The Surplus in Perspective
American politics has undergone a revolution in its view of public finance. Thirty years ago, a Republican president said, "We are all Keynesians now." Economic textbooks of that time discussed the automatic "fiscal drag" of a progressive income tax, and the need for a continuous fiscal stimulus to offset it.</br></br>Today, a full year into an economic slowdown, there is virtually unanimous political agreement on the need to maintain a federal surplus of at least $160 billion. Some politicians even argue that this sum is insufficient, that a surplus in excess of $190 billion -- 9% of federal revenue -- is needed.</br></br>One senator, Kent Conrad (D., N.D.), took to the Senate floor to announce that risking a surplus of a mere $160 billion, the second largest in American history, was an indication that we were driving "right into the fiscal ditch." Sen. Fritz Hollings (D., S.C.) introduced legislation to repeal the first year of the recently enacted tax cut, arguing that the foregone revenue was needed for other purposes in Washington.</br></br>By contrast, 38 years ago, President Kennedy proposed a tax cut twice as big a share of gross domestic product as the one just passed. The government was running a budget deficit of 1.3% of GDP at the time, not a huge surplus as today. Saying, in his 1963 State of the Union address, that enacting the tax cut "overshadows all other domestic problems in this Congress," Kennedy argued that the tax cut "will increase the purchasing power of American families and business enterprises . . . encourage the initiative and risk taking on which our free system depends, induce more investments, production, and capacity use . . . and reinforce the American principle of additional reward for additional effort."</br></br>Today, by contrast, with a surplus of 1.5% of GDP, Democratic senators warn of "driving into a fiscal ditch" and seek to recapture the $600 tax-cut checks that American families are about to receive. It is hard to imagine a more extraordinary turn of political perspective.