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When government saves "more",
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from NewsLink, Vol. 3, No. 4, Summer 1999
Last year, Massachusetts ran a surplus of $848 million. This year, the surplus will be about $600 million, close to the average over the last six years. State and local officials point with joy and relief at capital projects spared the budgetary axe. Others glow with pride over the state's bond rating. But we'll say it again: government surpluses are not good news. Government surpluses are moneys collected from taxpayers as a result of revenue underestimates made at budget time. When those underestimates become routine and when government keeps the unplanned revenues, rather than returning them to taxpayers, the surplus is rightly seen as a way of funding projects that wouldn't pass muster if subject to normal budgetary scrutiny.
Now the federal government has caught up with the state governments in committing this budgetary legerdemain. Republicans and Democrats agree that the U.S. surplus will come to about $3 trillion over the next ten years. Both parties claim credit for whatever alchemy has turned low-tax Reagan-era deficits into high-tax Bush and Clinton-era surpluses.
A personal saving plunge
For evidence of the questionable basis of this euphoria, consider the nation's plummeting personal saving rate. With government at all levels running large and growing surpluses, U.S. personal saving has declined sharply in recent years and is now negative (running in June at an annual rate of about -$63 million) for the first time since 1933.
Could it be that when government saves more (runs surpluses), people save less? A comparison of two economic indicators proves revealing. The first is the personal saving rate, which is to say, the amount people save expressed as a percentage of their disposable income. The second is the government saving rate, measured as the combined federal, state and local surplus expressed as a percentage of gross domestic product.
The chart shows that the personal saving rate has been moving in a direction opposite that of the government saving rate. The association is too strong to be dismissed as unimportant or as mere coincidence.
There could be more than one reason for this phenomenon. A rising stock market could encourage consumption at the expense of personal saving. People might be letting their bulging stock portfolios do their saving for them.
Yet, a comparison of the Dow Jones Industrial average and the personal saving rate doesn't suggest this is happening. And the gains registered by the stock market could, as we know, prove illusory. Surely, there is something worrisome about a consumption-driven expansion predicated on indefinitely rising stock prices.
Suppose government had been running a balanced budget all along. Then one year, because of unanticipated revenue inflows, government ends up running a surplus.
According to what we might call the conventional wisdom, private saving (the sum of personal and business saving) will remain undiminished even as taxpayers pay more in taxes. National saving will rise by the amount of the government surplus. By running a surplus, government can retire some of its debt. The funds thus freed up will go to finance new business investment and home purchases.
This argument is fatally flawed, however. As we are seeing, taxpayers don't neccesarily go on saving even as government taxes take a bigger and bigger bite out of their personal and business incomes. They don't forgo more and more of their current consumption to finance government surpluses extracted from them in the name of “sacrifice.”
Taxpayers have already made a sacrifice by forgoing personal consumption in order to accumulate their saving accounts, 401(k) plans and stocks. The fact that government chooses to run a surplus doesn't, in and of itself, make the idea of making an additional sacrifice any more affordable or appealing.
Taxpayers who find unaffordable or unappealing the idea of forgoing more consumption have a convenient way out. They can reduce saving and use the money to finance current consumption. Indeed, it appears that that's exactly what they have done.
In this less-than-euphoric scenario, there will be no rise in national saving. For every dollar added to the surplus, there will be one dollar less in private saving. There will be one dollar less to finance business investment and home purchases. Personal saving (the component of private saving over which individual taxpayers have the greater control) will move in the opposite direction of the government surplus. Government will claim but not deserve credit for strengthening the economy and inducing taxpayers to sacrifice for future generations.
The myth of sacrifice
The conventional wisdom runs deep, however. Clinton Administration and Congressional Democrats argue against a Republican tax cut on the ground that it would “end the budget surpluses that support business investment and growth.” Business groups resist state tax cuts that would jeopardize state government bond ratings. Even conservative icon Alan Greenspan heralds public debt reduction “as an extraordinarily effective force for good in this economy.”
There is rich irony in the specter of Republicans finding themselves unable to win public sympathy for tax cuts in the face of Democratic warnings against fiscal imprudence. Republicans who traditionally hawk their prowess as budget balancers are being hoisted on a petard of their own making.
The trouble is that both parties are trying to outdo each other in offering a sacrifice that taxpayers are themselves manifestly unwilling to make. Yes, there is political appeal in slogans that warn against tax cuts as “dangerous” to the economy and burdensome to future generations. But the same voters who buy into such slogans are running up credit card debt in the face of punitively high taxes and on the promise of an ever-rising Dow. Sooner or later, reality will puncture the myth of sacrifice on which slogans of this kind rest, leaving their purveyors with a great deal of explaining to do.
The question isn't how much sacrifice to extract from taxpayers through government surpluses. The question is, “How high should taxes be, given (1) whatever benefits we are able to derive from the government expenditures that are financed by those taxes and (2) the damage that taxes inevitably do to individual incentives to work, save and invest?” Repeated large surpluses of the kind we have been experiencing provide the answer: “Not as high as they are now.”
Would cutting taxes shrink the surplus and risk a deficit? Yes. But better that than the bad budgeting and wishful thinking in evidence now. The economy can survive an occasional government deficit just as it can survive an occasional government surplus. It is persistent budget imbalances in either direction that are the real sign of trouble.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-1999. All rights reserved.
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