The urge to spend needs holding

One of the most important moments for a primary candidate is his meeting with the Des Moines Register. The paper's endorsement can turn the Iowa Caucuses, which take place on Monday. Yet when John Kerry of Massachusetts got his precious Register minutes, he used some of them to emphasise his original support for a bit of 1980s budget legislation, out of existence for more than a decade now, known as Gramm-Rudman-Hollings. Dick Gephardt of Missouri likewise made sure Iowa and New Hampshire knew he had a role in negotiating the ancient law.

The fact both candidates would even touch on an obscurity such as Gramm-Rudman highlights something some of us might not have predicted: it is the economy, and not the war, that is in play in Campaign 2004. A Gallup poll shows a majority of voters trusting Republicans over Democrats on foreign policy. But on the economy the divide is quite narrow, with Democrats a few points ahead. The issue that is turning out to be hot is federal spending, which is what Gramm-Rudman sought to constrain. This contest's spending focus is not merely political news, however; it also suggests that even Republicans may change their economic policy after the election.

This story, however, starts in the 1980s, when the US federal deficit was also expanding wildly under a Republican president, Ronald Reagan. Three lawmakers - Phil Gramm of Texas and Warren Rudman of New Hampshire, Republicans, and Ernest Hollings of South Carolina, a Democrat - forged a sort of crude chastity belt for Congress. Whenever the deficit widened too fast, the bipartisan law automatically blocked federal outlays. It cut spending across the board according to iron formulae. The idea was to end the deficit by 1990.

From the start the Balanced Budget Act of 1985, as Gramm-Rudman was formally known, was not popular. Members of the administration despised Gramm-Rudman as a petty and humiliating gadget; this reflected their faith that the wisest course was to focus on promoting growth. Republicans generally wondered why Mr Gramm, famed for his brain, was wasting time on deficits; this reflected the party's affection for tax cuts as the primary policy tool. Mr Hollings' fellow Democrats railed against the cuts; they are (or were) after all the party of the Great Society. The press did not admire the new contraption, in part, one suspects, because of the constraints it placed on political elites: the New York Times labelled it "The Balanced Baloney Act of 1985". There were also questions about the constitutionality of the law. By the 1990s, Gramm-Rudman was gone, unmourned.

Nonetheless, Gramm-Rudman did "work" in a limited way. It did not end the deficit, its stated goal. But while the law operated, the deficit did narrow as a share of gross domestic product, and federal spending did not increase substantially as a share of the economy. What's more, even after Gramm-Rudman was gone, its embarrassing memory had a healthy chilling effect on exuberant spenders.

Even humiliating memories fade, however, and these days members of both parties are spending away again. About half of the outlays have to do with things that are arguably non-optional: defence, security. But not the other half, as even the most pro-Republican of think-tanks, Heritage, points out. And suddenly Mr Gramm's silly contraption does not seem so silly at all. Congressman Jeb Hensarling of Texas, a protégé of Mr Gramm's, has even introduced his own Son of Gramm-Rudman proposal for budget reform.

But how does Gramm-Rudman fit into this campaign? For Democrats, the answer is clear. Parsimony proved a winner for the party in the 1990s. Hence the canonisation of Robert Rubin, the former Treasury secretary, and the exaggerated respect being accorded to In an Uncertain World, his recently published autobiography. The Dems want the presidency back. And they'll do a lot - refer to dead legislation, embrace Herbert Hoover himself if they had to - to get it.

As for Republicans, their collective memory contains two lessons. The first is from the 1980s: tax cuts can spur growth, and so are different in quality from federal spending increases. The second is from the 1990s: Republicans lose when they reverse tax cuts or spend so much they feel forced to reverse them. Hence George W. Bush's plans to talk about both new budget cuts and widening tax-preferred savings plans in his State of the Union address tomorrow night. And hence the alacrity with which his administration dumped Paul O'Neill, who has just published his own tell-all story about his time at the Treasury. While Treasury secretary, Mr O'Neill argued for "triggers" that would automatically suspend new tax cuts if budget troubles arose. To Mr O'Neill, an old-fashioned budgets man, his triggers probably didn't seem so different from Gramm-Rudman's constraints. To the White House they were radically different. The triggers would have slowed growth and might have widened a deficit; the budget cuts reduced the size of government and so spurred growth.

But can Republicans get virtuous fast enough to avoid increasing taxes? Last week I asked Mr Gramm himself, now installed in the private sector at UBS, what he thought. Yes, he said, budget cutting could obviate a tax increase in the US. "We are in a period where the deficit is not hurting us," he said. "But it will some time after 2005 if we don't do something." The longer Washington waits, the nastier the device that will be deployed, no matter who sits in the White House.

© Copyright 2004 Financial Times

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