A Test of the American Spirit

Alittle over a year ago, the American public elected the first Republican Congress in more than 50 years. At the time, it seemed as if this election would prove to be a historic turning point not only in the history of American politics, but also in the history of America itself.

One of the centerpieces of the Contract with America, the campaign platform on which the vast majority of Republican congressional candidates ran, was a balanced budget amendment that would ensure a balanced federal budget by the year 2002. In surveys done before the election, this item along with term limitations proved the most popular among the American public. Yet now, only a year later, public support for the Republican balanced budget plan has drastically eroded, the result of Democratic attempts to scare and confuse many voters through sensationalism and half-truths.

In so doing, the Democrats have clearly put partisan interests before the good of the country. America desperately needs a balanced federal budget as soon as possible, yet the Democrats insist on playing political games that only delay the process.

The primary thrust of this Democratic strategy has been to repeatedly imply that Republican attempts to sensibly restructure Medicare, Medicaid and other federal entitlement programs amount to little more than stealing from the poor to give to the rich.

In this way, the Democrats have repeatedly strayed from the truth. Take the case of Medicare. Unless Congress restructures the Medicare system to reduce expenditures the system will go bankrupt as revenues generated by Medicare taxes fall below expenditures. At that point, the government will have to either subsidize Medicare by diverting other revenues to it or raise the Medicare tax. Either solution would only serve to further increase the tax burden on the general public.

Moreover, the changes proposed by the Republicans for Medicare reform are fully justified by the circumstances. Senior citizens should be encouraged to join HMOs just like many of the tax-payers who subsidize their medical insurance.

Why should the general populace pay higher taxes so the elderly can have special privileges generally unavailable to the average American? Further, senior citizens should pay more for their medical insurance. In recent decades, the Medicare tax has skyrocketed as expenditures on the program have grown much faster than inflation.

As a result, the current recipients of Medicare receive compensation far out of proportion to their initial contribution prior to retirement. Given this fact, the contention that somehow Medicare recipients deserve heavily subsidized health insurance due to their prior contributions to the Medicare fund is absurd.

Yet these facts have certainly not kept the Democrats from claiming that the Republican party is out to wreck Medicare. Democrats have used the same line of attack on other parts of the Republican budget plan.

They have attacked Republican cutbacks in student aid, welfare and Medicaid among others. In every case, the Democratic party has tried to portray the Republican cutbacks needed to balance the budget as disastrous for the individual special interest group that will be affected. Never once have they stopped to consider the vast benefits to America that a balanced budget will produce. While President Clinton has produced a plan that will supposedly balance the budget by 2002, the Congressional Budget Office determined that his plan would fall more than $300 billion short over the next seven years. Even in 2002 the Clinton plan would produce a budget deficit of over $100 billion.

Clearly the Democratic party is not serious about balancing the budget. Even worse, they are determined to prevent the Republicans from balancing it in the only way possible cutbacks in entitlement spending. In so doing, the Democratic party has placed its own partisan interests before the future of our country.

Just as clearly, the future of our country is at stake in the debate over the budget. The last 23 years have seen a general stagnation in the wages of the average American.

While many factors have caused this to come about, the steadily increasing budget deficits that began in the early 1970s have played a big part in that wage stagnation. Investment is the key to economic growth in the long-term because only through investment in human and physical capital can companies raise the productivity of their workers. Since productivity, in general, determines the wage rate, a lack of investment leads to little or no wage growth.

In recent years, the U.S. investment rate has lagged significantly behind that of other countries. Currently, the U.S. spends only about 15 percent of its GDP on investment.

In comparison, Japan extends close to 30 percent, while many European nations spend more than 20 percent. Given these facts is it any wonder that the wage rate in the United States has not increased much since 1972?

While some economists and politicians may argue that cultural factors, such as the American predilection for spending, are responsible for America's anemic rate of investment, the evidence suggests that the real culprit is the budget deficit.

In general, investment varies inversely with the interest rate. The higher the interest rate, the more expensive it is for companies to borrow money and invest, therefore, as the interest rate rises investment decreases. The budget deficit drives up the interest rate because as the government tries to borrow more and more money it increases demand in the loanable funds market. Since an increase in demand with no change in supply always causes the price of a good to rise, the increase in demand for loanable funds will produce a higher interest rate which leads to less investment.

Yet not only does the budget deficit drive down investment, it also creates a trade deficit. Since the budget deficit in recent years has been so large, it has routinely eaten up an enormous proportion of domestic savings. The savings left over generally cannot meet the demands for domestic investment so America must import foreign capital to make up the difference.

One general rule of foreign trade is that net capital outflows must match the trade balance. Since the United States, due to its huge budget deficit, must import capital, it must also run a trade deficit to balance the other side of the equation. The result has been a steadily increasing trade deficit for much of the past two decades.

In the end, these economic consequences of the budget deficit lead to less economic growth and more wage stagnation. The result is a weaker and poorer America filled with citizens battling over a steadily shrinking economic pie. Perhaps in such an economic climate the Democratic party would thrive given its ability to cater to special interest groups.

In contrast, America would slip into economic decline, joining Great Britain in the dust-bin of history, two has-been nations destroyed by the foolish economic policies of the Left.

The United States can still avoid this fate. But to do so the American public must band together and commit itself to balancing the budget and to saving America.

If all of us sacrifice a fraction of the many benefits we each receive from the federal government, then we can balance the budget. But we must all be willing to make that sacrifice for the good to the country.

Imperfect, the debate over the balanced budget serves as one of the great tests of America's national spirit. In the past we have always passed these tests. When Great Britain sought to impose taxation without representation on the 13 colonies thousands of men came forward to help carve out a new nation committed to freedom and democracy.

When the Union needed men to save America, hundreds of thousands volunteered to risk life and limb for the good of the nation. While perhaps the issue of the balanced budget lacks the drama of these earlier tests, it is a test that we must pass as a nation. We must do so for the sake of not only ourselves but for the sake of future generations of Americans.