A Freeze Is Not Enough

As George Bush takes the oath of office to become this country's 41st president, a near-consensus is emerging that the budget deficit must be eliminated. Unfortunately, Congress, the president, and most of the media are covering up the true extent of the deficit, thereby masking the need for serious cuts in government programs.

Virtually every discussion of "the deficit" uses the number addressed by the Gramm-Rudman law. That number is actually the sum of two others: the federal government's operating deficit plus the surplus or deficit of the Social Security trust fund. The latter is beginning to run a huge surplus—courtesy of the higher FICA taxes that you and your employer have been paying in the '80s. And with that surplus, of course, the sum of the two numbers masks the real size of what ordinary citizens mean by the "federal budget deficit." For 1988, instead of the $155-billion figure that we hear so frequently, the real deficit is $252 billion, according to the General Accounting Office. And this real deficit is projected to continue growing, not shrinking, in the years ahead.

What is more, that projection is based on "other things being equal." It excludes two major, predictable contingencies for the next few years. One is the highly probable taxpayer bailout of the federal government's savings & loan insurance program—which could total between $50 billion and $100 billion. And the other is a recession (remember them?), which could easily add another $50–100 billion to the deficit (since a slowdown in business activity means lower income-tax revenues and higher claims for welfare and unemployment benefits.)

Japanese bankers and other key players in the economy are well aware of these facts. That's why they will continue to demand higher real interest rates to hold the government's bonds—unless and until the real deficit is brought under control.

Of course, what you hear from many members of Congress, and nearly every expert opining on the editorial pages of the nation's newspapers, is that the only alternatives we face are to raise taxes, raise taxes, or raise taxes. But even if George Bush had not pledged to avoid that route, it is simply not an effective way to cut the deficit.

Congress, of course, has powerful incentives to spend any new revenues. But also, because of the way the Gramm-Rudman law is worded, setting annual deficit targets, any increase in revenue simply boosts the amount Congress is "permitted" to spend that year. So raising taxes holds no hope of ending the deficit.

Nor does the "flexible freeze" proposed by Bush and advisor Michael Boskin. Merely holding down the rate of growth in spending, to keep it below the (assumed) continued growth in revenues, is unlikely to meet the Gramm-Rudman targets, let alone tackle the real deficit. To do that requires real cuts—and that means eliminating bad programs.

The consensus on the evil of the deficit offers us as a nation the best chance in several decades to force a hard look at where federal dollars are going—and to call a halt to indefensible programs. In eight years of Ronald Reagan, the only turkeys that were actually killed were General Revenue Sharing ($5 billion a year) and Urban Development Action Grants ($225 million). Now that the health of our economy is literally at stake, isn't it time to "just say no" to a host of boondoggles and plums for special interests? For example:

• farm subsidies that lead to higher food prices (about $25 billion a year),

• the space station (a $30-billion public works project for aerospace),

• the Superconducting Supercollider (another $5 billion worth of science pork),

• transit grants to build subways in places like Los Angeles and to subsidize the operation of inefficient bus lines ($3.8 billion a year).

There are tens of billions more of this sort of thing, larded throughout the federal budget—not even counting any of the so-called entitlement programs (lavish federal retirement benefits, Medicare, etc.), which could at least be frozen for a few years.

Then there are the commercial assets of the federal government. Last year's Privatization Task Force—a sort of "shadow group" that stepped in where the President's Commission on Privatization feared to tread—identified over $300 billion worth of lands and business enterprises that could be sold off over a period of years if we are serious about eliminating the deficit. Among these are $150 billion worth of government-owned commercial timberlands (not national parks or wilderness areas), the TVA, the Postal Service, the air traffic control system, and many others.

While the easiest thing would be to count the proceeds from such sales as revenue when received, the more sensible approach would be to use asset-sale revenues to retire federal debt, which would also help the deficit situation. If implemented, such asset sales would produce ongoing savings in interest costs of some $28 billion, as well as reducing the burden on future generations.

Nor should defense spending be off-limits. Now is a golden opportunity to rethink the missions of U.S. military forces and to make hard trade-offs among weapons systems to accomplish those missions.

It is high time we decided—with plenty of advance notice to our NATO allies—to start withdrawing our troops from Europe, bringing them home and demobilizing them. With a combined gross domestic product of nearly $4 trillion, Europe can no longer make the argument that it can't afford to defend itself. A 10-year phaseout would not only save the manpower costs but would produce major savings in weapons procurement (tanks, tactical weapons, etc.).

We must also decide which big-ticket strategic programs are really necessary—and then build those at efficient rates (rather than keeping them all and stretching them out so that unit costs balloon). We don't, for example, need both the rail-mobile MX missile and the mobile Midgetman; procuring only one would save at least $20 billion. And it's not clear that there is really a mission for the $65-billion B-2 stealth bomber program. Cutting back on overseas deployments would undercut the navy's case for two more aircraft-carrier battle groups, each one of which gobbles up $40–50 billion over its lifetime.

In short, there are plenty of ways to cut the budget. And cuts—massive cuts—are what we need to put our fiscal house in order. George Bush has a great opportunity to ask the questions about federal spending that have been avoided during the past eight years. Let's hope he has the courage to do so.