October 3, 2002

Ms. Carol Cox Wait
President
Committee for a Responsible Federal Budget
220 E Street, NE
Washington, DC 20002

Dear Carol:

Thank you very much for inviting me to attend yesterday's roundtable on the budget. It was good to see Leon Panetta back in town talking about budget issues. He will be a great CRFB co-chair with Bill Frenzel.

Not being a budgeteer, I of course was reluctant to dive into a technical discussion that featured the likes of Bill Hoagland, Gene Steurle, and Barry Anderson. As Clint Eastwood opined in that monument of American cinema, Magnum Force, "a man's got to know his limitations." When it comes to the intricacies of the federal budget, no one is better endowed than I am with the self-knowledge Mr. Eastwood so thoughtfully urged.

I did want to use this note to offer a few thoughts on a more general level in regard to the apparent lack of public concern about the return of federal budget deficits and the expiration of the disciplinary tools enacted in 1997. This public apathy must be especially frustrating for you since one of the Committee's key functions over the years has been, especially through your Exercises in Hard Choices, to provide nonpartisan, grassroots education about the budget and the consequences of undisciplined budget policies.

I don't pretend to have much sense of the larger trends of public opinion, but I do regularly see and talk with the business leaders who comprise the American Business Conference (ABC). While I cannot say that ABC members have lost interest in budget policy - far from it - I must admit that, even with the return of deficits, they do not see budgetary discipline as a priority issue for our organization at this time.

How different this is from the ABC of days gone past! I joined ABC back in 1987, and then we had a subset of CEOs who had joined our organization specifically for the purpose of advocating budget discipline. For them, no other public policy issue was nearly so important. Their feelings about the budget ran deep.

I remember one particularly fractious meeting at the Willard when some of our members got into a shouting match with then-Congressman Leon Panetta over some item relating to the budget. I was standing outside the closed-door meeting room. The shouting was clearly audible to me as well as to passing guests, who doubtless wondered what on earth was going on. I interpreted the noise as a sign of health: an indication that our members took the budget issue seriously and Leon Panetta seriously, too, however much they might disagree with him.

Today there doesn't seem much to shout about. Why? The participants at yesterday's discussion offered two important reasons.

First, in the near term, the new deficits as a percentage of GDP are not that big at least by the standards of the 1980s. So there is no sense of emergency. Washington, after all, is not famous for nipping problems in the bud.

Second, and this is very important, there is no sense that the reemergence of budget deficits is in any way connected to other weaknesses in the economy. In the 1980s the specter of the "twin deficits" (budget and merchandise trade) was perceived as in some way having something to do with the economic ascension of Japan, anemic productivity gains, stagnant real wages, a high cost of capital, and the like. The exact intellectual connection was never really established, but it was believed by many to exist. People were interested in reducing the deficit because they hoped to solve other problems.

Today, we have begun to run deficits in the absence of any other large crises in our economic performance. The unemployment data are fairly good, the Japanese and German economies are not challenging our preeminence, and interest rates are low. Even skilled political pamphleteers are having a hard job demonstrating how, in the near term, the government's switch to red ink has had any measurable, adverse effect on the real economy. Indeed, to the extent that our economy requires stimulation, the Keynesian bias that Richard Nixon, no less, said all Americans share would seem to suggest tolerating even larger deficits. I suppose this is why Al Gore during his speech yesterday at Brookings ducked questions about whether the Bush tax cuts should be repealed.

As commanding as these two reasons are, there is more to the problem of public apathy, or, somewhat more narrowly given my perspective, business apathy.

To begin with, I would cite the fiasco that was the budget "process" this year. The failure of the Senate to bring to a vote, much less pass, a budget resolution has appalled those in the business community who care about such matters. For many ABC members, the Senate looks like a scofflaw. The decision to ignore the Budget Act is particularly offensive given that the country is at war. And, of course, the failure to pass a Congressional budget resolution contributed mightily to the subsequent failure of Congress to pass on time the 13 appropriations bills for FY 2003.

I'm not interested in pointing a finger at particular members of the Senate (though I easily could). My point is that there is a real and growing feeling among ABC executives that Congress as a whole lacks the will and basic competence to do a job performed every day by households and businesses: writing a budget and living up to it in a timely way. It would be interesting to know if members of Congress fully understand how much goodwill they lost with their budgetary follies this year. Why would any business leader relish the opportunity to come to Washington to discuss budget process reform and new budget disciplinary tools with members of Congress who thumb their noses at the current budget process? Why would such a business leader believe that deficits were anything other than the inevitable by-product of such behavior?

A deeper source of business apathy involves our current income tax system. According to a report from the Tax Foundation, IRS data show that the top-earning one percent of taxpayers made 19.5 percent of the income earned by Americans in 1999 (the latest year for which such data are available) and paid 36.2 percent of the total federal individual income taxes collected that year. In contrast, the bottom 50 percent of taxpayers earned 13.3 percent of all income but account for 4 percent of income taxes collected.

Obviously this situation results both from our nation's conscious decision to adopt a progressive income tax system and the happy effects of economic growth in the 1990s. I have no quarrel with the former and enjoyed the latter. Yet it must be recognized that this dramatic upward shift in the burden of the income tax,¹   combined with the removal of many Americans from the tax rolls entirely due to changes in the law, has resulted, in the view of ABC members, in a separation of those Americans who enjoy the benefits of government largesse and those who pick up the tab.

That separation of costs and benefits weakens the prospects for budget discipline. One purpose of a tax system should be to communicate to as many Americans as possible the cost of government. Our individual income tax system does not do that. That fact raises doubts in the minds of ABC members that even the most earnest of politicians can talk to his or her constituents about the need for hard choices. For many Americans, choosing does not seem especially hard or, for that matter, necessary.

Finally there is the matter of the opacity of government budgeting. Very few people outside of government understand it. Business people who come to Washington to discuss the budget end up feeling like hicks watching a game of three-card monte.

Here at ABC, we are veterans of Gramm-Rudman, Gramm-Rudman-Hollings, the 1990 budget agreement, the 1997 budget agreement and many other deals great and small in between. And like Wile E. Coyote, I think our dominant reaction to these adventures is frustration. For no matter how clever we think we are in supporting provisions designed to put some discipline into the budget process, ultimate success remains elusive. In fact, it may be that these stabs at budgetary discipline have served mostly to make long-term budgeting more complex and more gimmicky than it might otherwise be.

For all of the reasons I have described, I was not as troubled as some people were at yesterday's meeting when Bill Frenzel offered the thought that the entire budget process ought to be junked. I'm sure he said this mainly to get a rise out of the audience and that he surely did. But there is an element of seriousness in many jokes and I think that was the case with his. Maybe we've run out of incremental reforms for a flawed system.

In any case, I hope CRFB will take up Bill Hoagland's challenge to all of us to start thinking "outside the box" in terms of budget discipline. Few groups in town seem better positioned to do so and I hope that yesterday's discussion sparked some ideas.

May I also suggest that you renew the fine work CFRB has already done on entitlement reform? Bill Niskanen was correct, in my view, that the issue of inter-generational equity remains a powerful stimulant for reform. Nowhere is the responsibility of doing right by our children more evident than in finding a way to ease their burden of paying for our retirement. I also think that, because the payroll tax, unlike the income tax, is ubiquitous, a dialogue on hard choices regarding entitlements may be easier to initiate. I'm speaking here in relative terms, of course - none of this stuff is easy.

Thank you again for inviting me to yesterday's discussion. I look forward to working with the Committee in any way I can.

Sincerely Yours,

John Endean

¹  According to the Tax Foundation, in 1989 the top 10 percent of taxpayers accounted for 55% of income taxes paid. By 1999, due to th eupward shift of the burden, the top 5% of taxpayers accounted for 55% of income taxes paid.

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