In “The Adventure of Shoscombe Old Place,” Sherlock Holmes solves his sixtieth, and final, seemingly unsolvable mystery. Given his record, it is conceivable that Holmes could have unraveled a modern-day mystery that has baffled observers for years: The case of the missing $5.6 trillion surplus.
This mystery begins in January 2001, when the Congressional Budget Office (CBO) predicted a $5.6 trillion budget surplus for fiscal years 2002 through 2011. The federal budget had been in surplus for four years, and projected surpluses were growing faster than anyone in Congress could comprehend.
Today, however, the CBO projects a cumulative deficit of $2.9 trillion for the period — a swing of $8.5 trillion.
What happened?
From the onset, congressional Democrats have blamed President Bush. “This president has taken a $5.6 trillion surplus,” charged Sen. John Kerry, “and turned it into deficits as far as the eye can see.” One lesser-known congressional Democrat railed, “the American people should demand to know how in four short years the president frittered away a $5.6 trillion dollar surplus.”
So, what really happened to that $5.6 trillion? Is Bush truly the culprit?
Let’s follow the clues:
Clue #1: The $5.6 trillion surplus was a mirage. It never existed. The CBO based its surplus estimate on the existing tax and spending laws and on an economic forecast that simply did not stand the test of time.
President Bush’s first budget included sizeable, across-the-board tax cuts, first proposed in December 1999 as an “insurance policy” against recession. At the time, federal revenue equaled 20.9 percent of GDP — tying the record set during World War II.
Congress acted quickly to give the president most of the tax cuts he requested. Calling it “an important boost at an important time for our economy,” Bush signed the measure into law five years ago last June.
Indeed, it was an important time for the economy. Growth had slowed dramatically in mid-2000 and there was increasing concern the economy could slip into recession. It was later determined the economy was already in recession when Congress approved the $1.2 trillion tax cut. This revelation later prompted Alan Greenspan to commend the cut as “extraordinarily well-timed from the point of view of the economy.”
Subsequent tax cuts further reduced projected federal revenue, bringing total tax relief under President Bush to $1.8 trillion over ten years. This accounts for one-fifth of the $8.5 trillion swing.
Yet even this orchestrated tax relief pales in comparison to the impact the recession, technical adjustments, and other developments had on the budget projections. These factors trimmed nearly $2 trillion from projected revenue while boosting projected outlays $519 billion. This accounts for 29.4 percent of the swing.
Still, all of this explains barely half the swing. The remaining half is a result of the spending Congress enacted over the past six years to bolster national defense, fight the war on terror, provide seniors with Medicare prescription-drug benefits, confer disaster relief, and fund a myriad of other programs.
Clue #2: Even if the CBO’s economic and technical assumptions had been accurate, and even if President Bush had not championed tax relief, and even if the country had not been dragged into a global war on terrorism, the projected surplus never would have materialized.
To achieve the cumulative surplus the CBO projected, it would have been necessary to run increasingly larger surpluses ranging from 2.9 percent to 5.3 percent of GDP for ten consecutive years. In the history of the modern federal budget, a surplus of that magnitude has occurred exactly once — in 1948. Moreover, the last time the federal budget was on the verge of ten consecutive years of surplus, Woodrow Wilson occupied the White House.
Clue #3: Policymakers never intended for the $5.6 trillion budget surplus to materialize. They had other plans:
According to Senate Budget Committee estimates, Al Gore’s proposals in 2000 would have reduced the ten-year budget surplus by as much as $4.3 trillion.
President Bush’s first budget called for tax cuts and spending increases totaling $2.2 trillion over ten years. House and Senate Democrats responded with budget proposals (heavy on new spending and light on tax relief) that would have reduced the surplus by $1.9 trillion and $2 trillion, respectively.
Even as the long-term surplus projections deteriorated, lawmakers continued to introduce legislation that would have ballooned federal spending. According to the nonpartisan National Taxpayers Union, the typical House Democrat introduced legislation in 2001 that would have increased annual federal spending by $262 billion. That figure increased to $402 billion in 2003 and $547 billion last year. The typical House Republican, by contrast, proposed spending increases totaling $20 billion in 2001, $31 billion in 2003, and $12 billion last year.
So, what do the clues reveal about the missing $5.6 trillion surplus? 1) It never existed. 2) It never would have existed. 3) Policymakers never intended for it to exist.
Those are the facts. And for those who claim President Bush “frittered away” the surplus, I call your attention once again to Sherlock Holmes, who cautioned, “It is a capital mistake to theorize in advance of the facts.”
— J . Edward Carter is an economist in Washington, D.C. PLEASE SEE EDITOR'S NOTE.
