The Deficit: Stuck at Square One
FOR a decade Washington has wrestled with the federal deficit generated by Ronald Reagan's Big Defense, Little Tax, Less Government program. Congress returns this week for yet another budget round, in a pattern so familiar it seems the government has never gotten beyond square one. There is a certain symmetry to the budget exercise. After the big mistake of '81, the US public endured many tax inceases and cuts in spending - particularly cutbacks in defense, which budget experts like Rudolf Penner of the Urban Institute thinks would have happened without the Gramm-Rudman process.
True, the federal debt-to-GNP ratio has been stabilized at something like 42 percent the past few years. But the savings and loan crisis is adding to costs and recession is eroding revenues, so the deficit will likely rebound. The Middle East crisis has devalued hopes for a peace dividend, and it has mothballed the idea of an energy tax.
Washington's goal had been to reduce the deficit some $50 billion. Now half that might be ambitious.
The United States isn't alone in its sinking economic ambitions. The Japanese stock market decline is being followed by a real estate market decline. A little noted trend in the first quarter of this year showed private investment in the US from abroad actually in decline.
The Federal Reserve is doing its part. The dollar has been slipping against the deutsche mark and the Swiss franc. This is requiring the Fed to keep an eye on the dollar and not let it slip too quickly. The Fed is also taking care not to overfinance increases in oil prices.
Gramm-Rudman, the legislation designed to force Congress to do what it should do anyway - that is, balance the budget or face across the board cuts - has likely done more harm than good. True, it has helped lower the deficit a little, but at the cost of inefficient policy judgments. Washington has resorted to partial methods, such as allowing the early repayment of debt (which costs taxpayers money in forgone interest). If one assumes that defense spending was going to be cut anyway, little was accomplished by Gramm-Rudman.
At this moment, the huge sequester Gramm-Rudman would call for is being taken seriously; government agencies are planning for it. But it looks like little will be done until after the election, and then in a lame-duck session.
American taxpayers have had to take on greater burdens through the 1980s. Reagan signed the Tax Equity and Fiscal Equity Act in August, 1982 (this was really a takeback of scheduled cuts). In 1983, gas taxes and social security withholding were raised substantially. In 1984 Congress passed the Deficit Reduction Act (essentially a business-tax increase), and since 1985 a number of little tax increases have accumulated to a significant total. Medicare reforms changed the way providers were compensated, roughly from a cost-plus basis to set fees for certain illnesses.
The savings and loan crisis reflects only in part a draw on savings. Mainly it is an assets transaction, from an economic point of view: The effect on savings was mostly in the past. What we are seeing is the recognition of losses that were inherent in overvalued investments. Page after page of auction notices in real estate markets like Boston's reflect this owning up to losses.
Even with recession in prospect, Washington should do as much as it can on the budget. The size of deficit reductions talked about would take up less than one half of one percent of GNP - a trivial shock to the economy. Today's situation parallels 1982, when Congress passed a major deficit reduction bill even though the economy was sinking into the deepest recession since World War II.
If a major arms blowout occurs in the Middle East and the price of oil hits $50, Congress would want to curb its plans. But the least likely outcome is that Congress will cut spending too much.
Before Saddam Hussein's grab for Kuwait, an excise tax, a broad energy tax, and a tax hit on the rich were in prospect. Now it appears that a continuing resolution will get the government past the October budget-agreement deadline, and then a huge, complicated bill that nobody understands will be written during the lame-duck session weeks before Jan. 1.