THE federal debt picture may actually be worse than the architects of the Gramm-Rudman bill have portrayed it. Under their scenario, the current deficit would be cut by $36 billion a year until it disappeared in the year 1991. All sorts of events are apt to make this unlikely. Indeed, growing doubts about the wisdom of Gramm-Rudman appear to be slowing down its progress in Congress. But the arithmetic in Gramm-Rudman may be too hopeful. This is the conclusion of Carol Brock Kenney, an economist with Wertheim & Co., a New York securities firm. In her current economic commentary, she outlines the course of spending if legislation on the books isn't changed. Current laws would increase spending so that, without tax increases, the deficit would actually grow to $256 billion by 1988. Thus, Congress would in effect have to trim spending by more than the $36 billion the current bill requi res, since it would also be acting against the rising tide of spending caused by previous laws it has passed.
Moreover, Ms. Kenney points out, these figures are based on estimates that are in themselves probably overly optimistic. She thinks deficits could easily exceed $300 billion. The administration looks for no recession during the forecast period, and still sees the economy growing at a 3.6 percent rate in 1990. (It grows at a 4 percent rate until then.) Yet the current business expansion is already slightly older than the postwar average. It isn't impossible for the economy to keep from stumbling -- jus t unlikely, she says. One reason for her skepticism is that to grow as fast as we have in the last three years, consumers have borrowed far more than in past expansions. That kind of debt leveraging cannot be the basis for continued growth.
The administration forecast makes another convenient assumption: that wages and salaries will grow at twice the inflation rate. This conveniently raises income tax collections. Yet, Kenney says, wages can grow faster than inflation for a sustained period only if productivity advances smartly. This, she says, ``does not seem likely in view of the recent drop in year-to-year productivity. Two 3-plus percent productivity growth years (which the administration apparently assumes) would imply the best back-t o-back productivity performance in a noncyclical setting since the early 1960s.''
On the spending side, she thinks the interest costs for servicing the federal debt are too low. They assume interest rates declining to 5.9 percent on Treasury bills by 1990 in the face of an unprecedented need to finance the $250 billion-plus deficits. In fact, the government may need to try harder to attract savings, and that could mean higher rates than now.
Picture yourself telling your banker you need some money for five years. You inflate your expected income for those years beyond any kind of increase you have ever had in the past, and you tell him that your expenses are well under control and that, in fact, you expect to be spending a bit less. This despite the fact that you are asking for the loan precisely because you or your spouse's spending is out of control and you are borrowing just to pay current bills. You hope he will
One need not follow all of Ms. Kenney's numbers or even agree precisely with her every calculation. Her basic reasoning is valid, however, and the situation with the deficit is actually worse than those playing around with Gramm-Rudman would like to admit. Question: Should we tell them? Or, should they be telling us?