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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:

  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.

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