The Federal Deficit
By STANLEY W. CLOUD WASHINGTON
Once upon a time, there was a country that had almost everything. Businesses in this blessed land often made so much money that they could afford to pay robber-baron wages to mere managers. The medical system offered first-class care to most citizens while turning physicians into millionaires. The Social Security fund distributed inflation-indexed payments to the elderly, regardless of need. No new weapon was too costly for the military. The civilian space program, in spite of some setbacks, was dazzling. The farms produced more food than the people could possibly consume. Best of all, these and many other benefits were provided or subsidized by the government at far less than their overall cost. The nation had problems -- poverty, homelessness, drugs, declining cities -- but on the whole, what a place it was!
Once upon a time. In America. In the '80s.
Welcome to the '90s. The bills for the good times are long overdue, and politicians are thrashing about, wondering what went wrong. By how much did federal spending outstrip revenues in the past 12 years? Several measurements are possible. For example, cumulative budget deficits over the period added more than $2 trillion to the national debt. Or you can look at the annual record and watch the deficits mount. In the Reagan-Bush years to date, the average annual deficit has been about $200 billion. In six of those 11 years, the actual amount was well in excess of $200 billion, and this year -- despite the much ballyhooed 1990 "budget agreement" between Congress and the White House -- it will explode to some $400 billion.
Economists prefer to think of federal deficits in terms of their percentage of the gross domestic product. But here too, the news is not good. Back in the days of Presidents Kennedy, Johnson and Nixon, deficits generally hovered at a relatively harmless 1% or 2% of gdp, except for a brief uptick to 3% at the end of the Johnson Administration to help pay for the Vietnam War. In contrast, during the Reagan-Bush years, the deficit's share of gdp shot up to between 3% and 7%, meaning that government red ink was weighing far more heavily on the economy -- even on a rapidly expanding one -- than ever before in peacetime, sopping up credit that would otherwise have been available to the private sector and driving up interest rates. Even if this year's estimated deficit of $400 billion turns out to be a one-year ceiling-breaker caused by the recession, much of the underlying deficit is becoming self- perpetuating. This year 14% of federal payments -- or about $200 billion -- will go not for goods or services but merely for interest on the $3.9 trillion national debt. Since the bipartisan Congressional Budget Office projects annual deficits of $200 billion to $300 billion or more during the first decade of the 21st century, taxes to finance the rolling debt are almost certain to be much higher on tomorrow's workers than on today's.
The impact here and now is bad enough. Although experts disagree about how much of a macroeconomic drag the deficit represents, there is no question that it has severely hamstrung the government. Voters have a point when they complain that Washington doesn't seem to do anything anymore except collect taxes; but they should understand that the existence of a $400 billion deficit -- created in part to pay for programs that voters themselves demanded even as they opposed new taxes -- severely limits the kinds of things the government can accomplish for the commonweal. Moreover, the size of the deficit means that regardless of who is in power, things can only get worse before they get better.
Yet most politicians have tended to play games with the deficit, offering quick-fix schemes such as the balanced-budget amendment to the Constitution, which the House of Representatives narrowly defeated last week. But there are no quick fixes anymore. Consider this: if the U.S., in the throes of post-cold war euphoria, had decided to spend absolutely nothing on national defense in 1992 -- not even salaries for the troops or pensions for the retirees -- the deficit would still be nearly $90 billion, an all-time high for any year in American history before 1982. Actually to balance the 1992 budget would require lopping off an amount equal to all defense expenditures plus half of all domestic discretionary spending, which would mean massive cuts in such things as the space program, scientific research and development, agriculture, housing and law enforcement. Even in a more "normal" year, with the deficit at about $200 billion, it would take the equivalent of all current discretionary domestic spending to bring the budget into balance.
When you discuss the federal deficit, you are thus talking about very big bucks indeed. And when you discuss ways to reduce the deficit, you are talking about making extremely difficult choices that are likely to disrupt the life of the nation and the individual lives of virtually all of its citizens. That is why so few incumbent politicians -- and so few voters -- have been willing to engage in serious discussions of the problem. That is also why Presidents Reagan and Bush, for all their budget-balancing rhetoric, never came within $60 billion of actually submitting a balanced budget to Congress.
By buying into the supply-side notion that the U.S. could cut income taxes while simultaneously paying for massive increases in defense and certain highly popular domestic programs, Reagan may be justly dubbed the Father of the 12-Digit Deficit. Yet he and Bush are still trying to shift the blame to Congress. As recently as last week, Reagan wrote in the New York Times that "Congress alone has responsibility and authority for passing budgets, and Congress alone can balance them." True, but the argument begs the question.
What happened in the '80s was that Congress, impressed with Reagan's overwhelming popularity (and later Bush's), sheepishly followed the White House's lead on overall spending levels. If the resulting deficits were sometimes higher than those forecast in the two Presidents' own unbalanced budgets, it was because Reagan-Bush aides, such as former Budget Director David Stockman and current Director Richard Darman, consistently and deliberately overestimated federal revenues.
In this year's presidential campaign, the Bush team hopes to deal with the deficit by not dealing with it at all -- that is, by blaming Congress and calling for a balanced-budget amendment. The Democrats' likely presidential nominee, Arkansas Governor Bill Clinton, is on somewhat firmer ground when he advocates slower growth in outlays for Social Security and Medicare in addition to "means testing" that would peg the level of benefits to a recipient's income. Those measures at least would slow the deficit's growth. But Clinton has yet to offer a persuasive plan for reducing the deficit, and he is blowing smoke when he argues that a middle-class tax cut paid for by imposing higher marginal rates on the rich would not add to the deficit.
If you want a real smoke screen, however, look to Ross Perot. He doesn't seem to have a clue about the deficit, beyond comparing it to "a crazy aunt that we won't take out of the basement." Perot takes great umbrage when anyone tries to get him to explain how he would attack it. Does he favor higher taxes? No . . . Well, yes . . . Well, maybe. So far, the most specific program Perot has been able to describe would balance the budget by (shades of Michael Dukakis!) taxing the "underground economy" and (shades of the Grace Commission!) eliminating waste and fraud in government. It seems likely, somehow, that if it were really that simple, someone else would already have done it.
There is a consensus among politicians and economists about what needs to be done in order to cut the deficit. All you have to do is go where the money is. The trick is selling that to the voters. Examples:
CUT ENTITLEMENTS
These are programs like Social Security, Medicare, Medicaid, food stamps and farm-price supports, many of which aid primarily the middle class and those with higher incomes. This year alone, entitlements are expected to cost more than $700 billion, about half the annual federal budget and 14% of the GDP. The Congressional Budget Office estimates that $51.5 billion could be saved over five years by merely eliminating Social Security cost-of-living increases for one year. Similarly, Congress's Joint Committee on Taxation estimates that $26.8 billion could be saved over five years by taxing 50% of Medicare benefits for individuals whose income exceeds $25,000 a year.
CUT DEFENSE
The defense budget for 1992 is about $300 billion, down from a high of $369 billion in constant, inflation-adjusted dollars in the 1980s. Although further cuts would have economic and security implications, many experts in both parties -- and in the Pentagon -- believe a combination of troop reductions and weapons-system cancellations could save as much as $100 billion over five years.
CUT DISCRETIONARY DOMESTIC SPENDING
Total outlays this year -- covering such things as housing, space, transportation, energy and education -- will be a relatively small $216 billion. Under the you-can't-get-blood-from-a-turnip rule, the savings here would be relatively small. If the Department of Energy's controversial, big- ticket superconducting supercollider were canceled, for example, it would save only about $200 million next year and between $2 billion and $3 billion over five years.
RAISE TAXES
( This, of course, is the most controversial area of all. The taxpayer revolt is still very much alive, and many economists believe that raising taxes in a recession would slow the recovery and thus cause a net reduction in federal revenue. Still, higher taxation, along with reductions in entitlements, is where the most significant progress on reducing the deficit can be made. The Joint Committee on Taxation estimates that changing the marginal income tax rates from 15%, 28% and 31% to 16%, 30% and 33% would increase revenue by $18.3 billion in 1993 and by more than $169 billion over five years. The committee also estimates that a 12 cents additional tax on gasoline would yield $54.8 billion in five years. (It would have the added benefits of discouraging auto use and cleaning the air.)
CHANGE ACCOUNTING PROCEDURES
Some argue that the deficit as currently delineated is a meaningless figure, because it lumps together outlays for such capital investments as highways, bridges and education and operating expenses. Since private corporations distinguish between these kinds of expenditures, the critics say, so should the government. Then taxpayers could tell how much of their money was going down a hole and how much was likely to result in a long-term return on investment. It's a good idea, but there would probably still be a hefty deficit in the operating-expenses budget.
There are those, to be sure, who think nothing at all needs to be done about the deficit. Certain neo-Keynesian and supply-side economists have, willy- nilly, joined forces in an attempt to persuade Americans that the deficit doesn't matter all that much and may even be useful. Some of them think that a mere $200 billion in federal red ink has only a negligible negative effect on an expanding $4.9 trillion economy. Others argue that much of the deficit has positive, pump-priming effects and promotes growth and higher levels of employment. As Robert Eisner, an economist at Northwestern University, wrote in 1986, "The federal debt, however frequently viewed as a burden to the government or to future taxpayers, is wealth to those who own it . . . The holders of those deficit-financing Treasury notes, bills and bonds feel richer for having them. And the richer they feel, the more they try to spend now and plan to spend in the future."
Eisner is no supply-sider, but many who are agree with him up to a point. Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan Administration and a leader of the supply-side revolution, believes that all the hand wringing over the deficit is misplaced. The worst thing about it, in Roberts' view, is that "it causes the government to keep doing the wrong thing to correct it" -- raising taxes of one kind or another and thereby inhibiting growth. "The deficit is only a problem if it continues to grow relative to the gross domestic product over a sustained period," says Roberts. "Even then, it would be acceptable if the percentage of gdp is lower than the rest of the world's, because our bonds would still sell well overseas." Foreign ownership of U.S. debt does not bother Roberts at all. Where he draws the line is at the Keynesian notion that government deficits can encourage growth. "The deficit did not finance the growth of the Reagan years," Roberts insists. "Lower taxes did."
Where supply-siders like Roberts differ from other economists, not to mention more traditional conservatives such as George Bush, is in their hostility to almost any role -- except perhaps national defense -- for the central government. "What we are coming to grips with in this country is the collapse of the 20th century's romantic idea of Big Government," says Roberts, now a scholar at the Center for Strategic and International Studies. "There are very few government functions I can think of that should not be privatized." This is the dirty little secret of many Reaganauts: whether or not they planned it this way, they see the deficit as a welcome brake on government's involvement in U.S. social and economic life.
Such Machiavellian thinking is not typical. In varying degrees, most economists and politicians regard the deficit as a problem that must be solved for the sake of the economy and the government. Says Herbert Stein, former chief economic adviser in the Nixon White House: "The deficit is less serious than the public discourse suggests but more serious than our action on it to date indicates." The U.S. economy, says Stein, "is very rich. Making it grow faster is not my top priority. My top priority is doing something to help the poor and the miserable." President Jimmy Carter's chief economic adviser, Charles Schultze, sounds similar themes. "The deficit," says he, "is the most serious problem this country has that we know what to do about."
The real question is whether Americans want their Federal Government to work better or, in effect, to go out of business. If they choose the former, those overdue bills from the '80s must be paid. If they favor the latter, they should stay on the present course.
CHART: NOT AVAILABLE
CREDIT: TIME Graphic by Nigel Holmes and Joe Lertola
[TMFONT 1 d #666666 d {Source: Office of Management and budget}]CAPTION: 1992 U.S. SPENDING . . .
. . . AND REVENUES
FEDERAL BUDGET DEFICIT