- The Washington Times - Wednesday, August 29, 2001

Smart, ultra-sophisticated Washington politicians and journalists have a long history of talking themselves into utterly crazy policy prescriptions. But rarely have both the Democratic and Republican parties and the major media quite lost their collective minds as completely as they have over the budget surplus. The great debate of the moment is whether in the face of a national and world recession we should run a surplus of at least $153 billion dollars (as the Democrats urge) or perhaps only $144 billion (as the Republicans suggest.)
Democratic House Leader Dick Gephardt captured the current economic theory of his party earlier this week when, according to NBC, he said that the United States faces "an alarming fiscal crises, draining away the surplus cushion just as the economic downturn is hitting home."
Meanwhile, President Bush claimed that "The smaller surplus is a fiscal straitjacket for Congress. And that's good for the taxpayer, and its incredibly positive news if you're worried about a federal government that has been growing at a dramatic pace over the last eight years."
The last thing we need is a surplus cushion during a recession, and the last thing we have is a fiscal straitjacket with a surplus of $144 billion. These two normally sensible leaders of their respective parties have tailored their logic this year to fit last year's political fashions.
Last year, when the economy was booming and excessive revenues were piling up in the Treasury, both parties made the economically meaningless, but politically appealing, promise to not spend a single cent of the surplus revenues that were allegedly accumulating in the nonexistent Social Security Trust Fund. And last year, when the Democrats were threatening to further expand wasteful (and often destructive) domestic spending programs, candidate Bush promised to hold federal spending increases to only 4 percent if he was elected president.
But as we approach Labor Day 2001, the world is a very different place except for the mindset of our politicians. The American economy is at best flat or already in contraction. Unlike not only last year, but virtually every year since World War II, because of global economic interconnectedness as the American economy slumps into recession, so too does the rest of the world.
According to the respected British journal, The Economist, Germany's economy is "unexpectedly stagnant." Japan's is in "steep decline." East Asia and Latin America are "slumping alarmingly." Singapore's gross domestic product has fallen 11 percent and Taiwan's has gone down 6 percent so far this year. Overall, global industrial production fell at a 6 percent rate for the first half of 2001. Japan is experiencing deflation.
The world's excessive reliance on a strong American economy to buy its goods and services is a new danger. Six percent of everything made in the rest of the world is sold in America. That is up from barely 3 percent just 10 years ago. Last year, a full 40 percent of all economic growth in Asia (except for Japan) was due to increases in their export of information technology to America. If we can't restart our economy, and quickly, we will export our recession to the rest of the world and the entire global economy could spiral down into sustained contraction.
The Federal Reserve has just cut interest rates for the seventh time this year. But still the economy flounders, because the economic downturn is not caused by slackening consumer demand, but by a near collapse in investment. The overconfidence of the 1990s led to over-investment and heavy corporate borrowing. Thus, with the current overcapacity and debt overhang, lower interest rates don't motivate further investment. Such an investment-led recession, which was more common before World War II, tends to last longer and go deeper.
The time-tested policy prescription for ending such a recession is fiscal, not just monetary. That is, we should not be running a surplus at all, but should be pushing excessive tax revenues productively back into the private economy. Maintaining a big surplus now risks worldwide economic calamity. Social Security's fiscal future is best protected by a strong economy not an unproductive temporary surplus.
The best and quickest way for the federal government to increase production, jobs and investment would be to spend most or all of the surplus very specifically on ready-to-be manufactured military hardware. The Reagan-era arms build-up is now approaching the age when repairs and upkeep become excessive. We should start up the assembly lines for the Joint Strike Fighter (our uniformed leaders believe a $200 billion purchase would be in order). The new DDD-21 destroyer and the F-22 improved avionics fighter are also ready to be manufactured and are needed. Defense Secretary Rumsfeld's currently proposed $33 billion military spending increase allocates only $3.4 billion to actual assembly line manufacture.
Spending the surplus on such items will start up the assembly lines within months. Such spending has the added advantage unlike increased entitlement spending of being able to be turned off. Thus, it will not contribute to the uncontrolled expansion of federal spending programs.
In the current situation, vastly increased armaments spending strengthens our front lines both militarily and economically. The current alleged Social Security surplus is our prime weapon in the fight to save the world's economy and Social Security.
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