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A Deficit of Civic Courage

Report of the National Economic Commission

US Government Printing Office, 64 pp., $3.50 (paper)

In his approach thus far to major questions of economic policy President Bush is like a man who has just inherited his grandparents’ house and has to sift through their accumulated belongings before putting the property up for sale. He carefully picks up item after item, examines it fondly, allows it to prompt reminiscences of days gone by, and finally, to his credit, discards it after deciding—something never openly stated, of course—that with the passage of time it has become, well, junk.

First to fall into the rubbish pile was the insistence that the nation’s savings and loan industry wasn’t broke, and therefore didn’t need fixing. To be sure, neither the President nor anyone else in the administration has acknowledged the extent to which deregulation of the savings and loan associations in the early 1980s, and the laxness of what regulatory oversight remained, have created a crisis in the industry. The owner-operators of thrift institutions were able to milk literally hundreds of them by offering to the public, at above-market interest rates, federally guaranteed certificates of deposit worth billions of dollars, and using the cash collected in this way to make dubious loans, while compensating themselves well for their ingenuity. But at least Mr. Bush promptly put forward a plan to close the sickest of these institutions, and to tighten the government’s control over those that remain.

Next to go was the four-year-old “Baker Plan,” under which banks made whatever new loans were necessary to cover the amounts of interest that borrowers in the developing world owed but could not pay on their mounting debts. This plan did not require US banks to admit what everyone already knows as a practical reality—that US loans to Latin America and sub-Saharan Africa are worth far less than their value on paper. Critics of the Baker Plan argued that its transparent save-the-banks-at-all-costs approach would overburden many developing countries with new debt, and as a result would sacrifice significant long-standing interests of US foreign policy. The rioting over price increases this March in Venezuela, a country most Americans have long regarded as one of the stablest Latin democracies, helped produce general agreement that the critics of the Baker Plan were right. Despite Mr. Baker’s move to become secretary of state, the plan that bore his name has given way to the “Brady Plan,” named after the new secretary of the treasury. It explicitly advocates that even if the debts of developing countries are not being paid they still should be reduced, which means implicitly that bank earnings will suffer—and ultimately that banks will have to write down the value of their loans.

That leaves the deficit—or, more accurately, the Reagan administration’s strategy of wishing the deficit would go away on its own, without anybody’s having to make hard choices about either spending or taxes. What to do about the chronic excess of federal spending over federal revenues, which has led the government to borrow nearly three fourths of the net saving of Americans throughout the 1980s, has become the leading public policy issue of the decade. But precisely because it is so important, and because its origins—unlike those of either the thrift industry problem or the problem of third world debt—lie so firmly in the policies of Mr. Bush’s predecessor, it is all the harder for President Bush now to jettison the Reagan approach.

The National Economic Commission might have helped him to do so. It was created by Congress in 1987, following a suggestion by Governor Mario Cuomo of New York,

…to make specific recommendations on, first, how to reduce the federal budget deficit while promoting economic growth and encouraging savings and capital formation, and second, how to ensure deficit reduction did not undermine economic growth and was equitably distributed.

President Reagan, Senate Minority Leader Bob Dole, and House Minority Leader Robert Michel appointed six Republican members, led by Drew Lewis, Reagan’s first secretary of transportation and currently chairman of Union Pacific. Senate Majority Leader Robert Byrd and Speaker of the House Jim Wright appointed six Democratic members, led by Robert S. Strauss, who was the US special trade representative and then presidential representative for Middle East negotiations under Jimmy Carter, and is currently a Dallas and Washington lawyer. The commission began its work with twelve members, but after the election, as the law establishing the commission provided, President Bush appointed two additional members, one Republican and one Democrat. Although initially the commission was to make its report before Inauguration Day, it requested and received an extension until March 1.

Many people who welcomed the commission believed that the unending drain on American saving caused by the government deficit was depriving the United States of the basic investment it needed to become genuinely productive and competitive once again. Yet the same people appreciated the popular resistance to either raising taxes or cutting government spending programs. They therefore hoped that the National Economic Commission might give the new president just the political shelter he would need to break, perhaps sharply, with the Reagan policy of spend and borrow.

Just a half-dozen years ago a similarly constituted bipartisan commission headed by Alan Greenspan rescued the Social Security system from impending insolvency by forthrightly recommending a combination of sharply higher payroll taxes and a higher retirement age. Neither President Reagan nor congressional Democrats had been willing, on their own, to propose either of these potentially unpopular actions. But following the Greenspan commission’s report, Congress passed and President Reagan signed the Social Security Amendments of 1983, which enacted both of these measures. As a result, Social Security now appears able to deal with the strains on its funds that the retirement of the baby boom generation, beginning twenty years from now, will create.

Why couldn’t the National Economic Commission serve President Bush just as well? Why couldn’t it take the lead in putting forth a package of spending cuts that might attract broad support? Or, given President Bush’s public hint that his pledge of no new taxes might not apply after his first year in office, why could it not devise a compromise consisting of spending cuts and ways to increase revenue?

Yet in the end the commission failed to do either. Its report, submitted to the President on March 1, is utterly devoid of “specific recommendations on…how to reduce the federal budget deficit.” It suggests cutting not a single government program, nor does it call for increased revenues. It merely joins another voice to the already large chorus that repeatedly calls upon Congress and the President to balance the budget but has little to say about how they should do so.

Just why the commission failed to recommend anything is unclear and may never become clear. One explanation is that the commission could not even begin to seek compromises on such sensitive matters as spending cuts and tax increases because, by law, all of its meetings were open to the public. Cochairmen Lewis and Strauss have said as much, and the commission’s report ends with the “strong” recommendation to exempt future commissions from “the severely limiting open-meeting statute.”

A different explanation is that the commission failed because President Bush wanted it to fail. The legislation establishing the commission became law nearly a year before last November’s election. But by leaving it to the new president to appoint the commission’s remaining two members, the law made even stronger the power that he already would have had to shape the commission’s deliberations, whether by making public comments or giving private advice to some of the members. In the event, Mr. Bush, once elected, not only publicly disparaged the commission’s potential ability to make a useful contribution but also appointed two members—Thomas Ludlow Ashley, a former longtime Democratic congressman from Ohio, and former Senator Paul Laxalt, Republican of Nevada—who, apparently, took the same views.

Now the commission’s report has been published, although few Americans will ever bother to read it. The interrelated problems that the commission was created to consider—the deficit, hence the drain on saving, hence inadequate investment, hence disappointing productivity growth, hence stagnating incomes and inability to compete in world markets—are today just as troubling as they were in 1987, and Mr. Bush and the Congress can hardly be said to be dealing with them. The compromise budget plan for fiscal 1990, unveiled by the administration in April after two months of intense negotiations with Congress, supposedly trimmed $24 billion from the deficit. But that amount included such items as $6 billion from sales of government assets and $5 billion of new revenues from taxes yet to be specified. In light of this charade it is already clear what a successful National Economic Commission might have accomplished.

The commission issued two reports: a majority report, signed by all seven Republican members, plus Mr. Ludlow Ashley, and a separate dissenting report signed by the other six Democratic members.*

For all their differences, both reports agree, and say plainly, that the deficit matters, that it is now too large, and that it should be reduced. Both agree that the chief reason why the deficit matters is that the government borrowing needed to pay for it absorbs saving that otherwise would be available to invest either in productive capital in the US or in earning assets abroad.

Both also agree that an increase in investment in new plant and up-to-date machinery is necessary if the American economy is eventually to achieve satisfactory gains in workers’ productivity, and hence in the general standard of living. Both agree that the nation’s enormous trade deficit is, at least in large part, a result of the government’s budget deficit because the high interest rates caused by government borrowing drove up the dollar and made American goods less competitive. And both agree that the plan for deficit reduction specified in the Gramm-Rudman-Hollings law is inadequate. In imposing a limit on the annual federal deficit—$100 billion in 1990, for example—that law allows the government to use the accumulating Social Security surplus to offset a continuing deficit in other federal programs. This defeats the purpose of the 1983 amendments and leaves Social Security just as unprepared for the retirement of the baby boom generation as it was before the Greenspan commission came along.

Finally, both reports adopt the same strategy of saying absolutely nothing about what should be done to correct the problems associated with the deficit.

The majority report is so perfunctory one senses that its authors came to regard it as an embarrassment. About the length of several newspaper op-ed pieces, it presents its conclusions in a series of abruptly made points, with little attempt to connect them and little if any elaboration of even the seemingly most important ones. Its endorsement of President Bush’s specific attempt to deal with the deficit in the budget he submitted in February is so weak as to suggest condemning by faint praise:

The administration’s budget lays out one workable plan for eliminating the deficit. There are other alternatives reflecting different priorities.

This lukewarm statement is immediately followed by what any observer of the current debate over the Bush budget can only interpret as a slap at the optimistic assumptions that Mr. Bush took over from the Reagan administration:

The first step in forging a sound budgetary and economic policy is to establish a set of reasonable economic projections…. We recommend that caution be the watchword in setting forth economic projections.

But there is not a word to suggest what a duly cautious set of projections might look like.

The majority report not only ducks the commission’s charge to make specific suggestions, but openly declares that the eight members who signed it did so deliberately:

Our mandate was to recommend ways to eliminate the budget deficit while not impeding economic growth. It is clear that the President would prefer to coordinate this activity with Congress on a one-to-one basis. Indeed, this is the manner in which this process should proceed.

The only references to specific tax or spending issues in the entire report are an approving reference to President Bush’s proposal to lower taxes on capital gains and a stern warning not to cut defense spending: “We know of no basis in the world situation to justify further [defense] reductions.” The report even goes on to recommend that the Gramm-Rudman-Hollings law be changed so that the automatic spending cuts that it mandated if Congress and the President fail to meet the specified deficit targets would fall less heavily on defense.

In its main finding, however—that President Bush’s overall approach is to be encouraged—the majority report is clear:

We support the position that the deficit can be resolved through restraints on the growth of federal spending without increasing taxes or affecting low-income, means-tested benefits. Therefore, we recommend restraining spending increases while keeping growth strong as the mainstay of budget policy. With an estimated $82 billion in additional revenues in fiscal year 1990, it is clear that we do not have to and should not raise taxes but, rather, should restrain the rate of growth in federal spending.

Here the report seems to forget its own advice to be cautious in making economic forecasts, in that it makes no reference to the optimistic spending projections implied by the administration’s assumptions about interest rates and inflation. And since more than one fourth of the $82 billion in revenue growth projected for next year by the administration is supposed to go to the Social Security Trust Fund, the report also ignores its advice to protect the Social Security surplus.

Finally, the reader would be justified in thinking that President Bush would have benefited from some help—call it political cover if you want—in identifying the kinds of federal spending that should be cut. For example, the majority report says, “low-income, means-tested benefits,” such as Medicaid and food stamps, should not be reduced. This implies that other benefits should be cut. The largest benefit programs that are not “means-tested” for people with low incomes are Social Security ($217 billion last year out of total spending of $1,064 billion), Medicare ($86 billion), and other retirement and disability programs ($54 billion). Are these the programs that the commission’s eight majority members thought should be cut back? If so, would they not better have served President Bush by saying so explicitly? No doubt such advice would have been easier to give as part of a compromise that the six Democrats in the minority could have supported as well. But even if the members of the majority said it entirely on their own, wouldn’t this have been more help to the President, as well as a greater contribution to the public debate, than what they actually delivered?

The minority report could hardly present a sharper contrast to the report of the majority. Covering thirty closely printed pages, buttressed with numerous statistical charts and tables, studded with quotations from, for example, Alexander Hamilton on “political arithmetic” and William James on “civic courage,” repeatedly reaching for high patriotic rhetoric, the report of the original six Democratic members has the appearance of a work undertaken with some enthusiasm. In contrast to the terse and often clumsy prose of the majority report, the anonymous writer of the minority report provides such passages as this one, which sounds as if it were written to be quoted:

In 1981 the nation made what the Republican Senate Majority Leader at the time called “a riverboat gamble.” We lost. The “new economics” did not work out. Reduced tax rates did not bring about increased revenues. Still, there was a theory, indeed a new and legitimate school of economic thought. If it was wrong-headed, it was not weak-minded. Today, however, on the basis neither of theory nor evidence, we are asked to believe that the deficits will go away on their own like some friendly monster in a Disney cartoon.

Or to cite but one rhetorical flourish:

If we will it, we can march into the 21st Century all flags flying. We can know peace and abundance and civilization as never before, certainly never before in this benighted century. But there is one eminently doable and absolutely necessary condition. We must get our political arithmetic in order.

The minority report differs from its majority counterpart not just in rhetoric. While the majority report is silent on the origins of the deficit problem that it agrees is so troubling, the minority report makes a considerable effort to document the ways by which the 1980s represented a radical departure from the previous experience of US fiscal policies and attitudes, all the way back to Alexander Hamilton. Not surprisingly, in showing that such a change took place, it concentrates on the effects of the 1981 Kemp-Roth tax cut and the 1981–1984 defense buildup. One interesting chart shows that, even after correction for inflation, the government borrowed during Ronald Reagan’s presidency almost as much as it borrowed during all of World War II.

Most important, the minority report rejects President Bush’s claim that his modest approach to dealing with the deficit—a sheep in sheep’s clothing, as Churchill once said in a different context—is actually capable of solving the problem. About Mr. Bush’s “flexible freeze” the report says that the administration’s budget is a “one-year plan designed to avoid” the automatic spending cuts under the Gramm-Rudman law. The administration plan

…is not a viable long-term approach to deficit reduction. A proposal that relies on overly optimistic economic assumptions and severe domestic spending cuts may work for one year, but over the long term, is neither theoretically sound nor politically realistic.

In what is perhaps the most interesting section of all, the minority report explicitly threatens a congressional revolt against the continuing use of the accumulating Social Security surplus, created as it was out of repeated hikes in the payroll tax, merely to offset a deficit that was created, in large part, by a steep cut in what used to be a progressive income tax:

Let no one suppose that a Democratic Congress will much longer allow a payroll tax to be used to service a $2 or $3 trillion debt owned in vastly disproportionate amounts by wealthy individuals and institutions…. This is surely the largest transfer of wealth from labor to capital in the history of our “political arithmetic.”… That is not a threat. It is a political reality and, indeed, an ethical imperative. The nation struggled for a generation to ratify the XVIth Amendment [which made the personal income tax constitutional]. We are not about to see it effectively repealed by a reform in the financing of Social Security.

For all its economic information and rhetorical intensity, the minority report in the end delivers precisely the same number of “specific recommendations on…how to reduce the federal budget deficit” as the majority report does: none whatever. It neither identifies a specific tax to be increased nor calls for increased taxes in a more general way. It does not identify a single government program to be cut; nor is it even as straightforward as the majority report on the need to restrain federal spending in general. Even after underscoring the absurd contrast between President Reagan’s repeated claims that he favored reduced spending and his proudly taking credit for the increased expenditures on agriculture that amounted in his four last budgets to “nearly $600,000 per farmer in the whole of the United States,” the six minority commission members could not bring themselves to call for cuts in farm spending.

Still, both commission reports, read together, at least serve to dispel some of the confusions that have pervaded the debate over the deficit. For example, some opponents of measures that would reduce the deficit have claimed that government deficits simply do not matter. The standard way to make this argument is to point to Japan, where the government’s deficit (as a share of national income) is even larger than ours. Yet Japanese investment has continued to be ample, while productivity and living standards have grown rapidly, and Japan obviously has no problem about competitiveness.

What this familiar argument ignores is that the Japanese also save far more of their incomes than we do—between two and three times as much, depending on the conventions of measurement. If we saved the way the Japanese do, we too could run a deficit like theirs and still have plenty of saving left to support investment both at home and overseas. But the United States has always had a low saving rate by international standards; and surely one of the strongest lessons of the 1980s is that we do not know how to use government policy to increase American private saving. Despite higher market rates of return compared to inflation, lower tax rates, and saving incentives such as expanded access to Individual Retirement Accounts—all measures that advocates confidently predicted would boost Americans’ saving—the US private saving rate has fallen to record lows in recent years.

As a result, cutting the deficit is clearly essential if the US is to have an adequate supply of capital investment, as well as growth in productivity and all that follows. The majority report makes these points clearly enough, and the minority report neatly summarizes the pertinent evidence by presenting statistical tables giving international comparisons for net saving, net investment, productivity growth, and growth of living standards. Among the world’s five major noncommunist economies, Japan ranks first in all four of these categories, France and Germany are always second and third, and Britain is usually fourth. The United States is almost consistently last.

A second familiar confusion that the two reports dispose of neatly is the claim that the deficit is already going away on its own. Both reports—even the majority report, which includes a special appendix on the subject—discuss in some detail how the Social Security surplus accounts for most of the improvement in the deficit registered to date. During last fall’s election campaign, for example, Mr. Bush repeatedly pointed to the decline in the deficit from $221 billion in the 1985 fiscal year to “just” $155 billion in fiscal 1988. But last year’s $155 billion overall deficit reflected the combination of a $41 billion surplus for Social Security and a $196 billion deficit in the general account. Similarly, even if the deficit for fiscal 1990 falls to the $99 billion projected by the administration in applying its optimistic economic assumptions to the agreement reached in April with Congress, that miracle will still be brought about by subtracting a $68 billion Social Security surplus from a $167 billion deficit. Although neither report states the relevant numbers in just this way, no one could come away from reading the two together without realizing that the main source of overall deficit reduction that has taken place has been the Social Security surplus, or without seeing the folly and danger of using the Social Security surplus in this way.

A further confusion arises when people say that to argue that the deficit is too large, and should be reduced, is somehow synonymous with claiming that in the perspective of world history the United States is now on a path to inevitable decline. As the minority report aptly demonstrates, this increasingly wide-spread misreading not only is inaccurate but puts things backward. The reason why so many Americans now argue passionately for righting our fiscal policy is precisely because they believe, in my opinion correctly, that the slow but steady damage to the American economy that results from continuing outsized deficits is not inevitable, and that the US is entirely capable of changing its fiscal policy to stem the erosion of its economic strength that the chronic deficit is causing.

The two reports would have done well to address, but did not, the suggestion that the deficit is not harmful—indeed, is economically healthy—because the government is “using” the deficit to finance investment in infrastructure like roads, bridges, port facilities, and research stations. If that were so, then the government would be doing no more than what any soundly run business does when it relies on debt to finance capital improvements that will be productive over a long period of time. Indeed, such public investments might, if carefully made, enhance the nation’s economic productivity just as much as, and perhaps even more than, private investment in new plant and machines. And if so, there would be nothing wrong with using scarce private saving in this way. The same argument applies to investment in “human capital” through education and worker training.

But it is simply not true that such investment activity accounts for the swollen deficits of the 1980s. We hear more and more about the fixed assets the US government owns—ranging from military installations to office buildings to national parks to undeveloped public lands—as if their existence somehow nullified the economic impact of today’s government borrowing. But such an inventory of assets accumulated in the past says absolutely nothing about the actual purposes for which the government is now absorbing so much of the nation’s private saving. In fact, just as the federal deficit has swollen to record size in the 1980s, the share of federal spending devoted to investment that might improve productivity has shrunk to an all-time low. During the 1980s, investment in all civilian infrastructure has accounted for just 1.2 percent of federal spending. Spending on education, by both federal and state-local government, has been either stagnant or declining.

Just before leaving office, President Reagan submitted to Congress a budget calling for $1,152 billion in spending and $1,059 billion in receipts for the fiscal year beginning next October 1. The resulting $93 billion deficit represented, at least on the surface, a substantial improvement over the $162 billion deficit that the administration was projecting for the current fiscal year. It also fell easily within the $100 billion maximum deficit permitted for fiscal 1990 under the Gramm-Rudman-Hollings law.

Things are not always as they seem, however, especially when it comes to federal budget policy. For example, although by January the Reagan administration was projecting a deficit of $162 billion for fiscal 1989, just last October it had certified to Congress that the 1989 budget would fit under this year’s Gramm-Rudman ceiling of $136 billion (with a permitted leeway of another $10 billion). Moreover, by the end of the first week in February the Bush administration had raised the official deficit projection for this year to $170 billion. This progressive deterioration in the government’s fiscal prospects has occurred despite substantial strength in the economy.

President Bush’s initial spending proposals made minor adjustments in the Reagan budget, without offering any major changes in it: $1.5 billion more for health programs, $1.5 billion more for income security programs, $800 million more for energy programs, $1.8 billion less for defense, and so on. As for revenue, the only noticeable change that the President offered was a proposed cut in the maximum tax rate on capital gains, on the basis of which the administration projected a 1990 revenue increase of $4.8 billion. (The intense debate over whether cutting the capital gains tax rate will gain or lose revenue—either way the amount will be small—has mostly neglected the question of whether such a cut will actually spur saving and investment to any noticeable degree.) The budget compromise reached in April between the administration and Congress calls for $1,169 billion in spending and $1,066 billion of revenues. After allowing for a remarkable new adjustment that permits the administration to use one defense spending estimate for purposes of calculating total spending and a smaller estimate for purposes of calculating the deficit, the projected deficit is $99 billion—just within the Gramm-Rudman limit.

But it is already clear that the government will once again have to borrow more than the official estimates say. The Reagan administration, in its final days, reverted to just the kind of wishful economic thinking that undermined public confidence in the federal budget process earlier in the decade. For 1990, for example, the administration predicted both an acceleration of real economic growth, to 3.2 percent, and a decline in interest rates, to 5.7 percent for Treasury bills. For later years it predicted still faster growth and even lower interest rates.

The incoming Bush administration tinkered with these estimates but the changes were mainly gestures, not an effort to address the substance of the matter. As a result, the deficit for fiscal 1990 will exceed $99 billion even if the entire budget compromise becomes law. According to the Congressional Budget Office, simply shifting to economic assumptions that are more nearly in line with the current consensus among private business forecasters would boost projected 1990 spending by $25 billion. The further prospect that some of the administration’s spending estimates may be too low—because of the cost of rescuing the savings and loan industry, for example, or of cleaning up and reopening nuclear plants—means that the likely budget gap will be all the greater.

President Bush has suggested that a “flexible freeze” restraining federal spending, apart from Social Security, to no more than the rate of inflation can do the necessary job without requiring additional revenues. Wholly apart from the important question of whether the economic assumptions underlying this claim are overly optimistic, the very concept of the flexible feeeze, as the President has described it, is questionable in several respects.

For example, what if interest rates remain at their current levels (or go higher), instead of falling substantially as the administration predicts? Some descriptions of the flexible freeze have included the interest paid on the national debt as part of “all federal spending other than Social Security,” so that sticking to the flexible freeze would then mean having to make (perhaps even after the fact) some billions of dollars of additional cuts in non-interest spending, so as to offset the larger interest payments. Other descriptions of the flexible freeze have excluded interest from the overall amount of spending to be limited, so that the success of the flexible freeze in achieving its stated objective will depend crucially on whether the forecast of lower interest rates proves accurate.

To take another example, what if bailing out the savings and loan industry requires more than the amounts called for by the administration’s new rescue plan? If this spending is defined in Washington jargon as “on budget,” i.e., part of the regular budget, sticking to the flexible freeze would require finding an equal amount of additional cuts, beyond those initially proposed, in other spending programs. But the President has proposed to put the rescue of the savings and loan associations “off budget” and to carry it out with debt acquired by a new agency set up to save the thrift industry rather than with the debt of the Treasury directly. In this case the flexible freeze might be successful in some technical sense, but the government’s borrowing would continue to absorb private saving anyway. (The latest suggestion for solving the savings and loan industry problem is to borrow “off budget” but to record the transfer of funds from the borrowing agency to the agency responsible for resolving insolvencies as if it were revenue to the government—so that the worse the problem becomes, the better the budget looks. This proposal merely demonstrates how porous such restrictions as Gramm-Rudman can be in actual practice.)

For reasons such as these—and many other examples could be cited—the “flexible freeze” is not likely to be successful. Confronted in the future by its lack of success, its current advocates will no doubt say that it never worked because it was never tried. And, in a technical sense, they will be right. Federal spending, other than for Social Security benefits, will have grown faster than the rate of inflation. But the reason why the flexible freeze will not have been tried, in that sense, is that it is itself unworkable.

Even so, public discussion of the current budget situation has overstated the likelihood of automatic Gramm-Rudman budget cuts in fiscal year 1990. The mechanics of the Gramm-Rudman bill are simple. Unless the budget director, Richard Darman, certifies that the 1990 budget will fall within $110 billion (the $100 billion legislated maximum plus a $10 billion leeway), the law requires the government to “sequester,” rather than spend, enough otherwise authorized funds to bring the deficit down to $100 billion. Half of those sequestered funds will come from the Department of Defense, and the other half from a broad range of nondefense programs.

Some two thirds of all defense spending is exempt from sequestration under Gramm-Rudman, leaving the Defense Department half of such automatic cuts to be spread, uniformly, across the other one third. Social Security, interest payments, and many other nondefense programs are similarly exempt, leaving the nondefense half of any automatic cuts to be spread, again uniformly, over an even smaller spending base. For example, if Mr. Darman reports in October that the likely budget deficit for fiscal 1990 is $130 billion, the resulting sequestration of $30 billion—half from the Department of Defense and half from elsewhere—will mean automatic cuts of 7.7 percent in each nonexempt defense program and 13 percent in each nonexempt nondefense program. Not surprisingly, the possibility of such an outcome has been discussed with considerable intensity in Washington. Would the government simply fire one out of every thirteen civilian employees of the Defense Department; or one out of every seven immigration authority guards patrolling the Mexican border? Would it close to the public seven of the fifty national parks?

The budget compromise reached in April will presumably avoid a Gramm-Rudman sequestration in fiscal 1990. On reflection, it was never very likely that Congress and the President would come to such an impasse anyway—this year. Especially during this first year of the new administration, Congress is reluctant to challenge whatever economic assumptions President Bush chooses to make.

Next year is another matter, however. By then either real growth will have fallen short of the administration’s optimistic forecast, or interest rates will be higher than forecast, or both. At the same time, the Gramm-Rudman law lowers the maximum permissible budget from $100 billion in fiscal 1990 to $64 billion in 1991. (The Social Security surplus will increase in 1991, but only by $11 billion—not enough to offset even one third of the drop in the legislated deficit maximum.) Meeting the Gramm-Rudman ceiling in 1991 will therefore be far more difficult.

How the resulting budget drama will play out next year is impossible to foresee. Public discussion of the subject so far has almost entirely overlooked a crucial point: that the final deadline for invoking whatever automatic cuts Gramm-Rudman will require for fiscal 1991 comes on October 15, 1990, just weeks before the congressional elections. It is not in the President’s interest to force a crisis by standing back and waiting for Congress to take the initiative on either spending cuts or a tax increase. Even so, President Bush will not be on the ballot in November 1990, and the incumbents up for reelection will include far more Democrats than Republicans. Whether Congress and the President will agree on a way to avoid Gramm-Rudman cuts in fiscal 1991—and, if they do, whether the fiscal program they choose will include genuine deficit reduction measures or merely repeat this year’s pretenses—is likely to be more a matter of politics than of economics. It will remain for historians to say how it all would have been different if the National Economic Commission had summoned up more of what the minority report, quoting William James, called civic courage.


The Deficit: An Exchange September 28, 1989

  1. *

    The majority report was signed by Drew Lewis, Thomas Ludlow Ashley, Senator Pete V. Domenici, Representative Bill Frenzel, Dean Kleckner, Paul Laxalt, Donald Rumsfeld, and Caspar Weinberger. Lee Iacocca, Lane Kirkland, Senator Daniel Patrick Moynihan, Representative William H. Gray, III, Felix Rohatyn, and Robert S. Strauss signed the dissenting minority report.