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Jewish World Review May 5, 2000/ 1 Iyar, 5760

Lawrence Kudlow

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Give it Back -- THE TREASURY DEPARTMENT has just announced a record-setting government debt paydown plan that will redeem $185 billion of outstanding bills, notes and bonds this spring, over 60% more than they retired the same time last year. While this blockbuster plan has sent a legion of Wall Street economists back to their drawing boards in order to figure out the interest rate implications (if any), the real significance of the announcement rests with its impact on budget politics and policy.

Namely, what to do with the overabundant inflow of tax revenues that are filling the Treasury coffers. When properly adjusted, April 2000 tax collections will be 14% higher than April 1999. Non-withheld receipts from stock market-driven capital gains look to be rising about 10%.

Even assuming the usual late-year spending excess that has come to be a hallmark of recent budget policies, the FY2000 budget surplus will run upwards of $230 billion, about $63 billion higher than official government estimates. And this staggering overall surplus will leave about $70 billion in the so-called on-budget surplus, i.e., the non-Social Security portion.

Perhaps Mr. Greenspan will think about this in the run-up to the next FOMC meeting. For every time he tightens the policy noose around the economy, he threatens to block the incredible budget surplus story.

Economic growth solves a lot of problems, including government fiscal problems. In recent months our central bank has worried out loud that too much stock market wealth, job creation, productivity and economic growth will cause inflation. But that's just speculative Phillips curve hypothesizing. Actual core inflation rates have barely budged even after nine years of cyclical growth. Whoops. Make that eighteen years of consecutive prosperity.

On the other hand, we know empirically that more people working, investing, innovating and risk-taking pay more taxes on their successful effort. Lots more taxes. At current tax-rates -- which are vastly too high and complex -- our economic prosperity is generating a progressively cascading volume of tax over-collection.

That is a fact, not a forecast. We know it's a fact because the government's cash lockbox is overflowing. Mr. Greenspan is a great fan of budget surpluses, as he has so testified before Congress on numerous occasions. Surely he realizes that budget surpluses are borne of economic growth. Cutting back on growth, however, will reduce the very surpluses that he apparently cherishes.

So what will Washington do with the windfall? $70 billion is a big number, even by inside-the-beltway standards. There is no rainy day money market fund for the Federal government. It will either be spent, thereby enlarging the government's size and scope, or returned to the 130 million working Americans who earned it in the first place. (Treasury debt redemption and buybacks are scored as a means of finance, paid for out of rising cash balances.)

Polling data suggests that until recently 50% of the public doesn't believe that budget surpluses truly exist. But this year's eye-catching total will change that. Overcharged taxpayers will demand a rebate -- and a big change in Washington policy thinking. Welcome to the era of surplus politics.

If across-the-board relief from high personal tax rates is not feasible this year, then how about a simple one-time rebate check that would be paid to all payroll tax contributors?

The fiscal year books close on September 30. Within a week or two the government will know exactly what its financial position is. That's when the checks should be mailed out.

A $70 billion operating surplus would permit about $500 per working American. Well worth the while. It might not be optimal tax policy, but it would send the right message that money placed in private hands will be more efficiently used than if those surplus funds are left in the public trough.

JWR contributor Lawrence Kudlow is chief economist for Schroder & Co. Inc and CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


05/01/00: Wealth and Capital
04/18/00: Growth, Freedom and the New Investor Class--Stay the course
04/13/00: Correct Value
03/28/00: Governments roil the Markets
03/28/00: Fed should keep its powder dry
03/14/00: Reduce Debt, Derail Economy
02/17/00: Unsettled
02/10/00: Bush's Footprints
01/25/00: To preserve its standing as the world's number one economic power
01/06/00: It's not the '70s
12/28/99: They missed it
12/23/99: Bonditos
12/20/99: Dracula's Curve
12/16/99: When Alan Greenspan sneezes, Wall Street economists catch cold
12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow