- The Washington Times - Thursday, July 12, 2001

White House budget director Mitch Daniels will testify today before the Senate Budget Committee, whose new Democratic chairman, Kent Conrad of North Dakota, has become utterly apoplectic over the prospect that the federal budget surplus for fiscal year 2001 might fall below $200 billion. Before Mr. Conrad experiences cardiac arrest, a little perspective and context are in order.
What supposedly concerns Mr. Conrad is the possibility that the surplus for 2001 might be less than the cumulative surpluses of $184 billion in the so-called Social Security Trust Fund (an estimated $156 billion) and the Medicare Part A Hospital Insurance Trust Fund (an estimated $28 billion). He's blaming the badly needed tax relief, which President Bush pushed through Congress, for any potential shortfall below $184 billion, which he claims belongs in "lock boxes." Mr. Conrad has accused the administration of "raiding the Medicare and Social Security trust funds."
In the first place, the White House never acknowledged a "lock box" for Part A Medicare, whose Part B supplemental insurance program for doctors' fees and other health payments routinely raids general tax revenues for tens of billions of dollars annually for its massive subsidies. More importantly, the tax relief that will occur in fiscal 2001 is most assuredly not part of "the problem" — though it is is clearly part of the solution. The problem, of course, has been the rapid deterioration of the economy, whose annual growth rate has plunged from more than 6 percent from mid-1999 through mid-2000 to probably less than 1 percent during the first half of 2001. This drastic slowdown, Mr. Conrad surely understands, began last summer.
According to back-of-the-envelope estimates by Larry Lindsey, the president's chief economic adviser, the economic slowdown in fiscal 2001 will cause tax revenues to decline by about $56 billion from what was projected. Mr. Conrad will find few economists who would argue that it is good fiscal policy to maintain a budget surplus of nearly 3 percent of total economic output as the growth rate of that output collapses, threatening to plunge the economy into recession. Yet, that is the practical effect of Mr. Conrad's demands for "new revenues."
Most economists also argue that various time lags make it difficult for policy-makers to implement tax cuts designed to pre-emptively thwart recessionary pressures. However, the Bush White House has implemented such cuts, which Mr. Lindsey has estimated will be about $35 billion during the third quarter, supplemented by an additional $10 billion in related cuts. These reductions, which will have the effect of expanding the economy, will be augmented next fiscal year by other much-needed tax relief, providing additional timely fiscal stimulus from tax cuts.
The best advice Mr. Daniels can offer the hyperventilating Mr. Conrad and his Democratic colleagues at today's hearing is the advice he rendered Sunday. "Everybody breathe into the paper bag for a minute, and let's look at what is a very strong fiscal position," Mr. Daniels coolly suggested, noting, "The surplus has declined from being gigantic to merely immense because the economy slowed down — we now know — starting a year ago."

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