[Congressional Record (Bound Edition), Volume 148 (2002), Part 11]
[Extensions of Remarks]
[Pages 14836-14837]
[From the U.S. Government Publishing Office, www.gpo.gov]




              EXPRESSING CONCERNS ABOUT THE FEDERAL BUDGET

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                          HON. NORMAN D. DICKS

                             of washington

                    in the house of representatives

                        Wednesday, July 24, 2002

  Mr. DICKS. Speaker, since the passage of the President's tax cut bill 
last year, I have been very concerned about the effects such a massive 
decrease in federal revenues could have on our ability to meet the 
other critical needs of the United States--Social Security, Medicare, 
education and national security among them. In Monday's New York Times, 
Janet Yellen, a professor of economics and business at the University 
of California at Berkeley, wrote this interesting analysis of the tax 
cut and its long term effects on the national economy. I would like to 
submit this article for the Record for consideration by my colleagues.


[[Page 14837]]

                [From the New York Times, July 22, 2002]

               The Binge Mentality in the Federal Budget

                           (By Janet Yellen)

       Berkeley, Calif.--We read in the news of the plight of 
     older Americans as their nest eggs, invested in the stock 
     market, have dwindled. Some can no longer afford to retire as 
     planned; others are going back to work.
       The stock market binge of the late 1990's, with its dreams 
     of double-digit gains as far as the eye could see, was based 
     on illusion, not reality. Now we know it. Irrational 
     exuberance fed the bubble. Accounting tricks that inflated 
     reported corporate earnings reinforced investor optimism. 
     Insiders reaped huge gains; investors and employees saw their 
     savings tank.
       Another equally pernicious set of illusions--created by the 
     same binge mentality--surrounds the federal budget, but has 
     so far received less public notice because the negative 
     effects have not yet surfaced. The budget binge is supported 
     by the same kinds of unrealistic projections of future 
     revenues, low-balling of spending and obfuscatory accounting 
     that are now the focus of the Wall Street scandals. But the 
     impact in this arena could prove even more enduring than the 
     current problems on Wall Street. Those counting on Social 
     Security for their retirement, along with future taxpayers, 
     in due course will be left high and dry.
       The perpetrators of the budget binge--President Bush and 
     Congress--are sacrificing the public's long-term welfare for 
     their own short-term political gains. In the case of Enron, 
     the company's long-run stability was sacrificed for inflated 
     stock prices in the short run. In the case of the federal 
     budget, the health of Social Security and other programs is 
     being sacrificed for unaffordable tax cuts. The motivation is 
     the same: the decision makers don't believe they should be 
     accountable for the long-run problems. Kenneth Lay walked 
     away from Enron with millions. And the president and most 
     lawmakers in Congress will be gone from office before the 
     effects of the budget policies are fully felt.
       Americans are told that we can have it all: more defense 
     and more education; more homeland security and more 
     agricultural subsidies; and a Medicare prescription drug 
     benefit, in addition to last year's multi-trillion dollar tax 
     cut. On top of all this, we're told that it's possible to fix 
     Social Security--which is expected to exhaust its trust fund 
     in 2041 if no action is taken.
       These promises, of course, did not add up even in official 
     budget projections, which unrealistically assumed no growth 
     at all in inflation-adjusted discretionary spending, no 
     relief for the 33 million taxpayers who, in the absence of a 
     remedy, will unexpectedly face an alternative minimum tax, 
     and the expiration without renewal of popular business tax 
     incentives like the research tax credit. None of this could 
     be sustained in reality. But the problem is even worse than 
     merely having too little in federal revenues to do what 
     politicians promised voters. The deeper problem is that the 
     wayward budget takes off the table the resources that are 
     needed to reform Social Security if we are to avoid 
     politically unacceptable benefit cuts.
       In his campaign, George W. Bush promised that Social 
     Security could be repaired painlessly, by allowing younger 
     workers to divert a portion of their Social Security payroll 
     tax into individual accounts. Since the stock market has 
     historically offered higher returns than government bonds and 
     substantially higher returns than Social Security, he 
     suggested that such new-found investment freedom would repair 
     the finances of the retirement system. With the fall in the 
     stock market we now see that a secure, defined-benefit 
     pension has its merits after all. Imagine the political 
     pressures for bailouts in the face of the current stock 
     market decline if Social Security included individual 
     accounts!
       Even absent the failing stock market, privatization of 
     Social Security has a fatal flaw: it can only be achieved at 
     huge budgetary cost. Under the current system, the younger 
     generation's payroll taxes pay the older generation's 
     benefits. If Social Security is privatized, so that the 
     younger generation diverts part of its taxes into individual 
     accounts, then the government must finance, at enormous cost, 
     the retirement of the older generation. It's like a family 
     that hands down its clothes from one brother to the next: if 
     somewhere along the way a brother gets to keep his clothes, 
     the family has to head to the mall.
       The price tag for the missing generation of clothes was 
     disclosed in December, but without the emphasis it deserved, 
     in the report of the President's Commission to Strengthen 
     Social Security. This commission was supposed to devise a 
     scheme of individual accounts without jeopardizing the 
     benefits of current or near-term retirees. Two plans proposed 
     by the commission would eliminate the long-term deficit in 
     Social Security. Both plans entail large benefit reductions 
     for future retirees while still requiring substantial 
     infusions of cash into the Social Security system.
       This is the bottom line: there is no silver bullet to fix 
     Social Security. Any realistic plan is likely to require a 
     lot of cash to make it politically viable. Yet Mr. Bush 
     allocates trillions of dollars to permanent tax cuts, mainly 
     for the rich, and not a single additional dime to Social 
     Security. Forgoing parts of the president's tax cut that will 
     take effect over the next decade could provide the funds 
     necessary to address the Social Security gap.
       We can't afford this budget binge of irresponsible tax 
     policies based on unrealistic accounting. Earnings 
     projections that sounded far too good to be true on Wall 
     Street have turned out to be illusions, even though the 
     public desperately wanted to believe in those numbers. The 
     same is true with bad numbers in the federal budget--the 
     principles of arithmetic can't be denied. If the tax cuts are 
     left in place, high-income individuals, including 
     billionaires exempted from estate taxes, stand to gain while 
     future retirees and taxpayers will lose.
       President Bush has called for honest accounting in 
     corporate America. The administration could set an example 
     with an honest budget that ensures that retirees will have 
     the nest egg they depend on most, their Social Security 
     benefits. And to make that a reality, Congress should repeal 
     the tax cuts that have not yet been phased in.

     

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