Trading Places on Budget Cuts

August 28, 1996

THE DAILY FED

Trading Places on Budget Cuts

THE DAILY FED

Trading Places on Budget Cuts

When Republican presidential nominee Robert Dole told interviewers last weekend that balancing the budget would be his No. 1 priority and cutting taxes would be No. 2, he added a new twist to an already topsy- turvy season of rhetoric on the economy.

The Republican National Convention in San Diego was a week- long celebration of proposals to spur economic growth through tax cuts. Dole, once the quintessential deficit hawk, offered a plan to cut taxes by 15 per cent and picked Jack F. Kemp, a patron saint of the party's supply-side wing, as his running mate. Spending reductions were not mentioned as prominently as tax cuts, and House Speaker Newt Gingrich and his budget-slashing troops received an even dimmer spotlight.

Meanwhile, President Clinton's efforts at deficit cutting-- through his 1993 budget plan and his eventual agreement to sign Republican legislation to balance the federal budget by 2002-- have led the Democratic Party far from its historic role as a supporter of activist government.

Increasingly, Democrats are wrapping themselves in the mantle of fiscal conservatism, from the Blue Dogs in the House to Gov. Evan Bayh of Indiana, the convention keynote speaker, who boasts that his state has a budget surplus and hasn't raised taxes in eight years.

Here in Chicago, Bayh and other speakers are trying to portray the Democrats as more fiscally trustworthy than the Republicans, whose ``huge tax cuts . . . make balancing the budget incredibly difficult,'' Democratic National Committee spokesman Andy Solomon said. ``We will not shy away from debate about which party is more fiscally responsible,'' he said.

Democratic Senatorial Campaign Committee spokeswoman Stephanie Cohen said she plans to use the convention as a forum to promote a number of fiscally moderate and socially liberal candidates who could attract moderate Republican voters.

Robert Greenstein, executive director of the liberal-leaning Center on Budget and Policy Priorities, said the situation recalls the early-1980s budget conflicts in which President Reagan and his supply-side allies fought congressional Democrats who warned of fiscal disaster. Still, Greenstein said, the 1996 campaign may be a watershed.

``I think what's changed here is that these ideas have spread from the supply-side wing of the Republican Party to the party as a whole,'' he said. ``The proposed tax cuts are now much broader. It's not just capital gains any more--now it's a rate cut and a $500-per-child tax credit. And it's now the official position of the Republican Party as a whole.''

As for the Democrats, Greenstein said, ``the congressional defeats in 1994 were so traumatic for the Democratic Party that it made a fundamental shift in certain areas, and this is one of them. In 1981, and up through a couple years ago, the majority position was not to place emphasis on a balanced budget. Now, after last year's budget debate, we're at a point where if Clinton is reelected, any budget he submits will need to be balanced. And lots of people otherwise considered liberals in the House voted for the [Blue Dog] budget. I don't think that will disappear.''

Martha Phillips, executive director of the Concord Coalition, a bipartisan bastion of deficit hawks, acknowledged that the Republicans have promised to balance the budget ``the old- fashioned way,'' by cutting spending. But, she said, the GOP's proposed tax cut is so big that it may force bigger reductions than most Americans want. ``I see the Republicans being lured by the siren song of the supply-side message--that you can have your cake and eat it too,'' she said.

The going may be tough for Democrats who take up deficit hawkishness, though.

``The old Republican austerity is harder to sell,'' said Charles L. Schultze, an economic adviser to several Democratic Presidents who is now a Brookings Institution scholar. ``Look at George Bush. He joined the deficit hawks and signed the 1990 budget agreement. When he went up to face reelection, he disowned his earlier actions.''

And old Democratic habits die hard. ``On medicare, the Democrats ought to be chastised for demagoguing a very serious issue with scare tactics designed to win them the campaign,'' Phillips said. ``Clinton should be using his exemplary communication skills to ask voters to weigh the issues and consider. Instead, they're using it as a political whip to inflict as much damage to the Republicans as possible.''

Jeff Faux, president of the Democratic-leaning Economic Policy Institute, cautions party leaders about mimicking Republicans too much. ``If the only story out there is that taxes are too high, then Clinton's back on a slippery slope, because that's the Republican agenda,'' he said. ``If he's trapped like President Carter into retelling a Republican story with a kinder, gentler twist, then he's vulnerable.''