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The Home Front

K Street tries to exploit September 11

Prior to September 11 the White House and Congress were gearing up for an intensely partisan battle over the federal budget. The available surplus was suddenly gone, and with popular--and needed--spending on education and defense in jeopardy, each party blamed the other. According to the White House and some congressional Republicans, the fault was Democrats' unseemly attachment to the Social Security lockbox, an accounting fiction that masked the fact that we were still running massive surpluses within Social Security, surpluses that could be tapped to pay for defense and other spending. The Democrats, meanwhile, said there would have been plenty of money to pay for education and defense without endangering Social Security were it not for the irresponsible, long-term tax cut passed by the Bush administration in June.

Since September 11 the Democrats stopped making the latter case. And for good reason. In the immediate aftermath of the worst attack on American citizens in history, Bush's critics decided, rightly, not to inflict political harm on the president. And so almost no prominent Democrats made the rather obvious point that the commitment to slash government revenues by ever-deeper levels over the next decade while waging a war of unknown cost and duration might not be a terribly bright idea.

By contrast, Americans have heard a great deal of the Republicans' anti-lockbox, pro-tax-cut argument in the wake of the attacks. And since this argument has been repeated without opposition, it has come to sound less and less controversial, and has settled into the conventional wisdom. As a result the political momentum in Washington is not to roll back Bush's tax cut but, incredibly, to expand it. 

Conservatives incorporated the terrorist attacks into their economic arguments almost instantly. "Phony lockboxes must be thrown out the window," wrote Lawrence Kudlow, National Review's economics editor and an occasional GOP adviser, within hours of the assault. "Substantial tax cuts on individuals, business, capital investment and equipment depreciation should be immediately put into place." George Will waited only slightly longer."Just at the moment when American political debate had reached a nadir of frivolousness, with wrangling about nonexistent `lockboxes' and the like," he wrote in a September 12 column, "the nation's decade-long holiday from history came to a shattering end." For good measure, he declared two days later that the attack "should banish the recent sterility of political argument, the sheer littleness of budget-surplus fetish." A few days later, even The Washington Post included the lockbox on a list of "media obsessions that no longer seem very important," along with such stories as "Al Gore's beard" and "The Redskins quarterback controversy." Paying down the national debt is now widely understood as a silly, prewar indulgence that the country can no longer afford.

That understanding gets our recent fiscal history almost exactly backwards. One of the main reasons for setting aside future surpluses to pay down the national debt, after all, was to allow for an unforeseen disaster. Indeed, it was critics of Bush's budget who warned that it made no provision for, among other things, the possibility of a war. Bush's budget "would leave no funds available for subsequent Congresses to use to address needs that cannot be foreseen but inevitably will arise," warned the Center on Budget and Policy Priorities, a liberal research group, last January. "Such needs could be military, international, or domestic." It was the White House and its congressional allies, by contrast, who pooh-poohed such warnings, promising that there would always be more than enough money to cover all our needs. "My budget will fund our priorities, from education to defense to protecting Social Security and Medicare," declared Bush in his February economic address. "And when we have done all that, we will still have some money left over." In short, the nation's silly prewar indulgence was not the restraint and prudence of the Social Security lockbox, but the live-for-today, you-can-have-it-all ethos of Bushonomics.

It's true, of course, that we have to break into the lockboxes this year--both parties had implicitly conceded as much even before the terrorist attacks. The important debate, however, isn't over what to do this year. It's over what to do in the coming decade--and that question revolves around the Bush tax cut. Most people think of the Bush tax cut as the rebate they received in the mail. But the rebates represent less than 2 percent of the total revenue loss. The real Bush tax cut is a long-term ratcheting down of rates that will phase in slowly and will accrue almost entirely to the well-to-do.

Before September 11 conservatives said the Social Security surplus must be raided so the government could use the money to stave off a recession. Since September 11 they have said the surplus must be raided so America can prosecute a war. "The `lockboxes' that vitiated Bush's earlier promises to restore American military strength," exult Gary Schmitt and Tom Donnelly in The Weekly Standard, "are yesterday's news." But the idea that the Social Security and Medicare lockboxes, not Bush's tax cut, ever constituted the primary obstacles to more defense spending is absurd. The lockboxes existed before Bush took office and he--along with almost every politician in either party--promised not to touch the Social Security surplus from the beginning.

Within the universally accepted constraints of the Social Security lockbox, then, a fixed sum of money was available for tax cuts, defense, and other domestic spending. Bush's insistence on the largest possible tax cut meant there was less money available for everything else--including defense.Indeed, even though Bush made rebuilding the military a major campaign speech, he proposed to allocate less to defense than did Al Gore. Upon taking office, Bush poured all his political capital into the tax cut and then gave defense only what was left over.

But even if the lockboxes had not predated the tax cut, and even if Republicans and Democrats alike had not sworn fealty to them, fingering them--as opposed to the tax cut--as the primary factor limiting military spending would be disingenuous. This is because paying down the debt is not like giving a tax cut or spending on a domestic program. It's true that in the short term, devoting more resources to any of these objectives reduces the available resources for all the others. But paying down the national debt is different from tax cuts or spending programs in that it doesn't constrain how much you can spend; it only constrains when you can spend it. A smaller national debt means less of the budget has to go to interest payments and more can go to other things. (Indeed, the reason we have as much flexibility as we do to build up the military and stimulate the economy is that Bill Clinton insisted on saving the surplus rather than giving in to the tax-cutting urges of congressional Republicans.) In the long run paying down the debt has no effect on how much you can spend on defense. The only real constraints are how much you tax and how much you spend on other things. 

So does that mean the Bush tax cut will deprive the military of funds it needs to fight the war on terrorism? Not exactly. We could fight the war and still implement the tax cut if we were willing to starve domestic programs--or run deficits, like we did to finance World War II. It just wouldn't be a very smart thing to do with the baby-boomers' retirement looming. Alternatively, we could fight the war and still set aside the Social Security and Medicare surpluses if we scaled back the tax cut. Since fighting the war against terrorism is obviously the highest priority, the policy variables are basically the same ones as before: tax cuts versus new spending versus debt reduction. The only substantive difference is that there's less of everything to go around.

The political difference is more important. Conservatives are imploring Bush to use September 11 to cast his budgetary ideas in the warm glow of patriotism. A Robert Novak column this week lamented that Bush failed to use his war address to Congress to advocate tax cutting. (Apparently the speech could have been made more Churchillian by adding a ringing call for capital gains tax cuts.) A recent Wall Street Journal editorial made this argument even more explicitly. Bush's wartime popularity "gives him an historic opportunity to assert his leadership, not just on security and foreign policy but across the board," it urged, "the phony `trust fund' constraints on fiscal policy have fallen with the Trade Center towers, opening as much as $150 billion a year in surplus for pro-growth tax cuts." This logic bears a moment's scrutiny: If, as the Journal hopes, the agreement to save the Social Security and Medicare trust funds is permanently discarded as a result of September 11, it will only be because the public thinks it needs to spend that money on defense. But the Journal editors don't want to spend it on defense. They want to use it for tax cuts. The war is merely an "opportunity"--their word--to pull a bait-and-switch.

Anti-tax lobbyists sought to capitalize on that opportunity without delay. In the immediate wake of the bombing, Ways and Means Committee Chairman Bill Thomas tried to push through a melange of tax breaks for corporations and investors. While the ostensible rationale was to stave off a recession, most of the tax cuts are K Street golden oldies that long predate the current downturn and would do little to stimulate the economy. Thomas hoped to rush the package through as an emergency response, but he was thwarted when even Alan Greenspan--no enemy of aggressive tax cutting--urged caution. (Indeed, the economy is already suffering from a rise in long-term interest rates caused by the bond market's fear that Washington may abandon all fiscal restraint.) But the Republicans will have the opportunity to again take up tax cuts soon enough. 

There is something deeply unpatriotic about K Street's rush to turn the tragedy into quick profit. The temptation will be for Democrats to respond in kind, by accusing Bush of jeopardizing our national defense for the sake of tax cuts. They must not. The better response is to separate domestic politics from foreign policy. Democrats should maintain their unity behind the war on terrorism and give Bush all the funding for it he needs. At the same time, they have every right to press their own set of domestic priorities. That means canceling the as yet unimplemented parts of the Bush tax cut and devoting more resources to debt reduction and popular domestic spending. The public has supported these priorities all along. Before September 11 Bush evaded a debate about fiscal priorities by fooling the country into thinking it could have everything at once. This time his allies want to escape it by using the war as a diversion. Democrats shouldn't let them get away with it.

This article originally ran in the October 8, 2001, issue of the magazine.