[Congressional Record Volume 143, Number 100 (Tuesday, July 15, 1997)]
[Senate]
[Pages S7434-S7436]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




           RETURN THE EMERGING BUDGET SURPLUS TO THE TAXPAYER

  Mr. ABRAHAM. Mr. President, I rise today to talk about the emerging 
budget surplus and what Congress should do about it. According to 
recent Congressional Budget Office and Office of Management and Budget 
estimates, the fiscal 1997 budget deficit could be smaller than $50 
billion. The reason: Robust economic growth continues to boost tax 
receipts beyond projections. As a result, the deficit is declining 
rapidly and the budget could be balanced by the year 2000 or earlier.
  Further, if the President signs a tax bill that includes a deep cut 
in the capital gains tax, a budget surplus could emerge next year. 
Economist Larry Kudlow predicts that cutting the top capital gains tax 
rate to 20 percent could produce a $90 billion revenue windfall next 
year, assuming only 15 percent of investors realize their stock market 
gains from 3 years ago.
  The question we face is this: Should future budget surpluses--if they 
materialize--be used to retire the national debt, increase Government 
spending, or further reduce taxes?
  Our colleague, Representative Mark Neumann of Wisconsin, has offered 
The National Debt Repayment Act which proposes to use budget surpluses 
primarily to retire the national debt. This legislation would earmark 
two-thirds of any surpluses to debt reduction and only one-third to tax 
reduction. The plan attempts to build budget surpluses in future years 
by limiting the growth of Government spending at 1 percentage point 
lower than the growth of tax revenues.
  Although well-intentioned, the bill contains several problems. First, 
it would have the practical effect of locking-in high tax rates on the 
American people. Under the plan, Congress would have to maintain a tax 
burden that is higher than is necessary to pay for current Government 
spending. In fact, as economist Bruce Bartlett points out, ``(the 
Neumann) plan actually implies a stiff tax increase. Revenues as a 
share of gross domestic product would rise from 19.9 percent next year 
to 20.8 percent in 2002,'' producing one of the highest tax burdens in 
U.S. history. Further, because the plan calls for revenue growth to 
outrace spending growth, Congress will have the perverse incentive to 
keep taxes high.
  Second, the bill does nothing to reduce the size of the Federal 
Government. It is designed to generate budget surpluses, but does 
nothing about the actual levels of either Government spending or 
revenues. As long as tax revenues are growing, Government spending can 
grow too.
  Third, the bill would preclude significant tax rate reductions and 
fundamental tax reforms in the future. In my view, any budget surplus 
would be far better spent by cutting taxes that are most burdensome and 
stifling to economic growth. Enacting pro-growth tax reforms and 
increasing the size of

[[Page S7435]]

the economy would make it easier to carry the debt burden.
  Fourth, in effect, the bill would keep taxes on Americans 
unnecessarily high primarily to retire debt held by foreign interests. 
According to the Treasury Department, foreign and international 
investors owned $1,199.1 billion of the total $3,451.7 billion in 
privately held public debt in 1997. In contrast, U.S. individuals owned 
only $355.4 billion. By my lights, we ought to use any budget surpluses 
to provide relief to American taxpayers before making advanced debt 
payments to foreign central bankers and other investors in China, Japan 
and Germany.
  Overall, the bill is based on misconceptions of the true economic 
impact of the debt. According to most economists, the figure that 
really counts is not the total debt per se, but rather debt's size 
relative to the overall economy. As the Wall Street Journal recently 
noted, the debt as a share of GDP ``was as high as 111 percent in 1946, 
after we'd run up a debt to defeat Hitler--a cause worth some debt.'' 
But because of the post-war economic boom--boosted in the 1960's by 
President John F. Kennedy's tax rate reductions--the debt fell back to 
24 percent of GDP in 1974. The Journal goes on to note that the debt 
``rose again with the great inflation and spendthrift Congresses of the 
past two decades, but it stabilized at 50 percent of GDP in 1995 and is 
projected to decline slowly . . .''
  Furthermore, the economic benefits of running budget surplus are not 
at all clear. It is worth nothing that Great Britain ran budget 
surpluses in 1988, 1989, and 1990 equivalent to 1.5 percent of GDP--
equivalent to a U.S. surplus of $100 billion--yet British interest 
rates increased.
  Mr. President, to ensure that we return higher-than-expected revenues 
to the taxpayer, I have introduced the Economic Growth Dividend 
Protection Act (S. 800). Under my bill, if tax revenues received by the 
Treasury in the next 5 years exceed those projected under the budget 
agreement, the revenues will be made available for tax cuts first. If 
the Congress fails to pass tax cuts, then the surplus is reserved for 
deficit reduction--not new Government spending.
  In summary, Mr. President, we should reduce the burden of the 
national debt. But setting in stone today a policy to run huge budget 
surpluses well into the next century is a recipe for higher taxes and 
slower economic growth. In my view, the best way to reduce the debt 
burden is to run a balanced Federal budget with firm controls on 
Government spending and to cut taxes that hinder economic growth. In 
the event that Congress does cut tax rates and overhaul the tax system, 
we could then decide to use any resulting tax revenue surplus to pay 
down the debt.
  I ask unanimous consent that several articles on this subject that 
appeared in the Wall Street Journal, Washington Post, and Washington 
Times be printed in the Record.
  There being no objection, the articles were ordered to be printed in 
the Record, as follows:

               [From the Washington Post, July 15, 1997]

                     Why Pay Off the National Debt?

                         (By James K. Glassman)

       A balanced federal budget is not even law, much less 
     reality, but already a Republican congressman is proposing 
     legislation to deal with the surpluses he thinks will follow.
       A surplus happens when the government raises more than it 
     spends. The last time was 1969, but we're getting closer. The 
     deficit for the fiscal year that ends on Sept. 30 will be 
     about $45 billion.
       What to do with the extra revenues flowing into Washington? 
     Rep. Mark Neumann (R-Wis.), in a plan that's been embraced by 
     Speaker Newt Gingrich and become the hot fiscal topic of the 
     summer in conservative circles, wants to use the money to pay 
     off the national debt.
       On its face, this sounds like a reasonable idea. It's 
     actually dangerous and distracting. First, it just won't 
     happen: If we start running surpluses, politicians will spend 
     them. That's not just a guess. Just look at this year's 
     budget. With pressure from a burgeoning deficit relaxed, 
     Congress and the White House devised a budget in May that 
     sharply increases the growth of spending.
       But let's pretend that Congress and the president can 
     muster the discipline to enforce the Neumann plan. If 
     spending grows at 4 percent (which is, indeed, the rate in 
     the new budget) and if revenues grow at 5 percent (they've 
     been rising at 7 percent since 1992), then the entire 
     national debt can be wiped out by the year 2026 if we use the 
     excess cash to pay off Treasury bonds.
       Isn't this an admirable goal? Not really. The federal debt, 
     which is the total of all the deficits we've piled up over 
     the years, isn't such a terrible thing--especially if it 
     remains at current levels. Right now it's about 50 percent of 
     our gross domestic product, but if we run balanced budgets 
     through 2026, it will fall to less than 25 percent of GDP--or 
     back to 1960's levels.
       The argument about the evil of the federal debt is based on 
     a fallacy, which is that it's a burden on future generations 
     of Americans. This is what Neumann himself, a former math 
     teacher and real estate developer, means when he says he 
     wants children to ``inherit a debt-free nation.''
       But this popular analysis misses half the equation. If we 
     simply balance budgets, then today's $5.4 trillion debt will 
     perpetually be on the Treasury's books. But that debt will be 
     balanced by $5.4 trillion in assets. Roughly four-fifths of 
     those assets--beautiful T-bonds--are held by Americans. Thus, 
     our children won't merely inherit debt, they'll inherit 
     bonds.
       Neumann gripes about the $300 billion or so in interest on 
     that debt. But this money, in fact, is one of the few benign 
     federal spending programs. Private bondholders who earn 
     interest are likely to invest that money more productively 
     than Washington does.
       And the interest earners aren't merely fat cats. A 1984 
     Treasury study concluded, ``We find no basis for the belief 
     that interest payments on the public debt lead to greater 
     inequality in the distribution of income.'' Remember, the top 
     10 percent of Americans pay 59 percent of all income taxes, 
     so, in a worst case, interest is being paid by the rich to 
     the rich.
       The point is that Americans, at the very same time, are 
     both borrowers and lenders, as Francis X. Cavanaugh, a former 
     Treasury Department official, explains in ``The Truth About 
     the National Debt.'' He also notes that Abraham Lincoln ``may 
     have been the only president to recognize both sides of the 
     ledger.''
       In 1864, Lincoln told Congress, ``The great advantage of 
     citizens being creditors as well as debtors, with relation to 
     the public debt, is obvious. Men can readily perceive that 
     they cannot be much oppressed by a debt which they owe to 
     themselves.''
       Lincoln was urging Congress to go into debt to pay military 
     expenses. Debt, in other words, is simply a way to get the 
     dollars to pay for what we want government to do. The other 
     way is taxes.
       Debt and taxes are simply matters of financing. The truly 
     important public policy question is: What should government 
     do? Fight a war against slavery and on behalf of union? 
     Certainly. Fund railroads, corporate welfare and collective 
     health care systems? I don't think so.
       But Congress keeps spending more and more. Total spending 
     will rise from $1.6 trillion in 1997 to $1.9 trillion in 
     2002--a rate well in excess of inflation.
       Milton Friedman once said that he would rather have a $1 
     trillion budget that is way out of balance than a $2 trillion 
     budget that is in balance. He's right. The true goal is to 
     reduce government spending. The aim of balancing the budget 
     (or running a surplus) is merely a tactic to secure the 
     prize: a smaller government that takes fewer resources and 
     limits fewer liberties.
       Alas, Neumann, like so many Republicans, has been blinded 
     by balanced-budget rhetoric and missed this true goal. Under 
     his plan, for example, an incredible $33 billion out of the 
     surplus would go to replenish the highway trust fund, which 
     would mean more spending on pork. At a meeting last week, 
     Gingrich argued for appeasing big-spending Republicans like 
     the notorious Transportation Chairman Bud Shuster since they 
     represent one leg of the GOP ``three-legged stool.''
       It's a stool that ought to be knocked over. Believers in 
     smaller government have a very simple job to do: Make it 
     smaller. When that happens, Americans will be able to keep 
     more of what they earn and the federal debt will simply 
     wither away.
                                                                    ____


               [From the Washington Times, July 2, 1997]

                    Misguided Strategy to Trim Debt

                          (By Bruce Bartlett)

       Last week, columnist Robert Novak reported that House 
     Speaker Newt Gingrich has ``enthusiastically embraced'' a 
     proposal by freshman GOP Rep. Mark Neumann of Wisconsin to 
     begin paying off the national debt. Upon hearing this news, 
     Jack Kemp quickly shot a memo off to Mr. Gingrich strongly 
     urging him not to endorse the Neumann plan, saying it would 
     impose unnecessary austerity on American taxpayers. Instead 
     of paying off the debt, we should cut taxes, Mr. Kemp said.
       The basis of the Neumann plan is that revenues probably 
     will rise faster than assumed in the budget agreement, 
     providing budget surpluses in future years. Based on past 
     experience, Mr. Neumann believes that revenues will rise 
     closer to 6 percent per year, rather than the 4 percent 
     growth assumed in the budget agreement. If spending is no 
     higher than projected by the agreement, this theoretically 
     would provide a budget surplus of almost $200 billion by 
     2002.
       Mr. Neumann believes that if a surplus emerges it should 
     largely be used to retire public debt. His legislation would 
     earmark two-thirds of any surpluses to debt reduction and 
     only one-third to tax reduction. Furthermore, Mr. Neumann 
     believes that by holding the growth of spending to 1 percent 
     less than the growth of revenues, the entire national

[[Page S7436]]

     debt can be paid off by 2026. This, he says, would save a 
     family of five $600 per month that they are now paying in 
     taxes for interest on the debt.
       In truth, Mr. Neumann's plan isn't so much a bad one as a 
     misguided one. The likelihood of budget surpluses emerging 
     under any revenue assumption is absurd. The money will all be 
     spent long before any surplus arises. Moreover, his notion 
     that Congress can simply pass a law that will hold spending 
     to less than the growth of revenue is extraordinarily naive. 
     We tried that with Gramm-Rudman, and the first time the 
     spending cap began to pinch, Congress promptly repealed it.
       Moreover, Mr. Neumann seems not to realize that his plan 
     actually implies a stiff tax increase. Revenues as a share of 
     gross domestic product would rise from 19.9 percent next year 
     to 20.8 percent in 2002, using his numbers and the 
     Congressional Budget Office's GDP forecast. Also, he made 
     a mathematical error in computing the cost of interest on 
     the debt. With net interest at $248 billion and a 
     population of 268 million, the actual cost of interest for 
     a family of five is $385 per month, not $600.
       But the major problem with Mr. Neumann's proposal is a 
     misconception about the burden of debt. Interest on the debt 
     is no more a ``burden'' than the interest homeowners pay on 
     their mortgages each month. To think otherwise is to believe 
     that everyone who owns a home would be better off selling it 
     and renting instead, just so they can be debt-free. The 
     reason people don't do this is because they believe they are 
     better off with the house and the debt.
       Of course, taxes are higher than they would be if there 
     were no debt. And if the debt could magically be extinguished 
     it would certainly be worth doing so. But maintaining a 
     higher tax burden than necessary to pay for current spending 
     just to reduce the debt is a terrible misuse of tax revenue. 
     The money would be far better spent eliminating the worst 
     federal taxes, those that are hindering growth and making it 
     harder to carry the debt.
       In 1848, John Stuart Mill attacked a proposal similar to 
     Mr. Neumann's in England. ``I conceive that the increase of 
     revenue should rather be disposed of by taking off taxes, 
     than by liquidating debt,'' Mill wrote. Cutting taxes removes 
     a real burden on people, reducing debt does not.
                                                                    ____


              [From the Wall Street Journal, July 2, 1997]

                          Invincible Ignorance

       Democrats who want to retake Congress have found the issue 
     they've been looking for: It's the plan now being offered by 
     Republican Mark Neumann of Wisconsin and supported by Speaker 
     Newt Gingrich to run federal budget surpluses. If Republicans 
     embrace this idea, Dick Gephardt will be Speaker in no time.
       Now that Republicans can at least claim to have balanced 
     the budget, if only in five years, they're looking for 
     something else to do. You might think tax reform or securing 
     pensions for the Baby Boomers would be in order. Mr. Neumann 
     wants to do nothing so tangible. Instead he wants Republicans 
     to stand for the abstraction of paying down the national debt 
     by the year 2026, even if it means taxing Americans at higher 
     rates than are needed to balance the federal books.
       Both the economics and politics of this proposal make it 
     nutty even by Beltway standards. Mr. Neumann is like many 
     businessmen-turned-politicians who hold the mercantilist view 
     that debt is the worst economic evil. Adam Smith pointed out 
     the folly of this 200 years ago when he observed that the 
     point of economics isn't to collect gold in a nation's vault; 
     it is to improve the living standards of everyone.
       Mr. Neumann would amass a modern-day gold hoard, which he 
     imagines would accumulate to pay Social Security for Baby 
     Boom retirees. This assumes politicians won't tap this 
     surplus in the meantime, despite 70 years of recent political 
     history. But even if the pols left the money alone, the 
     government would in essence merely be using that surplus to 
     buy back its own bonds. It wouldn't change Social Security's 
     actuarial problem one iota.
       When the Baby Boomers begin to retire in 2012, the 
     government would still be faced with a choice of raising 
     taxes, cutting Social Security benefits or reissuing bonds 
     (i.e., reborrowing). Social Security benefits will always 
     have to be paid out of payroll taxes at the time or with 
     future borrowing. The best way to ensure higher tax revenues 
     is to grow a bigger economy in the meantime, but Mr. Neumann 
     would maintain higher tax rates that would reduce the 
     economy's growth potential. Mr. Neumann's proposal assumes 
     the federal government can create more wealth than private 
     Americans.
       In any event, he misjudges the history and menace of debt. 
     Economists the economy, or GDP. This was as high as 111% in 
     1946, after we'd run up a debt to defeat Hitler--a cause 
     worth some debt. But it gradually fell back down again as 
     the economy expanded--to about 24% of GDP in 1974. It rose 
     again with the great inflation and spendthrift Congresses 
     of the past two decades, but it stabilized at 50% of GDP 
     in 1995 and is projected to decline slowly if Congress 
     shows any spending discipline.
       Of course, Mr. Neumann also frets with other pols about 
     having to pay $250 billion in interest each year on the 
     national debt. But interest payments are the least 
     destructive spending the federal government does. At least it 
     doesn't subsidize lawsuits, dubious art or liberal lobbies.
       The silver lining here, we suppose, is that this idea is so 
     politically dumb it would never really happen. Democrats 
     could campaign as balanced-budget liberals, proposing to 
     spend the new tax revenues on health care and children. In 
     response, Neumann Republicans would become the Debt 
     Retirement Party. This is the castor-oil path that has ruined 
     parties of the right in Europe and Canada. While Mr. Neumann 
     does propose to return one-third of any year's surplus in tax 
     relief, that message would be swamped by the two-thirds going 
     into the national vault.
       In sum, the Neumann plan would return Republicans to their 
     historic role as ``tax collector for the welfare state.'' 
     That's what Mr. Gingrich once called Bob Dole, but with his 
     support for Mr. Neumann (Budget Chairman John Kasich is also 
     a co-sponsor) he owes Mr. Dole an apology. The Neumann plan 
     puts Mr. Gingrich squarely in the Hoover-Ford-Bush austerity 
     tradition of the GOP. The last Republican we heard such a 
     proposal from was none other than George Bush's budget 
     director, Dick Darman.
       It's possible this New Darmanomics is a poll-driven 
     continuation of the GOP's balanced-budget myopia. But it may 
     also be a matter of simple ignorance. We can therefore hope 
     that economically literate Republcians--Majority Leader Dick 
     Armey, Senator Phil Gramm--will be able to educate their 
     colleagues. Short of that, we recommended to Mr. Neumann and 
     his allies Adam Smith's ``Wealth of Nations,'' or for a 
     shorter read, ``Hamilton's Blessing'' by John Steele Gordon. 
     They might learn something.

                           *   *   *   *   *


  I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. STEVENS. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________