What to Do with the Budget Surplus

by Ed Crane

Ed Crane is president of the Cato Institute.

Official Washington is now salivating at the prospect of taking in more than it spends for the first time in 30 years. It’s not a pretty sight.

The projected surplus depends on revenue assumptions that are reasonable. But it also depends on a grossly optimistic assumption: that Congress and the White House will resist the itch to spend, no small concern given the fact that, this week alone, President Clinton has proposed a staggering array of expensive new initiatives.

Exhibit A is Medicare. The president is proposing a massive expansion of a program that’s already deeply in trouble because of exploding costs. Even if Congress does the right thing and rejects Mr. Clinton’s scheme out of hand, there’s an excellent chance that Medicare will make any budget surplus disappear. Last year’s budget deal assumes savings in Medicare as a result of new price controls on doctors and hospitals. A long and grisly history of similar efforts shows conclusively that price controls don’t work in health care or anywhere else. But that’s a lesson that Congress simply refuses to learn. In the meantime, implicit debt under Social Security and Medicare is increasing relentlessly. Social Security’s unfunded liability is already more than $9 trillion, and Medicare’s is more than $7 trillion.

If by some miracle a federal budget surplus does materialize, under no circumstances should the president and Congress be allowed to use it to buy more goodies for favored constituencies. Rather, it should be used in only two ways: to cut taxes or to finance a transition to a privatized Social Security system, or both.

Allowing people to keep more of their own money, instead of sending it to Washington, should be the highest priority. A tax cut ought to reduce the tax burden generally, not produce the kind of dumb, social engineering mess we find in last year’s budget deal. That package enormously complicates the tax code, probably reduces economic growth and creates a variety of new special interests that would have an incentive to oppose any genuine tax reform.

Privatizing Social Security would be the best investment we could make in our future and in the well-being of our children and our grandchildren. Here’s where allowing people to keep their own money will really pay off. Privately owned accounts will provide higher retirement incomes and allow us to avoid the otherwise inevitable hike in payroll taxes of 50 to 100 percent to finance promises that we’ve made to Social Security and Medicare beneficiaries. The cost of making the transition to a privatized system could be $50 to $100 billion or so a year. That would be the best possible use of a budget surplus.

This article originally appeared in the Gaston Gazette, January 18, 1998. It also appeared as a Cato Daily Commentary, What to Do with the Emerging Budget Surplus, April 16, 1998.