Peterson principle of welfare reform

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The Independent Online
MOST Americans are tired of talking about budget deficits. The daily barrage of numbers and charts of red ink that characterised the presidential campaign and Bill Clinton's bruising battle with Congress have left people glassy-eyed and curiously apathetic.

The national mood has shifted. People pay lip-service to deficit reduction while demanding more government spending to maintain the status quo and to attack front- burner problems: healthcare, crime control, education and training, Aids, children living in poverty, and more.

How to pay for it all? This is the dilemma of presidents in an era of structural deficits. The budget that President Clinton submitted last week to Congress is an illustration of the policy impotence faced by US administrations.

Mr Clinton stressed the strides he has made in reducing the deficit, and he deserves high marks. It is projected to come back to dollars 176bn in fiscal 1995 (which begins 1 October) from dollars 235bn this fiscal year, a result much better than had been expected.

Indeed it would mark the third consecutive year-to-year reduction, a feat last achieved by Harry Truman, according to Mr Clinton. This should silence Ross Perot.

However, what has it got Mr Clinton? Having submitted a responsible budget for the short term, one thankfully devoid of the usual fudge and the mirrors of false savings and optimistic assumptions, he is still left short of money to advance his own policy priorities. The dollars 8bn earmarked for his 'Putting People First' programmes is a drop in the bucket of a dollars 1,500bn budget.

The Office of Management and Budget managed to cut dollars 25bn from entrenched social programmes, earmarking dollars 17bn of this savings for deficit reduction and the rest for Mr Clinton's new social agenda.

This amounts to tinkering at the margins.

Barry Bosworth, a senior fellow at the Brookings Institution, recently wrote an article entitled 'Unemployed in Europe versus Growing Up Poor in America.' It tracks the decline in wages and US living standards that Mr Clinton promised to correct during his long presidential campaign. According to Mr Bosworth, the only way to reverse the US trend is to implement programmes that will reduce the large number of unskilled US workers, provide assistance to working poor families, and generally upgrade life at the bottom of the economic scale.

This will cost more, not less, over the next decade.

Looking at health care alone, Mr Clinton estimates that his proposed plan will cut dollars 50bn from the budget deficit over five years, while the independent congressional budget office estimates that it will add dollars 70bn. At the currrent rate of spending, there is simply no money for new undertakings, even when responsible attempts are made to lop off some of the old ones.

Of course, this is what structural deficits are all about. So much money is locked into entrenched programmes that continue to grow, year after year, that there is nothing left for much else. In the United States, these are the so-called 'entitlement' programmes of Social Security, Medicare and others, which grow more costly as the population ages.

Ross Perot captured the imagination of the electorate when he went on national television with his pie-shaped charts to explain how much of the total budget these programmes take. From 1994 to 2020, US entitlements are expected to grow by 7 per cent of GDP. This means much more spending on the old and less on the young. Perot decried the trend but never proposed real solutions.

Along comes a new book, Facing Up, by Pete Peterson which showed up on my doorstep two weeks ago bearing a cryptic note: 'This is the best thing since sliced bread. Read it and join us for discussion on Valentine's Day. Forget the moonlight and roses.'

Peterson, a former commerce secretary and chairman of the Blackistone Group and the Council on Foreign Relations, seems an unlikely candidate for cult symbol. And yet discussion of the 'Peterson Budget Action Plan' is taking place in small bipartisan groups across the country. I have since heard from friends in Colorado and Chicago on the merits and demerits of the 'Peterson Affluence Test'.

Essentially, Peterson, a lifelong Republican, is following a line advocated but not fully implemented by Bill Clinton: take from the wealthy in order to free up resources for new programmes and the less fortunate. Peterson, however, would attack the entitlements through cuts and taxed benefits - and he would include the middle class.

His progressive affluence test would mean sharply lower benefits at the top, and significant reductions in the middle - the 'sacrifices' he says are necessary to reclaim the American dream.

Having read three-fourths of the book, it is hard not to be beguiled by Peterson's plan to regain his American dream. First of all, you know why he wants it back so desperately, after reading of his Greek immigrant parents in Kearney, Nebraska, who worked and scrimped and saved to educate and raise the next prosperous generation. Under the present course, his three grandchildren face a much less promising world.

Peterson expresses outrage on learning that he, a wealthy investment banker, stands to gain a net dollars 100,000 from various federal benefit programmes above and beyond his lifetime contributions plus interest.

This will be tax free. His conclusion: 'welfare for the well-off elderly' has to go.

Examples of the 'shared sacrifice' under his affluence test plan are as follows:

The 13 per cent of Americans who earn from dollars 10,000 to dollars 20,000 a year would bear 1.7 per cent of the sacrifice - about dollars 200 per family.

In the middle range, from dollars 30,000-dollars 40,000 a year, the burden would be 13 per cent, or about dollars 1,800 a family.

In the upper tier, from dollars 100,000 to dollars 200,000, it would rise to 16 per cent, or dollars 5,600 a family.

For the wealthiest people, earning dollars 200,000 and above, the average burden would be dollars 23,300 per family.

This sounds promising enough to give up moonlight and roses on Valentine's Day.