Share this story
Close X
Switch to Desktop Site

The Budget Package Put Into Perspective

PREDICTING what ''a couple of dozen'' members of Congress and Clinton administration officials will decide in detail in the bargaining sessions on the budget that began this week is harder than forecasting the economy, says economist Christopher Probyn. It's tough.

One outcome seems certain: The growth of federal spending will slow. That restraint, aimed at balancing the budget by 2002, should boost both the overall economy and the housing market, figure Mr. Probyn and his colleagues at DRI/McGraw-Hill, an economic consulting firm in Lexington, Mass.

About these ads

Contrary to skeptics, the Budget Enforcement Act of 1990 also worked to hold back federal spending. ''Congress promised to rein in the growth of government spending, and it did,'' notes Paul Kasriel, an economist at the Northern Trust Company, Chicago. Federal outlays grew at a compound annual rate of 9.3 percent between 1965 and 1990. From 1990 to 1995, the timespan this act was in force, the growth slowed to 5.2 percent annually. These numbers measure a relevant subset of federal outlays that excludes interest payments on the national debt and deposit-insurance-related expenditures (remember the thrift and bank crisis?).

And, Mr. Kasriel says, if the budget resolution of June 1995 is enacted and adhered to, the compound annual growth in these expenditures will decelerate further to a shade above 3 percent.

Whether the compromise due by Dec. 15 will quite reach that goal is uncertain. But reports from Washington say the Clinton administration has already proposed to accept more than half the Republican cuts from domestic appropriations for this fiscal year. A compromise may mean somewhat more spending and somewhat smaller tax cuts.

Whatever happens, there will not be a huge shrinkage in the size of the federal government. ''It is still going to be a very big government,'' says Herbert Stein, who was Richard Nixon's top economist and is now at the American Enterprise Institute, a conservative think tank in Washington.

In the last two decades, federal outlays have run between a low of 20.7 percent of the gross domestic product (1979) and 24.4 percent (1983, after a recession). In the fiscal year that ended Sept. 30, federal outlays were about 21.9 percent of GDP, the nation's total output of goods and services. By 2002, if the GDP plan holds in place and the deficit is actually eliminated, the percentage might drop to about 20 percent.

''It is not a radical difference,'' says Mr. Stein, who likes to put the battle over the budget in perspective.

The last time federal outlays were below 20 percent of GDP was in 1974 (19.2 percent), a time when defense spending was declining as a percentage of GDP as it is today. Defense spending was about 3.9 percent of GDP in fiscal 1995, compared with 6.5 percent at the peak of President Reagan's arms buildup in 1986.

About these ads

''You are not talking about dismantling the federal government,'' says Stanley Collender, a federal-budget analyst at Price Waterhouse in Washington. ''You are talking about significant change. But it is not as dramatic as the New Deal.''

Social Security, a pillar of President Roosevelt's New Deal, remains a federal program. So does President Johnson's Medicare, though the Republicans and Democrats differ by a few dollars on the premiums to be contributed each month by the elderly. Stein calls that difference ''trivial and insignificant.''

The Republican plan does call for shifting the responsibility for welfare and Medicaid, programs that help the poor, to the states, with the federal government just making grants.

Stein says he is ambivalent about this ''big gamble.'' The states were regarded decades ago as having governments that were corrupt and more inept than the federal government. He wonders if today they will be capable of running these programs more efficiently and if they will fund such constructive measures as job training and child care for the poor. He doesn't object to the ''experiment,'' but says it should be recognized as such.

The DRI economists calculate that a plan to eliminate the federal deficit in seven years will cut the yield on 30-year Treasury bonds to 4.5 percent, subtract 2.7 percentage points from fixed-rate home mortgage rates, and boost productivity.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.