previous chapter
Twenty-Three Nobody's Darling, but No One's Disaster Either: A Moderate Proposal on the Deficit
next chapter

Twenty-Three
Nobody's Darling, but No One's Disaster Either: A Moderate Proposal on the Deficit

"Putting on the agony, putting on the style" would be a good theme song for the deficit. First the agony: inflation, deflation, depression; no one will buy from the United States, and no one will sell to it; catastrophe is the one certainty, partly because of bad economic policy and partly because of bad politicians who would not administer the bitter medicine in time.

Next comes the style. There cannot be good news because the deficit won't allow it. Consequently, the business pages are a scream. Rising unemployment would at once be taken as a sign that we were finally paying the price of our deficit irresponsibility. But lower unemployment (a fourteen-year low in July 1988) is supposedly a sure sign that inflation will follow. Hence. stylish headlines abound, all variants of "Economy Improves; Markets Panic."[1] Lower consumer spending (hence higher savings) could signal recession, but higher consumer spending means inflation, trade deficit, and lack of investment. If both bad news and good news are bad, maybe we can blame that, too, on the deficit.

After all the agony and style about the deficit, the government still needs a policy. Common sense requires, first, that we know how we got where we are and why. Our book has tried to answer these questions. Why weren't Congress and the president able to come close to balancing the budget, which everyone swore they wanted to do? For one thing, the problem was too big. Congress did a lot: stopped the defense buildup, passed two substantial tax hikes (mostly on businesses), created a growing Social Security surplus, cut medicare providers, squeezed and then Gramm-Rudmaned the domestic discretionary budget—and big deficits remained. For another thing, many in and outside Congress who feared deficits feared solutions—tax hikes or social security cuts, for example—even more. That is part of the reason that the cold-turkey budget-balancing


563

faction has never had anything like a majority: we need agreement on a specific solution, not on the need for one. There is also dissensus, disputes over deficit reduction being entwined with issues of distribution and the role of government in society. You might say that the participants in budgeting agree on everything except how much revenue should be raised and who should pay, how much should be spent and which programs should benefit. Whether balance is achieved at low or high levels of spending would determine the future shape of our government, and our politicians quite reasonably act as if that is as important as the deficit itself.

The Two Elderly Irishmen and Other Misleading Explanations

Nevertheless, the belief has persisted that the real obstacles preventing balance were not the factors we have mentioned but willful, perverse, and short-sighted politicians. What might be called the "two elderly Irishmen" thesis has held that the ideological extremism and personal intransigence of the two most influential party and institutional leaders, President Reagan and Speaker O'Neill, confounded and suppressed the underlying consensus. Neither the replacement of Representative O'Neill by Representative Wright, the conduct of the 1988 presidential election, the collapse of the National Economic Commission, nor the early rounds of budgeting in 1989 revealed such previously hidden agreement.

Had "Dutch" Reagan been willing to accept tax increases, or had at least not insisted on deep cuts, while manifesting willingness to reduce defense, accommodation on the budget readily could have been achieved. Had "Tip" O'Neill similarly been willing to reduce future social security benefits, agreement would have been much easier. True enough in both cases, but is this truth relevant?

Asking the Speaker to cut social security was like expecting him and his party to open a vein and spill out their political blood. Aside from their deep concern about elderly recipients, social security was and is the preeminent symbol of all they have accomplished and all they believe they stand for: the positive use of government to better the lot of people needing help. Asking Ronald Reagan to accept tax increases as good for the country was the same as telling him to renounce his political career and office, for his most important belief would be judged false. The implication would be that the government is a better judge than individuals of what they should do with their income. Instead of income being left with those who earned more, the Republican constituency, it would go to government, that is, to the Democratic party constituency, to pay off their supporters. Reagan's seemingly simple-minded children's


564

allowance theory (if they haven't got it, they can't spend it) was aimed at weakening, if not formally splitting, the Democratic party. Taxes are hardball.

Ronald Reagan and Tip O'Neill were not outside the mainstream of their political parties. Neither was seriously challenged from within, and each ended his term in office more popular than he began. Their unchallenged supremacy should give pause to those who think of them as somehow deviant.

There is far more truth to the hypothesis that the deficit problem stems from the unwillingness of Americans to pay for what they want. True enough—witness the gap—but that doesn't explain much. An appropriate answer to this smug contention (implying that you are reckless but I am responsible) is, "So what else is new?" People always want more than they can afford; we need to know why the seemingly inevitable deficit result finally occurred after 190 years.

Partisans would argue that the deficit arose from the sins of their opponents. Democrats blame the dishonesty of "Rosy Scenario" and Reagan's irresponsible tax cuts and excessive defense buildup. Republicans blame Democrats' refusal to cut wasteful, poorly targeted, and ineffective social programs. We try not to take sides, but we should point out the effect of the division. If you blame the deficit on somebody else's error, the deficit should be solved by correcting that error. Democrats who believe the deficit was created by raising defense and cutting taxes think it only fair that the shortfall be eliminated by cutting defense and raising taxes. To eliminate the deficit by cutting domestic spending seems, to them, to endorse the original mistake. Republicans feel a deficit created by social spending should be eliminated by cutting social spending. Thus dissensus about the cause adds to the belief that how we eliminate the deficit is a question of justice, of right and wrong, and thus not easy to compromise.

Again, mathematically, both sets of partisans have a point. Either's approach would reduce the deficit. But earlier in this book we argued from data that the magnitude of the likely FY1990 deficit, roughly 3 percent of GNP, was caused by the interaction of (1) long-term policy commitments and (2) widely-held views on both the limits of acceptable taxation and the desirability of more defense (a view shared in 1980 by both parties), with (3) unexpected economic changes that slowed economic activity, abruptly halted inflation, and drove up interest costs. Neither party expected the drop in inflation to reduce revenues so drastically; the difference between Democratic and Republican tax plans was less significant than their joint misjudgment of the economy. The politicians managed to return revenues to their historic plateau around 19 percent of GNP, but the interest costs incurred in the interim, and public


565

support for the vast bulk of federal activity, made further deficit reduction difficult. Now who is responsible for that? Everyone and no one.

Perhaps the difficulty is in our budgeting institutions? Institutions do matter: the spending cuts of 1981 would have been much more difficult without reconciliation, and Senate offset procedures somewhat inhibit measures that would increase the deficit. A constitutional amendment might make unbalancing the budget more difficult. But the present problem is how to eliminate a deficit, not how to prevent one. The only institutional solution that might work is one that would cut some large group of people (the elderly, the poor, business, the military) out of the political process so they could then be cut out of the budget. We hope and believe that solution is not available. Otherwise, Gramm-Rudman proved that as long as the same players have power, we will have the same results.

Or maybe the crisis just isn't clear enough. The budget summit of late 1987 is as good proof as anyone could want that the problem isn't a lack of panic. Indeed, everything in it—the pressure of the market after "Black Monday," the exasperation and obfuscation, the ideological hostility, the unwillingness to go beyond a certain amount of pain, the uncertainty about the reality of the semisolid mass of spending cuts and revenues—can be met again simply by inserting one's thumb anywhere in our account of prior battles. The sheer repetitiveness of these events (Didn't I meet you last year in Aggravation City?) is stunning.

Throughout the past decade, apostles of budget "responsibility" among experts, politicians, and the media wanted to believe that the necessity of budget balance constituted an irresistible force, such that eventually they could force the deficit reductions so obviously needed. Our story is filled with examples of mainstream politicians predicting that all congressional incumbents would suffer if they did not do their duty to fix the deficit. Instead, the 1980s were the best decade for incumbents in our nation's history. Or, the markets would force action. After the shocking stock market decline of Black Monday, Tom Kenworthy, in the Washington Post, reported that for budget balancers like Representative Buddy MacKay (D-Fla.), "who have been trying to engineer a fiscal crisis all year in order to force a 'grand compromise' on the budget … Wall Street's troubles have arrived in the nick of time."[2] But even Black Monday could not help politicians find a package that would eliminate the deficit at what seemed like a reasonable policy cost.

Thus Ronald Reagan was pragmatic enough to enter into negotiations—he would have looked bad otherwise—but such "pragmatism" did not extend to giving up his principles. If he gave in on taxes and defense, then government, he believed, would be intrusive domestically and weak internationally. In his two-decade political career his side had gone from a mocked minority to the White House; if he had frequently


566

bowed to others' sense of pragmatism, he would not have been in office. In government but not of it, President Reagan felt responsible to his supporters, not the moderate state managers. Speaker Jim Wright, in turn, believed his party's values worth fighting for. In the wake of the crash, he tried to influence the summit held by White House and congressional leaders by forcing a Democratic reconciliation package, featuring $12 billion in new revenues, through the House. It was a bruising battle, "a rowdy, vituperative floor fight and a one-vote victory wrung amid Republican charges of vote manipulation." Republican Whip Trent Lott was so mad at the Democratic leaders, he said, "I don't want to talk to them, let alone negotiate."[3] He also blasted the leadership's "Mussolini instinct."[4] This could do little for the bipartisan spirit necessary to budget compromise, but that was only significant if such a spirit existed in the first place. There was some, but not enough for the "irresistible force" of budget necessity to overcome the "immovable objects" of party leaders defending what their parties stood for.

The problem has not been stubborn leaders, the sins of the partisans, the cowardice of politicians, the flaws in our budgeting institutions (at least, not now), the inherent flaws of democracy, or, of all things, insufficient attention to the deficit. The problem has been in the target itself, the balanced budget, and in the policy and political theories of the forces of responsibility who are its strongest proponents.

Sliding By

No bipartisan agreement on how to eliminate the deficit was (or is) in sight. But by late 1987 the parties could agree, even if they could not quite articulate the point, on one thing: the nation's politicians were tired of fighting. More battles among the same players could only yield the same results. With an election coming up, it made sense to avoid trouble by limiting conflict. Besides, the election, by changing players, might break the budget logjam. Therefore the two parties (Republican and Democrat) and institutions (president and Congress) called an election-year truce over the two crucial issues, priorities and the size of the deficit.

The Balanced Budget Reaffirmation Act of 1987, otherwise known as the revised Gramm-Rudman, called for only small deficit reductions in FY89, and the Summit Agreement at the end of the year purported to meet those targets. As part of that agreement the contending parties also agreed on the totals for both defense and domestic discretionary spending for FY89. Good luck on the economy (it grew faster than expected), some artful posturing by the president (condemning the continuing resolution in his 1988 State of the Union address), congressmen's own disgust with budget chaos,[5] and clever accounting (allowing Congress


567

to exceed the summit's discretionary spending target by about $2 billion by redefining what was discretionary) allowed Congress to meet the targets. The National Economic Commission would report after the election; neither party dared suggest serious deficit reductions in an election year; and the budget struggle was put on hold to await the new president. With the big issues settled in advance, Congress and the president managed to pass all the FY89 appropriations separately and on time: it is easy if you accept existing priorities and do not try to reduce the deficit.

The election, however, did nothing to break the logjam. The new president, George Bush, had most of the same commitments ("Read my lips: no new taxes" and a strong defense) as his predecessor, in addition to a few expensive new ones (a kinder, gentler, better educated and drug-free nation). The House and Senate remained solidly controlled by the Democrats. The Gallup poll just before the election found "reducing the federal budget deficit" to be the public's top priority (though it didn't say how).[6] Meanwhile the National Economic Commission, reported to be at an impasse before the election, would prove unable to overcome the conflicts that had shaped deficit politics for a decade. Former Defense secretaries Caspar Weinberger and Donald Rumsfeld argued the military should not be cut to reduce the deficit; AFL-CIO President Lane Kirkland and other Democrats were reported to object to social insurance cuts; there was little talk about taxes.[7] On March 1, 1989, the NEC submitted its report, really two separate reports, one Republican and one Democratic.[8] The two sides agreed that the budget should be balanced excluding social security; that is, that the problem was even bigger, over $100 billion bigger, than Gramm-Rudman.[9] Unfortunately but typically, they agreed on nothing else. As budgeting expert Allen Schick put it, "They agreed you have to cut the deficit by $230 billion. The only trouble is, they couldn't agree on where the first billion should come from!"

The NEC having failed, signs pointed to another budget donnybrook in 1989. There seemed no way to meet the Gramm-Rudman targets and no willingness to admit they wouldn't be met. Nearly a whole new team was in place: Richard Darman back in government as OMB director, Leon Panetta as chairman of the House Budget Committee, Senator Jim Sasser (D-Tenn.) chairing Senate Budget, Senator George Mitchell (D-Maine) the new majority leader, and of course a new president, George Bush. All were men of moderation and compromise. Led by the House majority leader Tom Foley (later Speaker after Wright resigned and left Congress), they began extensive negotiations, but there was no way to resolve their deep, substantive disagreements.

When the going gets tough, however, the tough get creative. The only


568

sensible response to the fakery of Gramm-Rudman is more fakery, and that's what the negotiators agreed to. On April 14 they announced agreement on a "framework" for meeting the Gramm-Rudman targets. CBO was projecting a baseline deficit of $147.3 billion for FY90; the negotiators claimed to get just below $100 billion.[10] They accomplished this feat, however, with a remarkable combination of smoke and mirrors. The smoke, Representative Lee Hamilton (D-Ind.) explained, was "optimistic economic assumptions, or what might be called best case budgeting." The mirrors were various "accounting gimmicks" and false agreements. The 1987 revision of Gramm-Rudman, Hamilton pointed out, had created a neat division of labor. Congress gave OMB final authority over the economic forecast because "it is in our interest" to accept the inevitably optimistic forecast. And, make no mistake, it was optimistic: in the Blue Chip survey of thirty-nine private economic forecasts, none was as jolly.[11] In this case, the smoke "saved" $19.9 billion.[12]

The mirrors included nearly $11 billion in extremely dubious savings,[13] at least $2 billion from continuing existing policies that were due to expire,[14] $1.6 billion from the perennial lower interest costs and more efficient tax collection, and $5.3 billion in increased revenues. The latter sounded real but wasn't; the administration assumed the money could be raised by lowering capital gains taxes (memories of 1980!), while the chairmen of Senate Finance and House Ways and Means, Senator Bentsen and Representative Rostenkowski, refused to go along.[15] In short, about $20 billion in the agreement, and the subsequent House and Senate budget resolutions, consisted of mirrors, to go with the $19 billion in smoke. Maybe $8 billion was real, and even that looked difficult.

Therefore, the most good anybody could find in the agreement was that it was better than nothing. "The most significant aspect of this agreement," Senator Mitchell declared, "is its existence. No one should be deluded into thinking that this is the end of the process. It is the beginning of the process."[16] As Leon Panetta put it,

We are not going to adopt new taxes. We are not suddenly going to put [a] major burden on the spending side. We are not going to adopt [the Gramm-Rudman] sequestered budget. What are we left with? We are left with having to work around the edges as we did here…. We basically struggled to come up with what savings we could in order to, in a credible way, try to achieve the Gramm-Rudman targets….

The test of how good this agreement is will be how good the next agreement is. That is really what we are facing in terms of goals that we have outlined in this budget resolution.[17]

In other words, as summarized by a number of congressmen, "Wait till next year."


569

The obvious question was, "Why should next year be any different?" Well, maybe George Bush would figure his campaign promise not to raise taxes expired after a year. Or, the trust built in sliding by the FY90 Gramm-Rudman target together would help Congress and the president to confront the really impossible FY91 target of a $64 billion deficit. If politics only were a matter of politicians who liked each other ignoring principles and constituencies, of course, you wouldn't be reading this book.

It is common to call for tough choices. And choosing is, indeed, required. But a choice is tough only because both sides are equally (un)attractive. Those who call for toughness think only one choice, balance, is acceptable. Would that it were so, for then choice would be easy.

Defending what even Representative Panetta called the "slide-by" FY90 budget resolution, Representative Lynn Martin (R-Ill.), a loyal Republican and hardly a "spender," nicely described the difficulties she and her colleagues faced:

Mr. Speaker, let's face it. No matter how we make our budgets, somebody is going to feel left out, frustrated, angered, and resentful. In fact, as the former acting ranking Republican on the Budget Committee, I can testify to the thankless task budgeting is. Not only can't you please everybody; you actually manage to anger everybody in one way or another. Either you are spending too much on defense or too little; and you are always slighting the hundreds of underfunded domestic needs programs. When you are slicing up such a limited pie to begin with, everybody goes home hungry and angry.[18]

We have said it before; it must be said again: the deficit is high because reducing it will have serious adverse consequences for virtually everybody, and therefore for the country as a whole. Until that fact is faced; until politicians, the media, and the public admit that the difficulty is not a lack of courage or insidious "special" interests dominating the "public" interest, debate will remain distorted and unproductive.

What Would We Do?

We, like all Americans, are not separate from the participants in the budget war but integral to it, part of the problem. For we are no more agreed on the size and scope of government than are other politically active Americans. But we can suggest a far more productive approach to the deficit dilemma.

We have emphasized throughout this book that a problem cannot be considered separate from its possible solutions. Policy analysis is not just the craft of finding solutions to problems; it is the art of choosing problems


570

that have solutions. Thinking of policy analysis as the art of the solvable, we come closer to a productive approach to the deficit.

Something should be done, we think, for two reasons. In view of all the uncertainty, first, the nation would do well to limit its risk. Bad times may be in store, as in the past, and a lower deficit would make such times easier to handle. Because many people, including many members of the political stratum, consider deficit reduction vital, they should be placated. How? In part by reducing the deficit and in part by redefining reduction. We would set a target for the deficit that (1) reduced economic risks yet (2) could be reached.

Redefining the Deficit

After all the analysis and argument of the last decade, we cannot see that the economic arguments for budget balance justify the losses in either government or private activity that would be imposed by spending cuts and tax hikes big enough to eliminate the deficit in a few years. The short-term economic evils ascribed to the deficit keep failing to appear. In the long term, the deficit is more a symptom than a cause of any dangerous trends. Since 1973 the entire industrialized West has been going through a painful period of adjustment; Americans have had deficits while Europeans have had unemployment. Many other things have been going on: the international debt crisis; declining prices for third world nations' commodities; the challenge of lower wages in newly industrializing countries to American and European basic industries; a monetary system beyond any government's control. We worry about productivity growth when we don't even know how to measure productivity in the expanding service sector of the economy. If the long-term health of our economy is our concern, we should be thinking far more about these problems and far less about the deficit.

All other things being equal, we would be better off without the deficit. National savings, and thus investment and eventually productivity, might be higher.[19] Foreign money managers might be less nervous—if they did not find something else to be nervous about. In this or any other world, however, we would also be better off with a stronger national defense, housing for the homeless, rebuilt bridges and roads and aqueducts and sewers. A balanced budget is just one of many desirable goals. The nation has lived with deficits for most of the postwar era, a time of unprecedented prosperity.

Therefore the real questions are whether there is a level of deficit with which we cannot live, and what we have to do to ensure that we stay below that level. Because the macroeconomics of the deficit are unclear, we turn to ordinary economics.


571

No household wants to be in a position where its debt feeds on itself, that is, where interest expenses consume a growing portion of household income. Each dollar for interest is a dollar foregone for some useful task. At the national level, a growing interest bill means that each year's tax dollar buys fewer and fewer new services, as more goes to pay for old government. Running deficits that promise growing interest payments later may be justified by a crisis, such as war or depression. In such times, keeping the nation alive to face future burdens is more vital than avoiding those burdens. But we are not in such a crisis now. Therefore, at a minimum, we believe the interest burden should be brought under control, and preferably set on a downward path.

By FY89, according to CBO's January 1989 report, net interest, at $169 billion, was bigger than the deficit itself ($155 billion). It would grow to $203 billion by FY93, while the deficit, if policy stuck to the baseline, would decline to $129 billion. These numbers show why interest is such a problem for the federal household. Even with this growth, however, interest would decline from 3.3 percent of GNP to 3.1 percent. The deficit itself would decline from 3.0 percent to 2.0 percent of GNP.[20] Thus given the mediocre economic performance incorporated into the CBO baseline, neither interest costs nor the deficit seem so horribly out of control.

So where's the problem? The difficulty is that all the uncertainties go the wrong way. The CBO baseline assumes no real growth in discretionary programs. Yet the nation is highly unlikely to go five years with both no real growth in defense and the same force structure and obligations; the dollars and structure don't fit. We don't know which will change—maybe peace will break out all over and maybe not—but we know the baseline won't work. When Republicans talk about "hundreds of underfunded" domestic programs and get elected by promising a "kinder and gentler" nation, we suspect the domestic discretionary baseline may also be tough to maintain. Further, the economic assumptions, while moderate, could still be optimistic. It is always possible that foreigners who have been lending in the United States will start demanding higher interest rates for their money.

Some deficit reduction, therefore, is worthwhile. It should be enough to maintain control of the deficit and interest costs under less favorable economic assumptions than CBO'S. If taken, this action might enable prediction of a balanced budget a few years beyond the Gramm-Rudman target, but it should be neither sold nor conceived in these term . Rather, it should be conceived as a way of preventing the worst when we don't know what is best. And it should be sold as balance, balance between our ability to pay and payments due .

In Chapter 21 we discussed the difficulty of a $100 billion deficit


572

reduction in FY90, a minimal definition of the policy cost of hitting the Gramm-Rudman targets. What would have happened, however, if we aimed for $50 billion in policy change, $30 billion in FY90, and $20 billion in FY91? We talk in terms of FY90 and FY91 but, at the rate things were going in May 1989, as we wrote, our readers could insert whatever the next two budget years might be. The details will change, but the major consequences should not.

We would phase in the reductions because many policies take time to put into effect and because it is desirable to minimize any fiscal shock to the economy. Assuming there was no such shock, so that the economy performed as projected by CBO at the beginning of 1989, our suggestion would cut the FY93 deficit in half, to just above $60 billion. That would be less than one percent of GNP, well below deficit levels in the 1970s and average for the 1960s. Interest costs, which depend more on old than new debt, would be affected less dramatically, but still would be about $10 billion lower in FY93.

These policy changes would be enough to more than compensate if growth were to be half a percent of GNP lower, per year, than CBO projected, beginning in January of 1989.[21] The deficit in FY93 would still be significantly less than 2 percent of GNP, that is, below the trend line in the CBO baseline. Therefore a $50 billion package would provide a substantial margin of error to protect against economic bad news.

This target will not satisfy those who believe budget deficits should be eliminated, no matter what. It certainly will not satisfy economists who want to run a surplus by balancing the federal funds budget, spending excluding social security. But if our proposal will not satisfy them, neither will anything else they have a snowball's chance in Hades of getting. Their standard would require about $230 billion in deficit reductions in FY93.[22] That is equivalent to 40 percent of all domestic and defense discretionary spending, or nearly a 40 percent increase in income tax receipts. That kind of policy change is impossible, short of revolution. Given reasonable economic assumptions, the federal funds budget cannot be balanced in the foreseeable future.

Some budget sophisticates say privately that the real point of such unrealistic targets is to get as much savings as possible. Deficit-reducers, like program advocates, use the tactic of the high bid. Then if the politicians meet them half way, they might be satisfied. Economists and budgeteers seem especially prone to that tactic these days, as they tend to believe the rhetoric that politicians always compromise the public interest on behalf of special interests. By this logic, politicians must be scared or bamboozled into doing enough.

We disagree. If we want our readers to remember one single thing from this book, it is that such an understanding of politics and politicians,


573

in deficit politics, has done far more harm than good. Politicians have tried very hard to eliminate the deficit. They have been stymied by legitimate disagreements about the national interest and by the overwhelming size of the task. But reductions also are made more difficult because, so long as only an impossible target is considered acceptable, there is no reward for doing less, even if it is real and helpful. As one senator asked, "Why should I go through all this pain and trouble to get the deficit from $175 billion to $150 billion?" Why, indeed? If a $25 billion cut in the deficit is a pittance, leaving us, by the extreme definition of responsibility, over $200 billion away from what is desired, why suffer the policy and political consequences of $25 billion worth of pain? It is better to "game" Gramm-Rudman, claiming to do more (for we are "on the track" of the Gramm-Rudman "plan") but actually doing less.

Centrist politicians have called for deficit reductions in which all parties paid their "fair share." Naturally all the affected interests have resisted, for the policy rewards of deficit reduction seemed too distant and dubious to be worth the immediate pain. Worse yet, giving in once could only be taken as a sign of weakness, making one's priorities a target in the next round. Thus President Reagan could figure that if he gave in on taxes one year, the deficit cutters would be back again the next year—as they were. Tip O'Neill knew the same about social security, Cap Weinberger about the defense budget, federal employees about their pensions, ad infinitum.

People are sometimes willing to end a battle, even on disadvantageous terms, because the struggle itself is so painful. Peace is its own reward. Yet so long as each year's battle has only been one round in a seemingly endless fight, compromise could not provide peace.

Transforming a Futile Budget Politics

We want to brighten budget politics by providing the politicians a reward: if they take the recommended action, a $50 billion, real, no-fooling package, the deficit crisis will be solved. "Do this and we won't bother you again," our refrain would be; "then you can get on to the rest of the task of governing." Interest groups would get a similar reward; increases would still be difficult, but they would be freed from endless battles to protect their programs.

The deficit reductions would have to be enacted in one package—no magic asterisks—and the political leadership, especially the president and the chairman of the Federal Reserve, would have to make very clear that, if the economy did worse than our pessimistic economic scenario, further deficit reductions would not be appropriate. If any deficit reductions were left to later years, participants would lose part of their


574

reward: a clear limit on losses. If nominal deficit figures were made the target, as in Gramm-Rudman, the government would again become hostage to the economy's swings. Politicians could not be sure of their safety.

Immediate action and certainty about goals are the proper response to financial markets' supposed fears. Credibility, if it can be won at all, requires performance. Performance would also encourage foreign governments and central banks to support U.S. policy; they do not want to base their actions (buying dollars, pumping up their own economies) on promises. Clarity of purpose and standards is the best defense against market panics.

Governments should not calibrate their annual budgets to short-term swings of financial markets. It is a bad way to manage agencies and a worse way to manage markets. A government should try to minimize fluctuations by limiting speculation; changing policy frequently only encourages speculation about it. A government must try to sell its interpretation of the world. If it wants allies to agree, it must show that it is sure of its own policies, not about to pull the rug out from under those who go along.

The federal government cannot control the markets, but it can try to create circumstances in which individuals hesitate to bet against the government. A consistent and coherent and practical policy, supported by the Federal Reserve and our allies, is the best defense against such bets.

Any display of resolve behind a policy that most market participants considered a disaster probably would fail. Of course, nobody knows what markets really want. Still, few analysts would choose to risk bigger deficit reductions than we are suggesting in the short term. A $50 billion package would lower the deficit to levels where there is no rational argument for panic. As a display of will it would be impressive, the biggest deficit reduction in memory. The markets might still panic, but you cannot guard against irrationality.

Public opinion may never approve of unbalanced budgets. For this reason, many politicians might be scared to endorse our proposal. Public opinion, however, is not the real cause of the budget deficit panic. The public views the deficit as one of many evils. The general trend of the economy, as both polls and elections show, is far more important. The budget deficit panic is mainly a phenomenon of the public sphere, national experts and news organizations and politicians themselves excoriating our elected representatives for their supposed lack of courage.

This book is our attempt to use reason against that panic of the center. We can do less about the fact that the struggle over deficits involves basic values about the role of government in our society. Believers in less government may never accept a solution that leaves government bigger


575

than they prefer, nor should they be expected to do so. They will invoke any consensual, "public interest" notions they can in support of their beliefs. We ourselves disagree about the proper size of government, so must believe ideological differences are legitimate. But such differences should not be confused with response to a crisis of the economy or of governance.

Only if the public interest is defined as acts that are not in the interest of any substantial segment of the public would the clamor for budget balance above all other values make sense. The untold story of the deficit is that the political stratum has transformed a middle-sized, complicated problem into a moral test, leading to a policy panic that most Americans, by contrast, have had sense enough to avoid. Group-think on the deficit has led economists, editorial writers, and politicians to set impossible standards, demoralizing themselves, delegitimizing their procedures, feeding whatever fears may whip through those mysterious financial markets. Ignoring the policy and political lessons of the past decade, the forces of responsibility unwittingly increase our economic and political risk.

Whatever one thinks of the Reagan era, one thing is clear. The debate and politics of the deficit have been among the most stultifying experiences in our political history. From one year to the next we heard the same arguments, fought the same battles, prophesied the same doom. Nobody seems to have learned anything. Politicians of the right and left have so much fun beating one another over the head with the deficit that they cannot put it down. Besides, their heads hurt too much to think straight. Politicians of the center have come to see the deficit as a symbol of their own inadequacy. Having made elimination of the deficit the test of their ability to govern, they have come to see the deficit as a crisis because they cannot solve it, not because of any harm it causes. If that seems harsh, just listen to how they talk about their failure to eliminate the deficit.

The deficit has become an all-purpose weapon, used to oppose or support virtually any position. This is bad policy and worse analysis; it has paralysed our political system. Fixated on the deficit, we ignore other questions. Do we want more savings or more job training? Should we forget about full employment, define it as what we have already achieved, or try to lower unemployment further? What is a sensible defense policy—as opposed to a convenient way to fit into Gramm-Rudman? What is, or should be, our place in the world economy?

Until we end the deficit "crisis," we cannot even ask these and other questions. $50 billion will be very difficult, but possible. It should be enough. Let's do it and start thinking about other problems.


577

previous chapter
Twenty-Three Nobody's Darling, but No One's Disaster Either: A Moderate Proposal on the Deficit
next chapter