Memo to: Dick Armey, Pete du Pont, Phil Gramm, Jack Kemp.

* Memo to: Dick Armey, Pete du Pont,

Phil Gramm, Jack Kemp 

From: Bill Buckley

Re: A challenge from Pete Peterson 

Gentlemen:

I enclose an eloquent letter from Pete Peterson. I

think he has made a good point, and I hope you will

welcome the opportunity to answer his objection.

I will publish in NATIONAL REVIEW, and elsewhere,

Pete's letter, and your replies; and perhaps my

commentary.

Warm greetings from your admirer,

Wm. F. Buckley JR.

Dear Bill:

Permit me to be presumptuous.

During my dialogue with Jack Kemp on your Firing Line program, I made a point that seems to get too little scrutiny in most conservative circles. I believe too many so-called fiscal conservatives aren't being conservative at all, at least in the old-fashioned sense of the word.

Less spending, with less taxes, is an admirable set of twin objectives. However, and it is a very big however, I believe that high spending and low taxes is riscally irresponsible and intergenerationally immoral. That combination is precisely what more and more conservatives--particularly the supply-side version--seem to be advocating.

As I pointed out on your show, entitlement spending-particularly the non-means-tested entitlements disbursed without regard to financial need--has been, is, and certainly will be the fundamental driving force behind our public spending binge.

Yet, please tell me which of the "no new taxes," "cut big government" fiscal conservatives has come out for specific, credible entitlement-spending cuts? Forgive me, Bill, but spare me the proposals for "caps," which are a delightful euphemism for evading the kind of specific tough choices that are required. I told you about the hilarious "three-card monte" game on Bush entitlement "caps" Dick Darman played on Meet the Press. When pressed to indicate which specific entitlement-spending cut from a large list he was for, he was apparently against all of them. But he is not alone. Clinton's people also talk of "iron caps" on their new health-care subsidies. These caps turn out to be made of rubber.

You may or may not like my "affluence test" proposal to enact steep progressive cuts in entitlement benefits for above-median-income beneficiaries. But it, at least, has two virtues. It is specific, and it produces hundreds of billions in budget savings annually by early in the next century when the demographic bomb explodes.

A word about taxes. Fiscal conservatives are accused of never having met a tax they like. Neither have I. However, I prefer them, when combined with the largest entitlement and other spending cuts I could reasonably come up with, to the alternative; namely, the fiscal combination of euphemistic chatter about ambiguous, rhetorical spending cuts and jihad prayers about how one more tax cut is going to enable us not only to grow out of our current deficits but avoid the need for structural reform of entitlement spending that is metastasizing at a rate that should appall any true fiscal conservative.

As I pointed out, too many fiscal conservatives-- most particularly, the "public" conservatives, i.e., those running for office--are not only passive in the face of this spending metastasis, but conveniently ignore the huge tax increases (focused heavily on middle-class people) that must occur in the future in order to finance this entitlement-spending explosion.

I believe you are at the very heart of the "conscience of the conservative" movement. Could I, then, suggest you put your legion of fiscal conservative friends to this simple test: How precisely do you propose to reduce spending, by how much, and on which programs?

When you have gotten a responsible answer to that question, then we can all probably have a more rational discussion on whether, under what circumstances, and how one should reduce any remaining deficit. (My book, Facing Up, explains how deficits undermine the savings/investment/productivity/living-standard growth equation while imposing an immoral burden on future generations, then lays out a detailed plan for balancing the budget by the year 2000 as a principal way of providing those savings and reducing the generational inequity.) It is always a pleasure to see you.

Sincerely,

Peter G. Peterson

Chairman, The Blackstone Group 

New York, N.Y.

Dear Bill:

Thanks for sending me a copy of Mr. Peterson's letter. While he raises some interesting questions, on the whole I think he's misguided when it comes to the question of conservatives and entitlement spending. I would like to offer a couple of examples to counter Mr. Peterson's assertion. He dearly hasn't been watching what's been going on in the House recently:

1. Solely out of a commitment to sound fiscal policy, House Republicans twice voted for a cut-spending-only budget developed by Budget Committee Republicans that we knew would fail..The Kasich budget took $430 billion from the deficit over five years by cutting spending, including some overdue entitlement reforms. We put Medicaid patients into managed-care systems, raised the retirement age for federal employees to 62, and reduced agriculture spending.

2. Conservatives in the House overwhelmingly supported the Penny-Kasich bill--which Mr. Peterson's associates Paul Tsongas and Warren Rudman endorsed-- which would have cut $90 billion in spending over five years, approximately half of which came from entitlements. Among other things we would have required wealthy seniors to pay for more of their Medicare benefits, frozen retirement COLAs for military personnel who enter the service after passage of the bill, and reduced federal employee retirement costs.

3. The Republican welfare-reform plan, which requires work, cuts off benefits to non-citizens, and provides no additional money for additional children, saves taxpayers $20 billion over five years. Welfare is certainly a key and rapidly growing entitlement that has urgent societal and budget ramifications.

4. I've spent all of my years in Congress attempting to bring some sanity to the Department of Agriculture. In 1990, we offered amendments to eliminate programs, reform others, and cut off payments to those making over $100,000. Though most of the amendments failed, Michael Barone of U.S. News estimated that by pressuring the committees, we saved taxpayers $14 billion. I'm planning a similar effort when we get a crack at the farm bill in 1995.

Most everyone realizes that we can't hope to balance the budget unless we control the growth of entitlement spending, particularly in health care. I like some of Mr. Peterson's entitlement reforms, particularly eliminating some farm programs and asking wealthy elderly people to pay for more of their Medicare. But like the Clinton Administration, too many of Mr. Peterson's entitlement cuts are tax increases.

Mr. Peterson derides the notion of a spending cap, but caps have a very important utilitarian value: they force Congress to make choices or face the prospect of much more unpalatable across-the-board cuts. Phil Gramm and I developed such a plan, capping the growth of all entitlements at the same growth rate as Social Security in order to stem runaway entitlement growth. As the success of the base-closing process demonstrates, it's easier for members to cast a vote for procedural reforms that lead to tough cuts than to vote for the cuts themselves.

Senator Gramm and I also take important steps like adopting zero-based budgeting and sunsetting programs as well as setting fixed deficit targets, which would go a long way toward reintroducing some fiscal sanity to Washington. We must also eliminate some programs and reform health care along the lines laid out in the Republican plans.

I'll put my willingness (and my record) to reduce spending of all sorts up against anyone's. But as the Penny-Kasich vote showed, it isn't my willingness or that of the other 175 Republicans that matters; it's the willingness of the Democrat majority and the Administration.

On the whole I think I have the same fundamental disagreement with Mr. Peterson that I have with many deficit hawks of the center-left. Mr. Peterson doesn't have a problem with government being big; he has a problem with it being out of balance. On the other hand, my problem is with the size of the government. I want it to be much smaller. Government of the size Mr. Peterson is willing to live with damages the economy, which in turns lowers our standard of living and receipts to the Treasury.

We should balance the budget by shrinking the government.

Respectfully,

Dick Armey

Member of Congress

Washington, D.C.

Dear Bill:

So "which of these fiscal conservatives has come out for specific, credible entitlement spending cuts?"

First, Mr. Peterson should recognize spending restraint in government is possible. As governor, I held Delaware government spending constant (in inflation-adjusted dollars) for eight consecutive years. Compared to prior (and subsequent) years, this was a huge spending cut. As for where Delaware spending was restrained--everywhere: prisons, education, administration, police, etc.

One of the reasons we realized zero spending growth was the early enactment of a constitutional spending restraint, limiting spending to 98 per cent of revenue unless overriden by a 60 per cent super-majority vote in each House of the legislature.

I mention this because the fatal flaw of Mr. Peterson's reasoning is that a legislature will enact one spending cut at a time. It simply won't work. First, an overall spending limit must be established, forcing the legislature to act. Then spending will come down.

As for entitlements, during the 1982 recession the Democratic-controlled legislature worked with my administration to withdraw 2 per cent of every school district's budget, half way through the fiscal year, to be returned to them if revenues improved (which they ultimately did). Since Delaware schools are essentially funded on a per-student basis, this was a very real entitlement cut.

Delaware's economic policy worked for the very reason Mr. Peterson disdains: tax-rate reductions stimulated job and revenue growth.

Turning to the federal level, in my 1988 presidential campaign, I advocated two significant entitlement cuts: eliminating agricultural subsidies (then $26 billion per year) and replacing welfare payments with a combination of increased EITC and public jobs at 90 per cent of minimum wage, to save $6.2 billion per year after a three-year transition. These were fully developed, detailed proposals opposed by other candidates of both parties.

I also proposed a private-sector alternative to the current Social Security system which, while expensive, is the only proposal I know of that will avoid the doubling of payroll taxes or halving of benefits when the boomers retire. It's not really within Peter| son's entitlement framework, but it is better than his solution of eliminating benefits from a large portion of Social Security taxpayers. In 1990, I opposed Bush's domestic-spending increases.

I opposed the $4 billion a year we are spending to curb imaginary acid-rain deregulation--something thirty thousand scientists studied for ten years before concluding it didn't exist.

I have proposed deregulating and ending subsidies for the U.S. Merchant Marine at a savings of $2.3 billion per year and the repeal of the Jones Act, which would save the economy (not the taxpayers) $10 billion a year.

I have supported holding federal spending except defense, which has already been reduced by nearly one-third--to two-thirds the rate of growth of the economy for five years, and a constitutional spending restraint with a three-fourths vote override provision.

In conclusion, the only worse economic policy than Mr. Peterson's fear--"high spending and low taxes" is his prescription--high spending and high taxes. They will limit growth and opportunity and, worse, transfer an even greater share of America's economic wealth to collective-government decision-making.

Best regards,

Pete du Pont

Chairman

Committee for American Leadership

Wilmington, Del.

Dear Bill:

Thank you for forwarding Pete Peterson's thoughtful letter, and for your invitation to comment. In argning for a balanced federal budget, Pete is unquestionably on the right road, but I wonder if the cart is getting ahead of the horse.

It seems to me that until we achieve some certain means to require permanent deficit reduction-- something no one has yet accomplished despite truckloads of sincere and well-conceived lists of specifics--the way to a balanced budget by legislative action alone is likely to be a dead end.

To be sure, spending can be cut. The Gramm-Latta budgets specifically cut spending, but not forever. Then Gramm-Rudman I, II, and III forced Congress and the Administration to cut more spending over several years, but the big deficit reduction stopped when President Clinton waived the sequester mechanism on his first day in office. Spending cuts? Budget process reform? Been there, seen them, done 'em both. They both did a fair amount of good, too, but not permanently.

The current problem is that spending which Congress cuts with fanfare is never actually cut. Perversely, that seems particularly true when the spending in question is cut specifically in the name of deficit reduction. Somehow, despite good intentions and magnificent rhetoric, the money "saved" is inevitably spent, not used to reduce the deficit.

That's why I have come to believe a balanced-budget-amendment is the only sure-fire means of a deficit-free future. In an atmosphere marked mostly by philosophical convenience and routine budget flim-flam, I see the balanced-budget amendment as the one indisputable measure of intent to achieve deficit reduction. The Constitution works; lists haven't.

Yours respectfully,

Phil Gramm

United States Senator

Washington, D.C.

Dear Bill:

I am happy to respond to our friend Pete Peterson's challenge to lay out a credible plan for reducing the deficit. First of all, I'd like to compliment him on effectively identifying entitlement spending as one of the main sources of federal deficits, and for his sincere effort to develop a solution.

As you know, however, I have serious disagreements about his proposals. In his book, Facing Up, Peterson calls for a 5 per cent national sales tax, a 50-cent-per-gallon gasoline tax, new limits of deductions for home mortgage interest and health benefits, and a tax of 85 per cent on all Social Security benefits, in addition to the higher income-tax rates already imposed by the Clinton Administration. All economic history indicates that such a massive tax increase would cripple economic growth and thus reduce government revenues, further setting back Peterson's ultimate goal of deficit reduction.

There is little disagreement that slow growth increases the deficit. On page 266, Peterson writes: "If real annual GDP growth between 1993 and 1998 were to weigh in one percentage point under what the CBO now projects, it would add $106 billion to our 1998 deficit." In other words, slow economic growth causes higher deficits. Peterson apparently thinks his tax increases won't slow the economy; I disagree.

According to Lawrence Kudlow, chief economist at Bear Stearns and an NR contributing editor, some $140 billion of the FY93 federal deficit is attributable to slow economic growth. Peterson's tax increases would put us further below our historic growth potential, creating more deficits and the justification for Peterson to call for even more taxes ! The main element of his entitlement-spending cuts would be to means test Social Security and other entitlements for recipients with incomes over $35,000. Yes, entitlement spending is growing out of control. But Peterson's solution does nothing to address the underlying reasons for the runaway costs of entitlements. The answer is not means testing, which would only prolong the status quo. The reason entitlement spending is growing out of control is that we keep expanding services to an ever greater portion of the population that aren't subject to market competition of any kind.

Furthermore, his means test on Social Security recipients is a disincentive for anyone to save on his own to finance a more comfortable retirement. This leads to what might be called the Peterson Paradox. To increase economic growth, he wants more savings. To raise savings, he wants to reduce the deficit. To reduce the deficit, he wants to increase taxes. But I've never met anyone who said that they would save more if only their taxes were higher.

There is a better way to bring down the deficit. Instead of raising taxes and discouraging saving, why not restrain government spending, eliminate unnecessary programs, and combine it with a tax policy which would create strong economic growth?

Surely, there are areas of government spending, including entitlements, we could cut without creating the problems I've indicated in the Peterson approach. For example, a proposal to cut spending by $90 billion authored by Representatives John Kasich and Tim Penny was narrowly defeated late last year. We should take a serious look at these and other proposals to reduce wasteful government spending.

There is a host of government spending programs, many dating back to the 1930s, which have outlived their usefulness, if, indeed, they ever had any, which could safely be reduced or eliminated. Obviously, it's impossible to run through them all here, but the laundry list includes: big-business export-enhancement subsidies, waste-water treatment subsidies, rural housing development or electrification, power marketing subsidies, and farm-price supports with their attendant administrative bureaucracies, as well as the NEA, the NEH, the SBA.

This would be just the first step in jettisoning our 1930s hodgepodge of federal spending in favor of a twenty-first century budget. We should also end government industrial policy experiments such as funding for "smart" highways, supercars of the future, government-funded information superhighways, etc. High-tech porkbarreling has never worked because government cannot possibly foresee what technologies will be on tomorrow's cutting edge.

At the same time, we should follow the lead of our neighbors in Latin and South America (such as Mexico and Argentina), as well as the emerging democracies of Central Europe, by privatizing government services and selling off large portions of the massive government portfolio of loans, land, and other assets. Every successful American business has downsized over the past decade to meet the demands of the global marketplace it's time for government to do the same.

The real answer to Pete Peterson's challenge is not his call for higher taxes and across-the-board austerity. The answer is combining a pro-growth fiscal policy--which would generate new businesses, new jobs, and more government revenue with a twenty-first-century budget that limits the interference of government.

Very sincerely yours,

Jack Kemp

Washington, D.C.

Honorable Peter G. Peterson

New York, N.Y.

Dear Pete:

Here are the responses to your letter. As I view it, there is first the economic question, then the political question.

The first asks whether the Peterson proposals might not actually have a deleterious effect, first on the economy, second on the health of government. Clearly if increased taxation causes diminished production then we are taxing more or less for the sake of it, not in order to diminish the deficit. That point is axiomatic and, in a way, banal: We do not have sufficient data to answer it. It would be fun to sponsor a (politically) isolated Hong Kong somewhere out there (maybe buy Haiti?), and specify two years of taxation at level x, two years at x plus 2 per cent, two years at x plus 4 per cent, etc., so that we could try to measure that which is truly predictable, that which is simply intuitive. For instance, does anyone really know what will be the effect on savings of taxing Social Security for those whose income logs in at over $35,000?

A more elusive question has to do with the size of the state. There is no activity by government that is purely economic in character, the exception being raw redistribution. Years ago, economist Colin Clark advised us all (and J.M. Keynes wrote to congratulate him on his essay) that government overhead in excess of 25 per cent of GNP inhibits growth. But it does more than that, it would appear. It breeds regulation and so affects human spontaneity. What is the economic impact of a federal subsidy to a medical school, which subsidy requires conformity to a huge number of regulations designed 170 eliminate discrimination, promote discrimination, grant equal opportunity, and--you know the kind of thing I am talking about. A conservative must assume that the reduction in government by, let us say, 1 per cent of GNP is going to result in greater benefits than merely the elimination of 1 per cent in expenditures.

But we have to assume, don't we, that the primary problem is political? You and the panel don't really disagree that cuts should be made and probably wouldn't disagree all that strenuously about where they should be made. You are simply saying: Cuts in spending have not been made, and there is no prospect that they will be made, so let's concentrate on augmenting revenues by taxation.

Messrs. Armey et al. remind us that Gramm-Rudman in fact did curtail spending, but was aborted just about when it was showing signs of real life. And, shining through their thought, is the panelists' optimism that public pressure is generating for deficit reduction, pressure that will be felt by legislators.

You are entitled to wonder, as I wonder, what brings on such optimism? It would be good for the panelists each to submit to an interrogation even if conducted only in private. It would take some such form as the following:

1. Ronald Reagan was the most popular President since FDR. He talked about deficit and big government like a preacher talking about fornication. But although he slowed down the rate at which the government was growing, he did not meet the challenge head on, because that challenge was not to slow down, but, at the very least, to freeze.

2. Was it defective leadership in the Executive that emboldened Congress to ignore the deficit challenge?

3. If we were to flash back to the year 1981, what would the panelists publicly recommend that President Reagan endorse?

4. If Congress has not by now passed a spending amendment to the Constitution, what are the prospects that it will do so in the months and years ahead?

5. Is there, in the judgment of the panelists, a persuasive correlation between true fiscal reform and a limited-term amendment?

I thank you for initiating this effort, and recommend to all your important book, Facing Up: How to Rescue the Economy from Crushing Debt & Restore the American Dream (Simon & Schuster, $22).

Yours faithfully,

Bill