If you think the 1990 budget agreement will slowly balance the budget, think again. Yes, the deficit drops assuming that the economy recovers. Between 1991 and 1997, it’s expected to decline from 4.4 percent of gross national product to about 3 percent. But then it stops dropping and creeps up slowly. Expressed in today’s dollars, the deficit gets stuck at about $175 billion. These projections exclude the huge one-time costs of the savings and loan cleanup (but not the extra interest expenses). And they also reflect a 21 percent cut in defense spending-a big part of any “peace dividend”-from 1990 levels.
Gulp.
The reason to focus on these dreary numbers now is that almost no one wants to. Official Washington is eager to debate a plan to “jump start” the recovery because it’s more fun than debating the budget gap. The politics of reward (increase spending, cut taxes) are happier than the polities of retrenchment (increase taxes, cut spending). House Budget Committee chairman Leon Panetta, Democrat of California, wants to rebut this calculus. Give people and Congress the facts, he hopes, and they will do the right thing.
Doubtful. Predictably, his report has been virtually ignored. It merely reminds us of the unpleasant: the huge chasm between our desire for government services and our willingness to be taxed. Blame Reagan, blame Congress, blame whomever you want, but the problem is us. The idea, for instance, that the Reagan tax cuts and defense buildup caused the deficits is simplistic. By 1994, taxes as a share of GNP (19.4 percent) will be the same as in Jimmy Carter’s last year, and defense spending (4.4 percent of GNP) will be much lower. Yet, immense deficits remain.
Nor do people want to confront the central cause of higher spending: the federal budget is slowly becoming a vehicle to support the elderly. Already, social security, civil and military retirement account for about a quarter of federal spending. To that is added the soaring cost of health care, which is now the main driving force of federal spending. In 1991, Medicare and Medicaid represented 12 percent of federal spending, up from 6.3 percent in 1975. By 2001, they’ll account for an estimated 23 percent.
In other words, spending on the elderly will account for roughly half of federal spending even before the “baby boom” begins to retire around 2010. (Medicaid isn’t only for the elderly, but it does pay for long-term nursing-home care. That cost will soar as the population ages.) The implications of this aren’t subtle. We should:
Its uncontrollable costs are determining governmental priorities by default. Health-care reform may require more government control of spending and costs. The question is not whether this will cause problems (it will) but whether the problems are lesser ones than today’s.
These are old standbys, like Amtrak, farm payments, art grants and subsidies for rural electricity. Many of these programs are small, but together, their elimination would save between $15 billion and $25 billion. They serve no essential national need. We can’t afford them.
We can reduce the costs of bureaucrats talking to bureaucrats. Congress should slice its committees and staff by at least a third. Federal and local governments should simplify responsibilities. Washington might stop aid to local schools (6 percent of school spending), transit subsidies and police grants. In return, it might pick up all of Medicaid.
The Treasury has relied too heavily on long-term bonds with high interest rates. Shifting to more short-term securities would-if inflation stays low-ultimately cut federal interest costs by $30 billion or more annually.
The odds of these things occurring soon are, alas, small. Every constituency is strong enough to protect its own spending program or tax break. There’s an intense aversion to having the elderly bear a greater share of government for example, by paying for more of Medicare or taxing social-security benefits. Deficits reflect a genuine political consensus. Everyone prefers the status quo to the horrors of fixing the deficit.
A balanced budget is hardly impossible. The steps above would do much of the job. As the post-cold-war world takes shape, further defense cuts may be desirable. A tax increase of 5 percent (about $50 billion at today’s prices) would not be oppressive, if needed. Changes could be gradual to minimize any depressing effect on the economy.
But balancing the budget would mean paying attention to the long term. It’s hard to persuade people today (many of whom, frankly, won’t be around then) to worry about the fuzzy future. What will happen if they don’t? Well, unless deficits are curbed now, we won’t be prepared for the genuine spending crunch that occurs when the baby boom retires. Health costs will be excessive and debt service (interest payments) will still constitute 15 percent of federal spending–and perhaps more. In addition, the deficits may well hurt future living standards by siphoning funds away from productive investments.
Whatever the ill effects, though, they’re not so immediate or obvious as to compel action. So the political stalemate and the deficits persist. The real harm that we suffer now is to our national self-esteem. We won’t endure small hurts today to avoid larger hurts tomorrow, and we know it. Self-deception has become a way of life. Politicians routinely resort to little lies. They understand that their promises-for new tax relief or spending programs-are mostly make-believe. Moreover, the voters understand, and the politicians know that the voters understand. There’s a conspiracy against candor. It’s an open charade in which all the actors demean themselves.
