Slash the Deficit!
Congressional bleating and moaning about $100-billion budget deficits is a sick joke. While intoning cries of doom and disaster, our illustrious representatives are falling all over themselves with handouts-as-usual: synfuel boondoggles (despite a worldwide oil glut), cheap loans for middle-class college students, outrageous farm subsidies, the Clinch River breeder reactor…you name it.
And the Reagan budget is scarcely better. While proposing cuts in numerous small programs, it has left virtually untouched the ballooning Social Security and Medicare programs. These two alone account for some $229 billion! And Reagan has given the military a virtual blank check. Even the Army Times was moved to complain that "the Pentagon seems to be saying, 'We want it all.' By submitting such a budget request, the administration risks destroying the delicate consensus on national defense."
Both the administration and Congress—when judged by action, not talk—seem blithely oblivious to the stark reality of $100-billion federal deficits. What does it really mean to have the federal budget chronically in the red by such huge amounts? Quite simply, it means that the federal government is out of control. Like a senile old fool who cannot say no to his grasping children, the government continually gives out more goodies than it's willing or able to pay for.
Over time, continuing deficits wreck the economy. Either they are monetized by the Federal Reserve and we get ruinous inflation, or the Treasury sucks the lifeblood of capital out of the economy's veins, crowding out private investment. So instead of investing in productive new technology, Americans have to buy government bonds to pay for peanut subsidies, M-1 tanks that don't work, and annual Social Security increases twice as large as the average working person's raise.
Investors have finally wised up to this insanity. Their response to an out-of-control government is to demand real interest rates of about 8 percent rather than the traditional two to four percent. That's why newly issued corporate bonds must offer 15 or 16 percent interest, even though inflation is "only" 7 or 8 percent. Only a fool would still make long-term investments at 10 or 12 percent when chronic deficits threaten either renewed inflation or a decimated private sector.
Ronald Reagan's original idea seemed to be to attack the heart of the government-out-of-control problem. His principal weapon was not to be direct budget cuts. Instead, his supply-side strategy called for making two kinds of end runs around the big spenders.
The first was to decouple federal tax revenues from inflation. The three-year income tax rate reduction was designed to offset the effects of bracket creep and rising Social Security taxes. Although it would have an incentive effect, by keeping people's real tax burden from rising, its main effect would be to "cut off the allowance" of a spendthrift Congress. And the addition of tax-bracket indexing in 1985 would make the change permanent.
Without quite realizing what it was doing, Congress bought the whole package. And overnight, the nature of congressional debate changed—from where to increase spending to where to cut. This aspect of Reagan's program succeeded brilliantly.
The second stratagem was "the New Federalism": the transfer of dozens of programs to state and local levels. While the official rationale speaks of greater local control, the real purpose is to shrink the role of government. Despite polls showing that 77 percent of the people think that welfare, education, and health programs should be administered by state or local governments, the odds are that local governments will decide to scrap many of the programs.
Critics of the New Federalism, like economist John Reed of Arthur D. Little, point out that local governments "don't have the good money machine. The feds have that." But that is precisely the point. Without the ability to print money or destroy the economy by continual deficits, state and local governments will have to stand up to the special-interest lobbyists and decide if the myriad programs are really worthwhile. And they may find a surprising degree of support for phasing them out. New Age guru Kirkpatrick Sale, for one, applauds the idea of the New Federalism, saying that federal welfare programs are "subversive of what should be family-community-guild responsibilities."
Unfortunately, Reagan's game plan does not go far enough. By exempting most entitlement programs from cuts and by letting the Pentagon run wild, Reagan has invited calls for increased taxes to reduce the deficit. His own Treasury secretary recently launched a trial balloon that the hard-won 1985 tax-bracket indexing might be "negotiable." And the Business Roundtable has proposed "delaying" the 10-percent income tax rate cut scheduled for 1983. Members of Congress from both parties are suggesting all manner of new taxes.
But there are cooler heads around. Sixty-two senators are on record in support of a constitutional amendment requiring a balanced budget and a federal revenue limit, and the odds are high that Congress will soon enact it.
While the amendment would not go into effect until ratified by three-fourths of the states, its passage should give Congress the backbone to get serious about cutting spending. Simply freezing all cost-of-living allowances in Social Security, Medicaid, Medicare, and other entitlement programs for a year would save $24 billion. Real cuts in energy and agriculture subsidies could save billions more. And a serious program of selling off federal lands could save several hundred billion dollars over the next few years.
Public support for such measures would be strong. In January, a Sindlinger poll on how to cut the deficit found that only 18 percent think taxes should go up, while 53 percent favor cutting social programs. Asked if they favor or oppose budget cuts to reduce the deficit, a full 79 percent said "cut."
What the markets are saying via interest rates the people are saying directly. We cannot tolerate out-of-control government. That's what the deficit means. And that's why it must be ended.