What To Do With The Budget Surplus?

We have been a bit disappointed in recent years over the lack of a genuine debate inside of the Black community over the budget surplus. For the most part, what we have seen is a partisan puppet show with Black Democrats repeating the latest position on the budget from liberal-leaning think tanks and Black Republicans, doing the same, as the mouthpieces for conservative and libertarian leaning think tanks. Black Democrats and Black Republicans do make good points as to what should be done in this "surplus era" but don't appear to have done much independent research on the history of budget surpluses and how that history can advise Black political leaders today.

Today we take a look at a historical analysis of budget surpluses from Stephen Shipman, which ran in the December 4, 2000 issue of Barron's. We think that Mr. Shipman's opinion, on this matter, subsumes that of the liberal and conservative think tanks. And for our Democratic viewers, don't be fooled by the title, this very same argument, in principle, made by Mr. Shipman, has an equal application to those who may wish to boost spending on various government programs. In upcoming weeks we will continue to look at this issue of the budget surplus, in terms of the interests of the Black electorate.

Here is Stephen's article:

December 4, 2000

Pay Off the Debt Or Cut Taxes?

Inheriting a surplus, the next President should learn from Lord Liverpool

By STEPHEN W. SHIPMAN

History rhymes, rather than repeats, according to Mark Twain. If so, contemporary discussion about the national budget surplus -- a topic that figured heavily in the presidential campaign -- resembles rap rather than sonnet. Politicians and economists alike leave little room for nuance. Yet a cursory review of history's first significant experience with oversized governmental budgets should convince most market participants that tax reductions are the only appropriate and empirically sound response to our recent embarrassment of riches.

Nearly 200 years ago England vanquished Napoleon. At the conclusion of fighting in 1815, Great Britain had generated huge debts that arose from the successful prosecution of the French Wars. Government spending climbed more than 300% during the war years, and accumulated budget deficits facing the Tory government of Lord Liverpool reached 200% of gross domestic product. But with the return of the troops and subsequent demilitarization, a surplus emerged. Thus began the modern era's first great debate over tax cuts and debt reduction.

Parliament and the government addressed fiscal policy in a disorganized fashion. Then, as now, discussion split Parliament into two camps: those favoring dramatic tax reduction and the others for debt repayment. Both the Tory government and the opposition Whigs counted members in each camp. Liverpool's early cabinet was divided as well. Despite a debt burden of 900 million, the government and its cabinet could not keep Parliament from taking immediate action to cut taxes. In 1816 Parliament voted 238 to 201 to revoke the 10% income tax imposed during the war (a reduction of 14 million) and later voted to eliminate the malt tax (a further reduction of 6 million). Since the final war budget was some 78 million, many officials concluded that the absence of these two sources of revenues would constrict the affairs of state no matter how much military spending was curtailed. Chancellor of the Exchequer Nicolas Vansittart spent the first few years after the immense tax cut attempting to raise various duties and to cut others while restructuring a 16 million annual obligation of a sinking-fund scheme that was created by the Pitt government.

The British economy boomed. Government revenues barely receded, averaging some 55 million -- just slightly below the revenue projections following the 1816 tax reductions. Production in the economy accelerated sufficiently to replace the "lost" revenues. The resilience of the ensuing economic growth confounded most politicians and nascent economists of that day. Decades later British historian Stephen Dowell would comment that "the statesmen of the day had not as yet appreciated the fact that [tax] remission and financial reforms would in the end do more for revenues, and for the reduction of the debt [emphasis added], than the mere retention of oppressive and vexatious burdens."

This early period of postwar reform was prelude to even more important changes in tax policy. In 1823 Liverpool overhauled his cabinet to implement additional reductions. He started by promoting Frederick John "Prosperity" Robinson as chancellor of the exchequer and by appointing William Huskisson, previously an assistant to Vansittart, as president of the Board of Trade. The significance of these promotions should not be discounted. Huskisson, arguably the most important of the appointments, was one of the outspoken junior ministers who had urged Liverpool to support tax reductions and to embrace monetary reform rather than repayment of the national debt. He was the government's most articulate spokesman for fiscal reforms, and he conversed and debated easily with MPs like David Ricardo about the political economy.

Running the Board of Trade from 1823 to 1827, Huskisson established an aggressive policy of liberalized trade as the government's primary effort to cut taxes. Such indirect taxes accounted for almost all of Britain's revenues. He assiduously reduced duties and excise taxes in 1824 and '25 on coal, wool, iron, coffee, hemp, wine, rum, silk and myriad other items. He argued that trade unencumbered by heavy taxes would "disentangle Britain from those inefficient branches that impede rather than promote economic well being." He rewrote trade and navigation laws dating back as far as the 14th century. During his tenure, taxes were reduced a further 12 million. Yet government revenues again remained remarkably stable, falling only to 54.5 million in 1826 from 55.5 million in 1824.

What happened to the national debt? The government indeed repaid very modest amounts of the 900 million; it whittled the debt down to 820 million by 1824, a reduction of only 9% over the eight-year period. The majority of principal repayments occurred early in the Liverpool government, before the final reorganization of the sinking fund. At the end of Huskisson's tenure as Board of Trade president, the national debt had shrunk to a much smaller and more manageable percentage of the gross domestic product.

Clearly all evidence suggests and the record demonstrates that Great Britain's phenomenal economic expansion following the French Wars derived from a policy mix that favored top-line production over balance-sheet austerity. The people of Britain, its laborers and entrepreneurs alike, responded by creating so much wealth that the government never again really worried about its debt burden. In fact, the Whigs adopted the postwar success of the Tories regarding fiscal reform and extended further tax reductions well into the 1830s. Their combined successes ultimately enabled Robert Peel to eliminate the Corn Laws in 1846, a most momentous tax reform that allowed Britain to dominate both financial and commercial markets throughout the remainder of the 19th century.

Against this backdrop of history, it is simply ludicrous to oblige American taxpayers, as recommended by the Secretary of the Treasury, to remit 10 times the percentage of the annual principal repayments paid by British subjects when the debt burden of the U.S. relative to gross domestic product is one-sixth the size. Even if one includes the projected hypothetical obligations of the Social Security program, total liabilities amount to 60% of GDP, less than a third of Liverpool's burden in 1815. Instead, today's debate should focus exclusively upon the extent and type of tax reductions earned by the workers and businesses that financed the Cold War.

To this end, Congress and the next President ought to examine, with an eye toward cutting, all major tax burdens: not only income taxes, but capital gains, payroll, death and excise taxes, as well. Real wage gains have eluded a vast majority of Americans for good reason. Their elected officials insist upon benefiting our nation's comfortable creditors before encouraging and rewarding its overtaxed producers.

STEPHEN W. SHIPMAN is portfolio manager and director of research for George D. Bjurman & Associates in Los Angeles.

Reprinted by permission. Copyright 2000 by Dow Jones & Co. Inc. All rights reserved.

Thursday, December 21, 2000