for
abandoning that framework. It would be a regrettable irony if
just as the values of the American Romance were to triumph in the
East-West struggle, they were to be lost in what some
environmentalists like to term the struggle for "global
management."
Fortunately, this latter threat may well prove transitory.
The practical and moral underpinnings of the more radical green
"global management" regimes are unlikely to withstand unmasking:
The "global" management perspective will prove at once too
large and too small -- too large because free people will
not be managed by a globally centralized regime in which the
nation-state withers away; too small because pioneering
people will not long be limited to traditional earthly
bounds.
The absolutist approach to environmental values will prove
too rigid. Extremists will be met by demands for
trade-offs. In efforts to protect existing species, humans
will wish somehow to be counted along with turtles and owls
(however attractive the latter). And, in a world of limited
resources, proposed environmental investments for
incremental human health benefits will have to compete.
They will have to be justified in relation to the values of
economic growth, and also in relation to competing claims
for, say, health research, or maternal and child health
care, or auto safety, or drug and alcohol abuse prevention.
4
Further, in the end, the radical, anti-growth green
perspective will prove. too static. The needy of the world
will not be helped by, and-will not settle for, a neo-
Luddite attack on technological advance. More generally,
the human spirit -- by definition -- will not be limited to
an aspiration for "stasis." Americans did not fight and win
the wars of the 20th century to make the world safe for
green vegetables.
The Volcker Lecture Revisited
(or Managing Market-Oriented Pluralism)
There is, however, still a problem for those who would fight
for more than green vegetables and "global management. " For
those who favor market-oriented growth, technological advance,
pluralistic tolerance, and expanding opportunity -- along with
responsible environmentalism -- the problem is this: the
management of market-oriented pluralism is often too subtle and
complex to capture the public imagination. It is often at a
disadvantage in a simplistic competition among romantic images.
Consider, for example, the subject of last year's Gordon
Lecture. Paul Volcker was right to focus attention on the "G-5"
(Group of Five) and the "G-7" (Group of Seven). These informal
institutional arrangements are fundamental to the global
management of market-oriented pluralism. Building on the 1986
Tokyo Summit communique, they have a major role to play in
setting targets and in advancing economic growth, development,
and the quality of life. Their importance has increased with the
rise of interdependence and the decline of likely superpower
military conflict. They are an essential complement to, and link
between, multilateral economic institutions and independent
nation-states. Their reach is far beyond international monetary
policy -- to virtually all elements of economic policy. And
through their connection with the Summit of Industrialized
Nations, their reach extends to virtually all of the major
international politico-economic issues.
They are, essentially, an executive committee in the
international management system for market-oriented democracies.
Yet, they are largely unknown.
They are unknown partly because they have chosen to avoid
the spotlight and partly because much of their work is technical
(even arcane). But even if they wished to be more visible, they
would have an inherent disadvantage in the intense competition
for media attention. Because they are not dirigiste, they cannot
command dramatic leaps forward. Like market-oriented systems
generally, they must inspire more by actual performance than by
rhetorical promise. In the end, their power to reshape the world
for the better depends on their capacity to deliver, and the
power of positive example.
5
The Importance of Being Firstest
(or Building the "City on a Hill")
Within this framework, the same rule applies to the United
States. America's power to shape the world for the better
depends on its continuing capacity to deliver, and the
inspirational quality of its example. This is one reason (among
the many) that America must remain "Number One" -- in both
perception and reality.
In a world where symbols compete for popular appeal, America
is itself a symbol. Its status and visibility -- its capacity to
stir the imagination and deliver on its special promise -- have
much to do with the relative appeal of market-oriented pluralism.
The power of the American example is, thus, fundamental to the
pace of human progress and the ultimate quality of human life.
From its very founding, America has served as a beacon of
hope, the proverbial "city on a hill. " Millions of immigrants
have risked and sacrificed -- voted with their feet -- to reach
this promised land. Millions and millions more have voted from
afar with their hearts.
And America has been worthy of the hope invested in her:
--
America has successfully assimilated more of the
world's richly diverse races, colors, creeds, and
heritages than any nation on earth.
--
The United States has grown -- almost miraculously --
from close to nothing at its post-colonial birth; to
the largest economy on earth in its first century; on
to dominant superpower status in its second century.
In the process, America has created unrivaled
opportunity for upward mobility, while providing a firm
humanitarian safety net for those who might be left
behind.
-- In spite of the conventional strains of growth, America
has preserved what is perhaps the greatest inheritance
of natural beauty on the planet.
-- And although insulated by two large oceans and
continental self-sufficiency, America has engaged
directly in the distant struggles for freedom, and the
building of international institutions to promote human
advancement and healthy development within all nations.
This is an extraordinary record. Nonetheless, there is,
among America-in-decline theorists, the sense that America's time
has somehow passed; that Japan is (or is about to be) the new
"Number One.' " Confidence in Japan's continuing rise toward the
top is, of course, neither universal nor firm. In the face of
Japan's recent market troubles, for example, Business Week's
cover suddenly reversed its line and asked, "Japan: Can It
Cope?" This overreaction to temporary setback was as misplaced
as the previous overreactions to Japan's consistent advance.
6
But putting reactive fears and forecasts aside, it may be
useful to pause for a few current facts. It is undeniable that
Japan's post-War performance has been dramatically impressive.
still, these points are at least noteworthy as a matter of
perspective:
-- The U.S. economy is still the largest, by far. It is
more than double the size of Japan's. And although the
U.S. economy is more mature than some rapidly-growing
countries, the U.S. share of total world production has
been rising (slightly), not falling.
-- Although Japan's productivity growth rate has been
higher than America's, U.S. productivity still leads
the world, and is roughly a third higher than Japan's.
-- Although Japan and Germany are close, the U.S. is the
largest exporter of high technology products, and the
largest exporter overall.
-- The Japanese advantage in real long-term interest rates
has recently been eliminated.
-- And after adjusting for relative purchasing power,
American income per capita is number one, more than a
third higher than Japan's.
The fact that Japan has been gaining, however, seems to have
shaken America's self-confidence. To the extent that this
stimulates a constructive competitive response -- and necessary
domestic reinvigoration -- it can be useful. But self-confidence
is fundamental to the American identity, just as a sense of
special destiny is fundamental to America's self-concept. For
America especially, if self-confidence is lost as primacy seems
threatened, the loss could be a self-fulfilling cause of decline.
So, given the importance of American primacy -- the real and
symbolic power of the American example -- the question of
practical, ideological, even spiritual, interest is: How can we
keep America Number One?
III. RENEWING THE AMERICAN SPIRIT
BEYOND ALICE'S RESTAURANT
(or Budgeting for a Superpower)
Conventional wisdom suggests one place to start: reducing
the U.S. fiscal deficit. There are both moral and practical
reasons to attend to this:
-- As a moral matter, the burden of debt being left to
future generations is too high. Future generations are not
here to represent themselves. And while the build-up of
debt might be justified if it were financing investment in
future growth and benefits, it is in fact being used for
excessive current consumption.
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-- As a practical matter, reducing the deficit is probably
necessary to get interest rates satisfactorily down (in the
context of continuing growth). And deficit-reduction is
clearly desirable to reduce the risk of rates moving in the
wrong direction. This is so partly because it is a view
held by a strong faction within the Federal Reserve. It may
also be true for market reasons. Japanese capital available
for investment here may be contracting somewhat. European
capital is looking more Eastward and inward. U.S. borrowing
for the S&L mess is temporarily soaring. And there is, at
some point, a limit to how much debt our capital markets can
absorb on reasonable terms.
-- Further, as a political matter, deficit reduction may
be necessary to allow the governmental system to get beyond
its current stalemate, on to the host of policy reforms that
are necessary for America's future.
For all these reasons, the conventional wisdom is correct:
deficit reduction should be a high priority.
But that said, there is one bit of related conventional
wisdom that needs to be put in better perspective: the notion
that raising taxes would solve the deficit problem. This is much
too simplistic a presumption to be useful. The problem with
Federal budgeting extends far beyond the issue of revenue. Any
serious approach to the problem must address at least six
additional issues:
(1) The budget process must be reformed; and its fail-safe
discipline must be strengthened. The current system simply
cannot effectively control spending. Without reform, there
can be no assurance that increased revenue would actually
reduce the deficit. Indeed, in the current system, the
likelihood is that it would not.
(2) The rate of growth in automatic spending programs must
be slowed. Entitlements and other "uncontrollable"
expenditures are taking over the Federal budget. They have
grown from less than 25 percent in President Kennedy's day
to about 50 percent now. When combined with interest
expenditures, they threaten to consume almost two-thirds of
the budget -- leaving less and less room for discretionary
initiative. This trend cannot be sustained. Reform of both
major and minor "mandatory" programs is essential.
(3) The pattern of federal expenditures must shift away
from current consumption, toward investment in the future.
This is related to the previous point. The growth of
transfer payments must not be allowed to drive out necessary
investment in infrastructure, research, and development.
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(4) The growth of "hidden liabilities" -- now approaching
6 trillion dollars -- must be slowed and capped. The
current budgeting system hardly gets at these at all.
Credit subsidies are not properly accounted for.
Risk-sharing is minimized. Exposure to loans, guarantees,
potential insurance claims, and implicit obligations is
largely unattended to. And the next round of avoidable
S&L-like surprises is simply left to show when it will.
(5) To the extent that new revenues are to be generated,
they must not hamper healthy economic growth; indeed, they
should be designed to encourage it. That means, for
example, an emphasis on incentives for growth-oriented
investment, and on user fees rather than increases in income
taxes.
(6) Finally, the Federal accounting system must be reformed
to improve financial control and to encourage greater
attention to the future. The current system is essentially
a primitive cash budgeting system -- without satisfactory
controls or audits; without accruals; without balance
sheets; without a clear picture of assets, liabilities,
returns on investment, or risks. It is arguably worse than
the old city of New York's when New York went bankrupt. We
have started to fix it. But basically, it is still the type
of system one might associate with a 20-person restaurant,
not with a superpower.
The Federal budget in fact is (itself) larger than the
economies of all countries except the United States, Japan and
the Soviet Union. Yet one would sense that something is
seriously amiss if one were to hear me as I walk down the old
hall toward my office in the morning. Knowing what I know, I
can't help whistling the Arlo Guthrie song from just west of here
(Stockbridge), in the '60s: "You can get anything you want, at
Alice's Restaurant." This really should not be what comes to an
OMB Director's mind as he walks to work.
When bipartisan negotiations on large-scale deficit
reduction commence -- as necessarily they will -- one of my
personal objectives will be to erase the image of the Federal
budget as Alice's Restaurant!
That will require serious action on all six of the issues to
which I have just alluded. The political system has fooled
around for just about long enough. It's time to get beyond
conventional posturing and conventional wisdom about the deficit
-- time to get down to serious work.
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Beyond the Risk-o-phobic Society
(or Ending the Fear of Flying)
That said, let's suppose for a minute that the deficit
problem were soon responsibly addressed. Would that suffice to
assure the extension of the American Romance for yet another
American Century? Clearly not. Deficit reduction in and of
itself -- even if it is done right -- is hardly a romantic
inspiration.
There are, of course, additional issues on our economic
agenda. Internationally, the U.S. can and should: open markets
through the GATT and through bilateral negotiations; strengthen
economic development through the IMF and the World Bank; assist
emerging democracies in the process of transition; and help
coordinate all this through the Groups of Five and Seven. Yet,
though this is the stuff that one day may fulfill dreams, it is
not -- in itself -- what dreams are made of.
If we are to continue to lead the world toward achievement
of its full potential, its higher mission, we must renew our own
self-confidence and our pioneering spirit. Given the
inspirational importance of the American Example, we must somehow
do more to restore the American Romantic Spirit -- at home.
Prudent risk-taking has been central to the American
Romance. America was founded by risk-takers, expanded by risk-
takers and led to the highest standard of living on earth by
risk-takers. Now, we must renew the risk-taking capacities that
historically have expanded so many frontiers. In the U.S.'s
third century, we must counter the tendency to become a risk-o-
phobic society.
There is a near-limitless amount of pioneering work to be
done -- on technological frontiers, physical frontiers, political
frontiers, and social frontiers. But we must move the pioneering
spirit toward the 21st century.
-- In public policy-making generally, there must be more
scientific and mathematical literacy, less "innumeracy."
This would help dispel the misguided notion that we can or
should eliminate all risks -- or that human welfare would be
greater if we tried. The challenge, of course, is to manage
risk more rationally, and to select the appropriate risks.
-- In regulatory policy and the burgeoning range of
publicly-subsidized insurance policies, we must give greater
attention to the relationship among risks, costs, and
rewards. (This sounds like an old Kennedy School ad!) If
we were to regulate houses with the same principles we now
apply to our food and air, for example, we would all have to
live in single-story homes -- for fear of falling down
stairs.
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And while we undoubtedly need insurance programs, do we
really need to design them to produce the likes of the S&L
fiasco -- or even, say, the Federal crop insurance program:
where we subsidize the premiums, then guarantee the
insurance companies against losses, and then pay both the
insured and uninsured when disaster strikes? Somehow we
must get our basic thinking about risk straight.
-- In social policy, we must allow ourselves -- encourage
ourselves -- to be more innovative. Consider, for example,
our approach to aging. The fear of medical adversity (and
the support of a strong economy) have led the U.S. to the
forefront of medical research. One reward is increasing
lifespan. But as we continue this healthy advance, we will
have to be more inventive in structuring ways for the rising
population of older Americans to continue to work and
contribute. To date, we've spent far more creative energy
on preventing the downside of aging than on benefitting from
the upside.
-- or consider the other end of the life cycle: America's
pre-college education system is an embarrassment. We have
rightly committed to improve our standing internationally.
But to meet our new goals, there will have to be a degree of
innovation that approaches both technological revolution and
cultural revolution in the American system of education.
That cannot be achieved without a greater willingness to
take risks.
-- In R&D generally, we must be willing to invest more for
the future. Our basic research remains the strongest in the
world. But in applied civilian R&D, both the public and
private sectors have shown a tendency to underinvest. This
must be countered -- with stronger tax incentives for
private applications, and direct public investment in
generic applications.
-- The recently-launched Hubble telescope might serve as a
metaphor for a renewed spirit of basic exploration. But
important for the understanding of the cosmos though it be,
it is inadequate. A far better inspiration will be the
manned missions to Mars and beyond -- to which President
Bush committed America on the 20th anniversary of man's
reaching the moon. These missions will involve more applied
research. More imporantly, they will symbolize directly
what is at the heart of the American Romance: Man is meant
to pioneer, to explore, to expand, to advance, to reach and
exceed new frontiers.
In this land of the Wright brothers and The Right Stuff, we
must get beyond the policy equivalent of the fear of flying.
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Toilers on the Shining Sea
(or Advancing Realistic Romanticism)
Returning to Ryder's images: we don't have to look over our
shoulder at an imaginary rider gaining on us in the race. And we
should not be distracted by the allure of siren songs; there is
serious navigation to be done.
At its best, American Romanticism is a realistic romanticism
(if you'll pardon what may seem a contradiction in terms). One
might think of it as more like one of the often-copied Ryder
marines. The most famous of these, perhaps, is "Toilers of the
Sea." In it, the sea is dark. The boat is less than secure.
But the moon is a bright and shining light. And with it as a
guide, one senses, the toilers will reach the distant horizon.
The distant horizon is where the American Romance is meant
to take us. A budget may make some difference, like the state of
provisions in a boat. But of larger interest must be: the light
that serves as a guide, the Romantic dream, and the spirit that
moves us to advance.
We will get the deficit down. But as we do, we must not
lose sight of the larger picture. We must -- with confidence --
continue to foster the policies of growth, the risk-taking of
pioneers in all walks of life, and the Romantic Spirit that has
given the world the better American Example.
Thank you very much.
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