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                ¼óΓ.C,                        é=Ç=                          ╚GOVERNMENT, Page 38

The Federal Deficit


Everyone knows how to stop the Niagara of red ink, but most
politicians lack the courage to do it, including Bush, Clinton
and Perot

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 before 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.