"Running on Empty" by Peter G. Peterson

Supply-siders believe that when a government cuts taxes on citizens, people see an increased incentive to work, save and invest, thereby leading to faster economic growth. Sometimes they're right: When John F. Kennedy lowered the top tax rate from 91 percent to 70 percent in 1963, or when Ronald Reagan lowered the 70 percent rate to 50 percent in 1981, revenue from the wealthiest Americans did increase. But "there's plenty of empirical evidence that when marginal tax rates are not high, the efficiencies you gain by cutting them may be modest and the impact on economic activity may be ambiguous," Peterson points out. If your tax goes down from 39 percent to 35 percent, you could possibly decide to work more -- but you might also not change your behavior, or you could work a bit less. We saw this on a national scale in 1993, when Bill Clinton increased the top marginal federal income tax rate from 31 percent to 39.6 percent. Supply-side theory would have predicted a decline in economic activity in response to such a tax hike, but of course what we saw instead was a boom in "jobs, hours, savings, investment, and productivity -- a chapter in economic history that never appears in supply-siders' texts."

But even if Bush's supply-side ideas prove true, and lowering tax rates do somehow lead to a permanently faster-growing economy (a highly, highly dubious proposal), the resulting gains will not set us free from our liabilities in Social Security and Medicare. Social Security benefits are directly indexed to wages, Peterson points out. If the economy turns red hot as a result of Bush's tax cuts, current workers will receive higher wages, and consequently, they'll pay more in taxes, thereby helping the government support current retirees. But when today's workers retire, the government will award them benefits according to how much money they earned while they were working -- and since they're earning more today, they'll receive larger checks tomorrow. Republicans often argue that affording the long-term liabilities will be simple -- we can just "grow the economy" through supply-side tax cuts. But because Social Security (as well as, more indirectly, Medicare) benefits are linked to economic growth, "higher productivity growth cannot possibly save today's pay-as-you-go retirement systems," Peterson concludes.

Many supply-siders won't be too upset if, instead of making it easier for us to cope with the coming wave of retiring seniors, tax cuts only bury the nation in red ink. That's because some of them like the red ink. According to Peterson, some in the Republican Party are fond of privately espousing the Reagan-era "starve the beast" theory of governance; they see the deficits caused by tax cuts as a way to shrink the size of government or force a reform of entitlement programs. That theory would be easier to swallow if Republicans themselves had shown any restraint during the past few years of ballooning budget deficits, but they have not. Bush, Peterson notes, isn't starving the beast -- he's fattening it. Under Bush and the Republican Congress, spending has gone through the roof. Domestic discretionary outlays (excluding the tab for "homeland security") have increased by 7 percent annually during Bush's presidency, and the practice of earmarking bills for special projects in lawmakers' home districts -- delivering "pork" -- has reached record levels. Yet Bush has done nothing to rein in the spending; he is on track to become the first president since John Quincy Adams to serve a full term without vetoing a single bill.

While there is much in Peterson's book to keep Bush bashers smiling -- "This administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history" could make a nice T-shirt -- the author is equally critical of Democrats, many of whom have not yet accepted the idea that entitlements for seniors will need to be radically reformed in order to stave off disaster. While Democrats have recently tried to paint themselves as the more fiscally responsible party, Peterson can't see much responsibility in their record. The party's leading lights offer few solid plans to bring the budget back into balance -- indeed, the majority of the budget proposals floated by this year's slate of Democratic presidential contenders would have deepened the deficit, Peterson notes.

Worse than that, "Democrats regularly short-circuit any prudent examination of the single biggest spending issue, the future of senior entitlements, by castigating all reformers as heartless Scrooges," Peterson writes. "No national candidate who says the affordability of these entitlements is a problem ... has a prayer of winning a primary." As proof, Peterson points to Howard Dean, who learned the hard way that to his party, entitlements for seniors constitute a sacred cow. In the mid-1990s, when Dean headed the National Governors Association, he supported a plan to reduce the annual growth rate of Medicare -- an effort he has defended as a way to keep the program solvent. For his troubles, John Kerry and Dick Gephardt attacked him for weeks during the Iowa caucus contest, accusing Dean of siding with Newt Gingrich and against poor defenseless seniors. "I'm not going to use Medicare as a means to balance the budget ... on the back of seniors," Kerry began saying on the stump.

Next Page: So how does Kerry plan to tackle the Social Security and Medicare deficits? Um...

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