TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/87/87capts.12

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                                                                                January 12, 1987

ECONOMY

Pie in the Sky


The White House and Congress battle to cut a trillion dollar
budget


As the 100th Congress begins a new year of work, it immediately
faces an economic dilemma that is agonizingly old:  what to do
about the monstrous and dangerous U.S. deficit. Despite all
efforts in years past to control it, the gap between federal
spending and revenues grew to a record $221 billion in fiscal
1986. This week, as President Reagan sends Congress his 1988
budget, the annual battle over the deficit gets under way.
Behind the barrage of statistics and beyond the parade of
partisan interest groups fighting for bigger shares of the
federal pie, the issue at stake is, quite simply, the
well-being of the U.S. economy. The outcome of the budgetary
wrangles could have a profound effect on taxes and take-home
pay, interest rates and the cost of a house, the health of the
stock market and the value of the dollar.

In many ways Reagan's 1988 budget seems like a wishful
blueprint for a miracle. The President proposes to slash the
deficit to $108 billion, the 1988 target prescribed by the
Gramm-Rudman law, without a tax increase and while still
boosting defense spending by 3%, after adjustment for inflation.
The deficit reduction would come entirely through further cuts
in social and other nondefense spending, along with short-term
expedients like sales of Government assets. But private
economists are almost universally doubtful that the formula can
work. Charles Schultze, a Brookings Institution scholar who was
President Carter's chief economic adviser, sees "no way" that
the 1988 Gramm-Rudman goal can be met without a tax increase.

As in the past few years, Congress is likely to reduce the
President's defense request and insist on fewer cuts in social
programs. Since the Democrats have taken control of the Senate
and already command the House, Reagan will find it more
difficult than ever to get a budget that even remotely resembles
his original plan. Though James Miller, Director of the Office
of Management and Budget, maintains that the President's budget
is "eminently doable," critics are labeling it "dead on
departure."

Congress is still weary from its struggle with the 1987 budget.
In the end the lawmakers decided to let federal spending pass
the once inconceivable $1 trillion mark this year. Their final
spending bill anticipated a deficit of $154 billion, as
permitted by Gramm-Rudman. But the Congressional Budget Office
now projects a 1987 deficit of $174.5 billion, and some private
economists say it may go as high as $190 billion.

For 1988 Reagan has proposed spending $1.02 trillion against
expected revenues of only $916 billion. He thus becomes the
first President to send a trillion dollar budget to Capitol
Hill. His proposals call for the deficit to be cut to the $108
billion Gramm-Rudman target through a combination of $42 billion
in spending reductions and revenue increases. Some $20 billion
of that would be trimmed from domestic programs, including
mass- transit aid, housing assistance and farm subsidies.
Social Security, as usual, remains untouchable.

The other $22 billion would come in part from gimmicks that the
White House used to call revenue enhancements. One proposed
strategy is the sale of Government-owned assets to private
investors. Among items that could make it to the auction block
are the Amtrak rail system and several regional power-marketing
administrations, which sell electricity to local utilities.
Reagan is putting forward a plan in which the Government would
sell $8 billion worth of the loans it has made to students,
small businesses and other debtors. Private investment
companies would buy the loans and then collect the interest and
principal payments.

Many of these ideas have been floated before -- and sunk -- on
Capitol Hill. So opposed has Congress been to the sale of
regional power-marketing administrations that the lawmakers
last year passed a bill forbidding the White House even to study
the subject. Critics contend that the Government is not really
bolstering its revenues through sales of assets, since the
transactions result in the loss of future income like interest
payments on the loans. Says Rudolph Penner, head of the
Congressional Budget Office:  "It's a one-shot deal that
doesn't mean a long-run cut in the deficit."

One of the touchiest budget issues may be military spending.
Most Democrats do not want to appear soft on defense, which
could be politically damaging. Still, many Democrats, along
with a number of Republicans, remain convinced that the U.S.
cannot afford as much of an arms buildup as Reagan has proposed.
Says a Capitol Hill staffer:  "If there were a way to provide
3% real growth for defense, you can bet that the Democrats would
do it. But the cupboard is bare. There's nothing there."

An even more politically explosive topic is farm aid. U.S.
farmers, who are still mired in a deep depression, enjoy
perennial clout on Capitol Hill, but Reagan wants to cut the
farm budget by several billion during the next five years. The
Administration seeks to cut target farm prices, which determine
the size of subsidies, by 10% a year. It would also like to
toughen up the rules on maximum payments to ensure that the
bulk of the aid goes to farmers who need it most. Says OMB
Chief Miller, alluding to the movie Country:  "A lot of money
goes to people who are not Jessica Lange on the farm."

Leading the congressional efforts to deal with the deficit will
be the chairmen of the two budget committees. On the Senate
side, the budget panel will have a new chief, Democrat Lawton
Chiles of Florida. Chiles is no stranger to the budget wars.
In years past he worked so closely with the former Republican
budget chairman, Peat Domenici of New Mexico, that the two men
became known as the Bobbsey Twins. In the process, Chiles
earned a reputation as a sincere and often effective budget
cutter.

The House Budget Committee will be led for the third year by
William Gray of Pennsylvania. Gray has been willing to stand
up to the White House in the budget debate, and this year he
seems more determined that ever to challenge Reagan's
priorities. Says Gray:  "What Congress is saying, Mr.
President, is if you want to spend more money for the Pentagon
and foreign aid, you've got to pay for it out of new revenues
and not our of decimating education, health care for the elderly
and nutrition for children."

In an interview with TIME, Gray suggested that one way of
raising revenue might be to impost a "temporary" surcharge on
foreign imports that would last no more than three years. Gray
estimated that higher fees on imports could raise anywhere from
$10 billion to $30 billion annually, depending on the type of
surcharges imposed. The duties would have the beneficial side
effect of reducing the trade deficit and helping American
industries, but would surely invite retaliation by other
countries and might worsen the U.S. trading position in the long
run. Many economists advocate a more focused tax on imported
oil, which would not only boost revenues but also encourage
conservation and reduce dependence on foreign supplies.

The least likely step is an income-tax increase. Last month
Texas Representative Jim Wright, the incoming Speaker of the
House, suggested that the tax-rate cut in the new reform
legislation be delayed for the wealthiest Americans. Wright's
notion was promptly criticized by members of both parties, and
he has not broached the subject since.

More and more economists and Congressmen believe the current
Gramm-Rudman target for fiscal 1988 is unrealistic and needs to
be revised. If Congress made too drastic a cut in the deficit,
they argue, it could throw the sluggish economy into a
recession. Says C. Fred Bergsten, director of the
Washington-based Institute for International Economics:  "I
don't think anybody believes that it is either possible or
desirable to meet the Gramm-Rudman target."  Admits Chiles:
"There is nothing magic about $108 billion. But I think you
have a problem if you abandon it without something better in its
place."  House Budget Chief Gray and incoming Senate Minority
Leader Robert Byrd have also suggested that Gramm-Rudman may
have to be revamped. But the White House would probably object.
Says Miller:  "If we go back on Gramm-Rudman, the deficit will
shoot right up again."

While economists oppose cutting the deficit by too much, too
fast, they agree that doing nothing to diminish the level of
federal red ink could be equally dangerous. Massive Government
borrowing soaks private savings out of the economy, leaving
fewer funds available for business investment. Most ominous,
the national debt may exceed $2.2 trillion this year. The
interest payments on that gargantuan sum already threaten to put
an intolerable burden on future generations. Says Roger Noll,
a professor of economics at Stanford:  "What we will see happen
as a result of continuing deficits is the slow, persistent
erosion of the health of the U.S. economy."

Like clean air and water, a reduced budget deficit is a public
good:  everyone benefits from it. At the same time, though, it
is in each person's private interest to fight to defend his
particular piece of the Government spending pie. Ultimately,
America's prosperity will depend on whether its leaders have
the courage to put the public good above private interests.

By Barbara Randolph. Reported by Bernard Baumohi/New York and
Jay Branegan/Washington.