The last thing anyone expects George Bush to do as president is balance the federal budget.
Chances are he won't even try. The deficit is now so large and the political choices so difficult that short of a crisis more severe and lasting than the 1987 stock market crash, everyone has an incentive to stall. The new president and Democratic leaders of Congress have no compelling reason to solve a problem that no one is certain how to define.A decade ago, most experts believed a $100 billion deficit would wreak havoc on the economy. Instead, the economy thrived while the government experienced deficits twice that size. As a consequence, "there is no level of deficit that in and of itself is seen as a disaster," says political scientist Norman J. Ornstein of the American Enterprise Institute.
The government has operated in the black only five times in the past 38 years, only once since 1961. The outstanding debt now totals $2 trillion, not counting another $550 million held by federal trust funds, such as Social Security.
Given that mountain of debt, the growing odds for an economic recession in the next two years could wipe out all possibility of balancing the budget before the end of the century. A recession would drive the chasm between government outlays and revenues even wider, as more workers are taken off payrolls and forced to rely on unemployment insurance and welfare.
Raising taxes to balance the budget would then be unthinkable, since it would only aggravate an economic downturn. The government would be left with few if any policy options for reducing the deficit.
For now, budget officials in the Bush administration will be asking themselves not so much how to erase the deficit, but how the government can continue to get away with it.
The experience of the Reagan years has turned economic thinking about deficit spending on its head. No longer do economists and budget experts agree that federal deficits are inherently evil. Michael Boskin of Stanford University and Richard Rahn of the U.S. Chamber of Commerce are two leading conservative economists who insist that the current deficit level is no cause for alarm. Both advised Bush during the campaign, and their views are expected to strongly influence the policies of the new administration.
Boskin and Rahn say the fact that the fiscal 1988 deficit is a declining percentage of the gross national product _ down to 3.2 percent from its peak of 6.3 percent five years ago _ is evidence that a growing economy will take care of the existing shortfall in due time. It would be a major mistake, they say, to increase taxes (taking potential investment capital out of the economy) just to balance the budget.
"A tax increase would slow economic growth," Rahn maintains. "Its effect on reducing the deficit will be minuscule, but its effect on the economy may be devastating." Even some liberal economists have lately begun to share the idea that the nation can "grow out of the deficit," while others are urging lawmakers not to overreact with quick fixes to balance the budget.
Northwestern University economist Robert Eisner, president of the American Economic Association and author of "How Real Is the Federal Deficit?", argues that further attempts to cut government spend 1/4ing would reduce investment in the nation's capital structure to dangerously low levels. "What it comes down to is that measures to reduce the deficit may well throw the economy into a recession," he says.
In response to this new type of thinking about deficits, some odd alliances are forming among liberal and conservative economists who still believe the government must act to bring the deficit down quickly.
Peter G. Peterson, former commerce secretary under President Richard M. Nixon and chairman of the Blackstone Group, an investment consulting firm, has insisted that the nation must undergo a long period of sacrifice to reduce the national debt and ensure future prosperity. Fiscal balance is the "cornerstone" of that policy, he says.
Many liberal economists share Peterson's concerns. Robert Reischauer, a Brookings Institution scholar who advised the Dukakis campaign, voices a widely held view that future growth in the economy _ and increases in American living standards _ hinge entirely on the nation's ability to invest in the future. "The nation must add to its stock of physical, human and intellectual capital for the American standard of living to increase," he says.
Generating the necessary investment capital depends on the nation's ability to put aside money into savings, Reischauer says. Yet Americans are notoriously poor savers, especially compared with citizens in Europe and Japan. Since World War II, the U.S. national savings rate _ the combination of private and public savings _ has shown a steady decline. It has gone from an average of 8 percent of the net national product in the 1950s to just a little more than 3 percent in the 1980s.
The U.S. government appears powerless to induce individual consumers to save more. "What's the only other way to boost national savings?" asks Reischauer. "The answer is, reduce the deficit."
But even those economists who believe strongly that deficits are still a danger to the U.S. economy concede that the real consequences will not appear until long into the future and may be difficult to measure.
"It depends," says William Cox, an economist at the Congressional Research Service, "on how strongly you feel about having the highest standard of living in the world, and on how much you should sacrifice now to enhance the living standards of our children _ who will probably be living better than we are anyway."
To maximize living standards for the next generation would require eliminating the deficit, not just reducing it. "You must achieve a surplus," insists Brookings economist Alice M. Rivlin, former director of the Congressional Budget Office.
The difficulty of selling that concept to election-minded lawmakers is obvious. "Politically, the Gramm-Rudman balanced-budget targets look like Mars, and I'm saying how about a trip to Jupiter," Reischauer concedes.
"The real question is, can you sell it to the president?" says Rivlin. "We've got eight years of history to prove that Congress, if it has to fight the president, doesn't solve the deficit by itself. It takes executive leadership."
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