By Mortimer B. Zuckerman editor-in-chief

Don't blow the surplus

'None of us," said David Stockman, "really understands what's going on with all these numbers." That comment about the federal budget was made in 1981, when Stockman was President Reagan's budget director. Today's numbers are far bigger, but this time they are happy numbers of budget surplus, not budget deficit. Still, the same lack of understanding about the budget is evident today as we head into the crucial weeks of the campaign with big budget numbers and big political promises. If we get it wrong again, we could head back to those awful years–decades of apparently insuperable deficits, slow growth, and recurrent recessions.

All of us could relate to the numbers better if we could knock off a few zeros from the trillions being discussed. Most American families with a lot of debt would know what to do with a windfall. They'd instinctively feel better if they used the money to redeem loans, freeing themselves from long-term obligations and insecurity, and I suggest the same principle should apply to the country, which is in exactly the same position. The family members would try not to deceive themselves, because that way lies disaster. So first they'd work out the size of the windfall. Our candidates have a different approach. They are using a 10-year forecast of the surplus, which makes it look as though so much money is available that we can have it all–tax cuts, enhanced spending programs, lower debt.

Don't believe it.

Some $2.3 trillion of the 10-year estimated surplus of nearly $4.6 trillion will be accumulated in the Social Security trust fund. We must keep it there to meet our pension obligations, because even $2.3 trillion is not enough to pay future beneficiaries at currently promised rates.

Illusions. Most of the other $2 trillion is a mirage. The surplus forecasts assume that nonentitlement spending, including defense spending, won't exceed the rate of inflation. In effect, this assumes an unrealistic reduction, on a per capita basis, because it doesn't take into account population growth. And the notion that we are going to freeze other government programs is simply moonshine. Last year alone, congressional discretionary spending soared largely unnoticed because it was obscured by a gaggle of budgetary gimmicks. And the surplus forecast does not allow for increased entitlement spending, such as on prescription drug benefits and the elimination of the retirement tax on Social Security, all of which will add billions. To preserve Medicare alone, around $400 billion must be set aside.

So we have shed a lot of zeros. The actual surplus over the next decade will probably be around $700 billion–and this $700 billion is the figure that should frame the tax and spending programs of the candidates.

The centerpiece of George W. Bush's economic program is a huge tax cut that, in total, would come to about $1.7 trillion over the next decade. His plan to privatize about 16 percent of Social Security payments would take about $1 trillion of funding out of the pay-as-you-go retirement program over the same period.

The rhetoric is that the surplus belongs to the American taxpayers and should be returned to them before being used for federal spending. This rhetoric glosses over the fact that the federal debt also belongs to the taxpayers–as do future obligations to meet Social Security and Medicare obligations for the current work force.

The Bush tax cut seems to worry rather than excite most voters. They do not feel the need for the cut, and it's easy to see why. For most Americans, the federal tax burden is the lowest in more than two decades, while incomes have soared. The poorest 50 percent of households are paying just 4 percent in income taxes–half their 1985 share. Middle-income families have their lowest burden since 1966. The marginal rate for the highest earners has come down from 70 percent in 1980 to 39.6 percent today. In fact, the top 1 percent pay only about 22 percent of their income in taxes. Over 80 percent of Americans turn over less than 10 percent of their earnings in income taxes to the federal government. With taxes so low for so many Americans, it's no wonder they give tax cuts a low priority, behind government benefits that would put money in their pockets, for expenses such as prescription drugs and college loans. And those voters who are, on average, older and nearer retirement are even more concerned with preserving Social Security and Medicare. Furthermore, Americans are doing so well today, and expect to do so well in the future, that they don't feel the need for big tax cuts. Inflation and unemployment are low and incomes are rising. Advocates of tax cuts who cite President Reagan's approach seem to forget it was a different story when he came into office. Inflation stood at 13 percent, unemployment exceeded 7 percent, and output was stagnant, so tax cuts were seen as a way to stimulate the economy. That's why a Gallup Poll of 1979 found that 62 percent wanted tax cuts. But by August 1999, that number had dipped to 21 percent.

Unbalanced. The fiscal discipline once traditionally associated with Republicans seems to have vanished. They exhibit a marked reluctance to explain why they want to do things that would not only squander the surpluses but also disproportionally benefit those who have done so well over the past 20 years–the last group that needs a break. More than half of the benefits from Bush's tax cuts would go to the richest 10 percent. The top 1 percent would receive average annual relief of about $21,000, while the 60 percent with incomes below $38,000 would receive average benefits of only $99 a year. This was not a prescription for political success in 1996 or in 1998. It doesn't look like a winner today, either. A recent Los Angeles Times poll showed that, by a margin of 5 to 1, voters say the federal budget surplus should be used primarily to pay down the national debt and stabilize Social Security and Medicare.

There is another big problem. The tax reductions are, in many cases, backloaded–which means the biggest cuts do not kick in for years. In the second decade, they would cost an estimated $3 trillion–just at the time when the largest number of baby boomers will be tapping into the Social Security fund. And because of the fall in federal revenues, there won't be dollars available from general funds for Social Security and Medicare–a scenario for a rerun of the fiscal deficits whose eradication took us so many years and caused such pain.

So much for the accounting. The macroeconomics point in the same direction. To spend the surplus on tax cuts would stimulate more consumer spending in an economy already threatening to overheat, thus forcing the Federal Reserve to raise interest rates. Major tax cuts would mean looser fiscal policies and tighter monetary policies, which is bad for long-term growth. No wonder the chairman of the Federal Reserve, Alan Greenspan, has supported using the surplus to pay down the national debt. The benefits are manifest.

The interest bill facing government would be progressively lower as the national debt was repaid. The economy would grow faster because government would exit the financial markets, freeing up funds for private investment instead of absorbing private savings to pay for the fiscal deficit. Interest rates and mortgage rates would go down, putting more money in Americans' pockets and stimulating growth, and the added gross domestic product growth would make the promised Social Security benefits more affordable.

Paying down the debt, in short, is the best kind of tax cut and the only sensible one. It is a vital step in meeting our greatest challenge and seizing our greatest opportunity: sustaining for many years the much-admired high growth of the American economy. Growth is the only way to pay for the graying of our population. If we interrupt our present trajectory, the only way to meet our promises would be to increase taxes or reduce benefits. There is far too much happy talk about giveaways. Instead, we should concentrate on how to drive up the savings rate and the investments that have made our boom possible–and with it, the increases in productivity that have contained inflation in a period of full employment.

The numbers tell the story. We are borne along by an investment spending boom, especially on information technologies, which is about a half of all capital spending. Figures from the Commerce Department indicate that spending on equipment and on software, the latter now properly classified as investment spending, has increased from 6.1 percent of GDP at year-end 1991 to an astonishing 11.4 percent as of the end of 1999. This is the investment that has been driving the U.S. economy, especially in the past three years, when overall investment, including residential spending, has increased from 15.1 percent of GDP to 18.2 percent while the share of GDP accounted for by the other three components–consumption spending, government spending, and net exports–has fallen slightly.

This might be contrary to what we read in the press, which often asserts that the spurt of GDP growth has been caused by strong consumer demand. While demand has been strong, the real growth stimulator has been investment spending, not consumption. Now we have a unique opportunity to sustain this pattern of GDP growth and the fiscal dividend it has produced. Two of the architects of our prosperity–Greenspan and former Treasury Secretary Robert Rubin–are among those warning against frittering our surplus away. This is no time to change a policy that has transformed huge deficits into huge surpluses, enabled us to pay down the national debt, bring down the cost of capital, and fund our national investment program. Why risk the highest growth rate in GDP, the highest productivity rates, and the lowest inflation rate that we have seen in more than three decades? That's the 4 trillion-dollar question.