Doing in the Deficit


The advocates of big government are at it again. Their latest ploy to permanently increase the size and power of government is the claim that we must have a tax increase in order to reduce an unending stream of federal budget deficits. Indeed, dismay over the deficit projections is leading even reasonable people to concede that, while spending cuts are needed, there's no way to balance the budget without a tax increase, as well.

This ostensibly neutral conclusion is actually an endorsement of bigger government. It ignores the fact that federal revenues have grown enormously over the past four years, keeping pace with the growth of gross national product (GNP). The problem is simply that government spending grew even faster, as Congress proved unable to discipline itself and stop giving away our money to every interest group in sight.

Numerous analyses during the past few months have shown that modest, achievable reductions in the growth of federal spending, combined with normal postwar rates of economic growth, can eliminate the deficit entirely in a few years, with no tax increase.

• New York economics consultant A. Gary Schilling, for example, shows what happens if the growth of federal spending is limited to just the rate of inflation (that is, zero real growth) for four years. Assuming real GNP growth of 4 percent a year and modest (3 percent) inflation, the deficit would be nearly zero by 1990. And if interest rates declined significantly, a balanced budget could occur as early as 1988.

• Alan Reynolds of the economic consulting firm Polyconomics uses slightly different assumptions—4.2 percent real GNP growth, interest rates down by two percentage points, inflation at 3.8 percent, and much more modest spending restraint—to reach a balanced budget by 1988.

• Even a two-year freeze only on nondefense discretionary spending (that is, excluding Social Security and Medicare, as well as the defense budget) plus 4 percent GNP growth would shrink the deficit to $58 billion by 1989, according to a special study by the Congressional Budget Office.

The key to achieving any of these results is to prevent government from growing faster than the economy. And the two essentials for doing that are (1) to control federal spending, (2) to resist incentive-killing tax increases.

How realistic is the 4 percent annual growth assumption? For the two decades from 1948 through 1968, average growth was 3.9 percent per year. From 1960 through 1969, it averaged 4.7 percent, declining to 3.7 percent for 1970–79. Thus, the Congressional Budget Office's baseline projection of 3 percent average annual growth for 1980–89 is in fact a pessimistic view.

Some analysts think the economy can grow even faster than the 4 percent range. Richard Rahn of the Chamber of Commerce and consultant Pierre Rinfret argue that tax cuts and deregulation have fostered major increases in productivity that increase the economy's real growth potential to between 5 and 6 percent a year. Such growth could produce a 1989 federal budget surplus of nearly $100 billion, according to Rahn's analysis.

The latest Washington buzzword is a "one-year spending freeze"—holding expenditure levels constant for a year to allow revenues time to catch up. The advantage of this tactic is that it short-circuits the special-interest constituencies for each particular spending program, by going after all programs at once. A significant drawback is that most of those who support a freeze do so except for some major pet programs—except for the defense budget, say, or except for aid to the poor, or except for Social Security.

A more basic problem is that a spending freeze leaves every single spending program in place, to rise up again the following year. Yet the sad fact is that there are hundreds of programs for which there is no real justification and which should be eliminated, not frozen. What kind of fantasy world do we live in where we pretend that the federal government has enough extra revenue to be able to "share" $4.6 billion of it with state governments each year? Why should $7 billion of our tax dollars be loaned or given to middle-class college students each year? Why should $20 billion be doled out to farmers not to grow crops? On what grounds should a handful of urban transit riders (or an even smaller handful of Amtrak riders) be able to get cheap rides at everyone else's expense? Questions like these could fill volumes, accounting for well over $100 billion of grants and subsidies each year.

Then there are the so-called entitlement programs—some $400 billion worth. Only about $60 billion of that is aid to poor people, where the recipient has to pass a means test to get aid. The other $340 billion goes to anyone: Social Security (all you have to do is be old, not poor), Medicare (same thing), and federal pensions (you have to have been a soldier or bureaucrat). All of these programs are out of control, paying out far more than their recipients ever paid in. They represent an open-ended claim on our children and their children—the kind of claim that prompted Peter Grace's ads showing a baby saddled with a $50,000 burden. While a freeze on these heretofore sacrosanct programs would be a welcome first step, all must be fundamentally reformed. It's high time Congress faced the issue—which they'll refuse to do if bailed out by another tax increase.

Finally, there are the hundreds of businesses that are run by the federal government. Some were identified by the Grace Commission: hydroelectric plants, military commissaries, the Washington, D.C., airports, veterans' hospitals. Others include huge commercial forests, grazing lands, the postal and weather services, printing plants, and hundreds more. A massive privatization program, on the scale of Margaret Thatcher's, should be drafted to sell off all these businesses, with the proceeds (as in England) applied to the national debt.

In short, there is no earthly reason for increasing the government's tax take. Just getting rid of a fraction of the federal government's vast assortment of subsidies and boondoggles would easily reduce federal spending below the level of federal revenues. And normal economic growth—if not hobbled by new taxes—will do the rest.