How will we finance the war on terrorism?

Laura Tyson, who was President Clinton's chief economic advisor, has an excellent suggestion: repeal Bush's $1.8 billion dollar tax cut.

From the New York Times:

October 8, 2001

Financing the Fight Against Terrorism

By LAURA D. TYSON

ERKELEY, Calif. -- Now that the United States has begun its military campaign against the Taliban in Afghanistan, we have to face the question of how to pay for what promises to be a prolonged war on terrorism. Just days before Sept. 11, President Bush said that only a recession or a war could make him willing to spend the Social Security surplus. Now the nation confronts both difficulties.

The federal government has already approved an additional $55 billion in spending — $40 billion of emergency appropriations to aid in recovery and rebuilding from the attacks, and $15 billion to support the reeling airline industry. Congressional appropriators have proposed another $25 billion for defense, education and emergencies for the 2002 budget year. Meanwhile, Washington is considering proposals for additional tax cuts, many of them permanent, costly and ineffectual, ostensibly to head off a recession. At the same time, a multiyear, multifaceted war on terrorism will impose substantial new costs.

How will the federal government pay for additional tax breaks or spending increases to stimulate the economy, and how will it finance a broad and effective war on terrorism?

In the short run, there is only one choice: funds pledged to Medicare and Social Security will have to be used. Because of the tax cuts passed last spring, nothing else remains in the government's coffers. And even with optimistic assumptions, the same will be true for the next 10 years.

There's nothing wrong with a temporary raid on the Medicare and Social Security surpluses now. Indeed, isolating them to save for the future is a bad idea when the economy is sinking. And dipping into them is justifiable to pay for military efforts, intelligence gathering, enhanced air travel security and safeguards at embassies in waging the war on terrorism.

In fact, since the erosion of consumer and investor confidence is the most pressing threat to the economy right now, additional government spending to fight terrorism is the most effective form of fiscal stimulus — far more effective than cuts in the capital gains tax or the corporate income tax, which would do nothing at all to bolster investment spending next year. Regardless of its final size and composition, however, an immediate stimulus package must not undermine the nation's hard-won commitment to fiscal responsibility. It is important that Congress and the president not lose sight of the nation's long-run needs.

In time, the economy will recover, and the case for borrowing from Medicare and Social Security to finance stimulus measures will disappear. But the costs of the war are likely to last for years, and they will be high. Victory will require additional spending not just on defense and intelligence, but also to fight poverty, ignorance and disease in poorer nations that have become training grounds for terrorists. Self-interest, as much as compassion, should motivate the United States to make these kinds of investments around the world.

Like wars with more conventional and identifiable enemies and more limited objectives, our war on terrorism will require unavoidable budgetary tradeoffs. Guns versus butter is elementary economics: a society that chooses to spend more of its resources on defense and security will have less available for things like education, health, retirement security, productive investment and personal consumption. If the tax breaks passed last spring are not rolled back, paying for a strong assault on terrorism will require either cuts in other parts of the federal budget or a return to deficit spending — as soon as next year, according to recent forecasts.

And if we choose the former route — financing the war with cuts in government programs — Social Security and Medicare will have to bear the brunt, since there is nothing left to trim in other parts of the budget. The federal government has been skimping for years on everything from airport security to public health to education.

Slicing into the Medicare and Social Security surpluses now will only make the day of reckoning, when the baby boomers begin to retire, more painful. The government will then be forced to choose between higher payroll taxes, reduced retirement benefits and escalating budget deficits. In the meantime, concerns about the government's need to borrow more in the future will keep long-term interest rates high and depress growth.

Fortunately, the country has a sounder economic option for financing an all-out fight against global terrorism. The Bush tax cuts — programmed for the future and under realistic projections likely to cost about $1.8 trillion — should be repealed. They were never justifiable on economic grounds. Now they have become just another luxury item for the wealthy that a country at war can no longer afford.

Laura D. Tyson, former chief economic adviser to President Bill Clinton, is dean of the Haas School of Business at the University of California at Berkeley.

Copyright 2001 The New York Times Company