New backing rallies those fighting the war on superdeficits
Seventeen unknown American patriots met last Nov. 5 in what may best be described as the reverse of the Boston Tea Party. They gathered at the Empire Motel in the tiny town of Abingdon, Va., to try to spread the idea of taxation without representation.
More precisely, they were organizers of 17 small grass-roots efforts to get citizens to donate money to help retire the national debt. Last fiscal year they - and an estimated 58 other local groups - helped to stimulate contributions of this fiscal year, these widely scattered efforts have funneled another $800,000 -plus to the Bureau of Government Financial Operations at the Treasury.
Unfortunately the federal debt has risen some $306 billion in those two years. The United States is going into the red about 170,388 times as fast as that thin line of fiscal good samaritans can bail red ink out of the ship of state.
Congress and President Reagan recently moved to extend the ceiling on America's national mortgage to $1.49 trillion. That limit should keep the United States in missiles, social security checks, dams, unplowed acres, food stamps, civil service pay and pensions, highway overpasses, and paper clips until next April.
But, if deficits remain as now projected, the debt limit will have to be raised to $2.041 trillion by fiscal 1986 and $2.664 trillion by 1988. (These figures are government estimates of the so-called ''current services'' budget - based on current spending patterns.)
That projected ballooning of the national debt is the most graphic example of what has heated up the gentlemanly but biting debate between mainline economists - led most visibly by Martin Feldstein, chairman of the President's Council of Economic Advisers - and supply-siders in and out of government.
Dr. Feldstein projects an increase of at least 50 percent (from 2 percent of gross national product to 3 or even 3.3 percent) in the share of our national pie going to pay interest on the national debt by 1988. And that increase will eat up most of what is saved by cuts in the rate of increase of federal civilian spending.
According to a new study by Feldstein's former associate, Harvard economist Benjamin M. Friedman, the size of the projected deficits in the mid-'80s would sharply undermine the supply of new investment capital to retool older industries and start new ones, or to lessen US energy dependence. In turn, such a shortage of capital would slow the growth of productivity. And that, ultimately, would erode the national standard of living.
The Feldstein headlines are, in short, less important as evidence of political intrigue in the White House than as evidence about the future standard of living of Americans.
Professor Friedman's research gives Americans some perspective on where they've been and where they're going. Among his findings:
* The US capital formation rate is already low in relation to the American economy's past performance - and in relation to that of major industrial economies abroad. And it is likely to erode further in the 1984-88 period unless the projected deficits are cut in half or more.
* Despite claims that the federal budget has ''always'' shown a large deficit , persistent deficits larger than 0.5 percent of the gross national product (GNP) have occurred only since the 1970s. In contrast, neither President Reagan's nor Congress's projections show a deficit substantially below 4 percent of GNP before 1988. Repeated federal deficits of that magnitude will be unprecedented in US peacetime history.
* Deficits in the preceding two recession years were ''normal'' for a recession cycle, resulting from depressed revenues rather than a ''structural'' gap between revenue and expenditure. Effects of economic weakness, in fact, accounted for three-fourths of the total deficit accumulation during the past three decades. Only one-fourth was structural. But the deficits projected for the rest of the decade are increasingly structural.
* To give an example of the forgoing: The then-sobering 1982 deficit of $128 billion would actually have amounted to only about $19 billion if the economy had been running at near-capacity rate with high employment. But in the administration's estimates for fiscal 1984, the ''structural'' or underlying deficit amounts to some $181 billion out of a total figure of $249 billion. And by 1988 the structural portion will have reached $306 billion out of $315 billion - or 97 percent as compared with 15 percent in 1982.
* Even an apparent decline in the deficit - from $212 billion in 1984 to $203 billion in 1986 - masks an increase in the ''real'' gap from $128 billion to $ 147 billion.
* The unprecedented peacetime rise in ''real'' deficits is not cause for panic. But neither can it be wished away by saying that full recovery of the economy will take care of it. To stabilize the ratio of federal debt in relation to the whole economy even at the relatively high level of the 1970s would require cutting the average federal deficit level in the 1984-88 period to about one-half of what the Reagan budgets call for. That means cutting to one-third of what would be expected if current taxation and spending levels persist.
That's an enormous cutback. Are there other factors that might create more economic growth and thus shrink the size of the projected structural deficits?
Or are there factors that might create more saving, therefore more capital formation, therefore greater productivity, therefore a rising standard of living?
Professor Friedman examined several possibilities. One promising area would appear to be increased private-sector saving - both personal and corporate. Another would be increased corporate borrowing or reinvestment stemming from recently liberalized depreciation allowances. A third factor would be increased investment of foreign capital. A fourth, federal investment in either physical plant or training programs that would increase productivity.
Each of these factors would provide new investment capital. But could all, or any of them, rise significantly in the face of huge federal bites into available national output?
The Friedman study shows American individuals and corporations have been quite steady savers throughout the post-World War II era. The national private saving rate has hovered close to 7 percent of GNP. But he sees nothing sacred about that 7 percent figure. And he wonders if it might rise to the higher levels that Japan, Germany, and most of Western Europe manage.
The problem, he finds, is that it would have to rise soon by ''an astonishing 50 percent'' - from the historic norm of 7 percent to some 10 to 11 percent - in order merely to bring the capital formation rate back to what it was in the 1970 s.
To give some idea of what this would mean for capital investment, he again takes a look at postwar history. In the 1960s, domestic investment amounted to 6 .9 percent of GNP. In the 1970s, it dropped to 6.2 percent. So far in the 1980s it has amounted to only 3 percent of GNP.
Obviously that 7 percent savings rate is having a hard time funding both private investment and the federal deficits in recent years.
To date, the savings rate has not risen significantly, as forecast, in response to the three years of Reagan tax cuts.
The Friedman study suggests that this may be because the 1981 tax bill created ''few specifically targeted saving incentives'' beyond its enlarged IRA and Keogh pension plans. Creating new savings incentives may therefore be one area for President and Congress to explore further. Congressional leaders have explored, but not acted upon, plans for taxing consumption more and saving less.
The study further indicates that historically large federal borrowing has crowded out corporate borrowing for new plant, innovation, and other productivity-increasing investments. It sees liberal depreciation allowances as not providing substantial new reinvestment capital.
Foreign capital will continue to flow into the US economy. But, Friedman argues, it is not likely to come in sufficient quantity to make a difference. And, he adds, it is offset by its effect of causing a stronger dollar - and thus hampering the US economy's export earnings.
As to federal investment in new plant and training, the study shows that proposed government spending for nonmilitary capital formation is shrinking rather than growing. That would seem to suggest to President and Congress that federal programs encouraging research and development as well as retraining need to be emphasized in the future.
So, what is the message to those 17 patriots who want to pay off the national debt? Or to the millions of Americans who polls show are increasingly worried about deficits and debt?
It appears to be that in the 1950s, 1960s, and half of the 1970s, they were succeeding. The federal debt actually shrank from from 62.9 percent of GNP in 1953 to 24 percent in 1974. Then it began to rise again. And, as seen above in the sharply rising deficits of the mid-1980s, it may be heading back to levels not seen since the late 1950s.
In earlier periods of high federal debt, private households, corporations, and state and local governments have compensated by lowering their own debt levels. The result has been that overall total national debt remains fairly steady.
So one moral for both the debt-payoff samaritans and for Americans in general may be: Pay down personal and corporate debt and save more.
But just in case, Mrs. Kay M. Fishburn of New Berlin, Wis., (one of the 17 who gathered at Abingdon, Va.) is busy going through ''Who's Who in America'' and mailing out formal invitations.
She represents the informally linked ''Debt Retirement Network.'' Their handsomely scripted invitation urges recipients to send what they can to: Jean Whisonant, Suite 300, US Department of the Treasury, Bureau of Government Financial Operations, Pennsylvania Ave. and Madison Pl., N.W., Washington, D.C. 20206.
So far 23,000 have gone out. Some 10 percent are returned undelivered (which may mean that Who's Who Americans move a lot). Of recipients who reply, about 80 percent make a positive response, 20 percent negative. Another 100,000 mailings are going out this fall.
The aim of the Abingdon 17 is not just to make a dent in the existing megadebt. It is ''that our leadership and purpose will inspire our public servants to meet the challenge of the future with competence, efficiency, and thrift.''