IF SURPLUS IS THERE, FEDS WILL BOTCH IT.

Byline: Charles D. Van Eaton

RUNNING federal budget surpluses when the economy is operating at full employment is not fiscally responsible.

Real fiscal responsibility demands not only immediate across-the-board reductions in income tax rates, but also a total restructuring of the federal income tax code to erase its complexity and the dead-weight cost which complexity imposes on the economy.

Nothing good can ever come out of purposefully running a persistent federal budget surplus when the economy is operating at full employment because a sustained surplus virtually begs to be spent. Indeed, in anticipation of future surpluses, the rate of growth of federal discretionary spending has, over the past two budget cycles, accelerated above the so-called budget caps members of both parties agreed to in their so-called balanced budget agreement.

In addition, a surplus at full employment creates something that was once a big issue but is now scarcely discussed, especially by that school of economists who made it a big issue in the first place. That something is ``fiscal drag.''

The reigning theory of fiscal policy economics when I was a graduate student would not have tolerated the kind of federal budget surpluses we are now seeing. Fiscal policy is about the federal government using its taxing and spending powers to maintain a level of total demand consistent with full employment and price stability.

In this argument, fiscal policy would aim to create just the right-size federal budget deficit when the economy was operating below full employment and to have a balanced federal budget at full employment - or, if that was not possible, to have a small deficit, a so-called full-employment deficit, so as to provide just enough stimulus to maintain sufficient total demand to keep the economy from slipping back into unacceptable levels of unemployment.

But never a surplus when full employment existed. A surplus at full employment would slow economic growth and yield higher unemployment.

A funny thing has happened to those who are the philosophical children of that school of economic thought. As the hard reality of counterarguments, specifically arguments from the non- fiscal-policy-economics crowd camped at the University of Chicago, hit the stage, the old crowd now seems to have become advocates of having the Federal Reserve drive the economy to full employment and keep it there without inflation. Budget surpluses at full employment are now looked upon as acceptable.

In a word, fiscal drag is not a problem and, certainly, tax cuts are ruled out.

But there's more. To the extent that our current on-budget surplus (that portion of the surplus separate from excess Social Security taxes) is even a slight problem, the intellectual children of the ``fiscal-drag-is-bad'' school prefer to reduce that drag with more federal spending. For example, Alice Rivlin, a fine economist and former director of President Clinton's Office of Management and Budget and a former vice chair of the Federal Reserve Board, recently wrote in The New York Times that if current debt retirement moved to the point where the publicly held federal debt was reduced to zero, what needs to be done is to reduce the surplus, not taxes.

``The problem,'' she said, ``could just as easily be solved by increasing government spending.''

Others share her view.

The essential problem is that increased federal spending on old programs and the creation of new programs to absorb the surplus through new spending do not go away even after the surplus ceases to exist. Spending programs have powerful political constituencies which will fight spending reductions and push for even more spending even when it can be shown that such programs do little to help the overall economy and much of it, as the General Accounting Office has shown, is wasted.

Indeed, the GAO's recent report on federal accounting shows that federal agencies often have no way of knowing how much they spend and where the money goes.

Conservative economist Lawrence Kudlow has summed up this issue nicely:

``The whole budget-surplus model of economic growth has fallen apart. (The argument that surpluses reduce interest rates.) Huge surpluses have been built on record personal tax payments, and the transfer of resources from private hands to government coffers has created fiscal drag that is even now badly undermining economic growth. Personal savings have collapsed into the federal surplus and, if left unchanged, the economy will be weighed down even more.''

The economy is on the edge of recession. It's time to take money out of government's hands and put it back into private, productive hands.