The Budgeting Dilemma

Budget resolutions (setting internal congressional targets for total spending and revenue) and appropriations could be delayed but eventually would have to be passed. When resolutions were considered, Democrats had to face the great divisive issues of defense spending and inflation. On defense, a large faction of Democrats, led by Senators Hollings of South Carolina and Nunn of Georgia, was enough alarmed by America's military position to join Republicans in fighting President Carter for a larger military buildup. And many Democrats, along with most Republicans, felt that inflation posed so great a threat that some action—probably budget balancing—was imperative.

Two contradictory pressures—higher defense spending and stopping inflation—originated in attitudes toward events beyond Capitol Hill. The Soviet Union's invasion of Afghanistan, the administration's reaction to a Soviet combat brigade in Cuba, and the taking of American hostages in Iran all helped generate a sense of American military weakness. Voters in their districts and commentators in the media informed politicians that people felt insecure about national defense.

Congress clamored for a big defense buildup. Speaker O'Neill declared:

I think the mood out there is that we have to be prepared for conventional skirmishes, and the American people feel for the first time that we do not have that capability. I'm talking about the safety of the country, and you put that ahead of energy, inflation, balancing the budget and everything else.^[1]

If Carter bowed to this pressure, yet wanted to balance the budget, he would have to raise taxes further or turn on the Democrats' own constituencies by taking from social programs to give to defense; if the president held down the defense buildup, he would come under fire for risking the nation's security.

But if the public felt insecure about defense, it reached near panic at the prospect of inflation. The polls were showing inflation as the major political issue, while financial markets gyrated wildly and the media clamored for action.

Consumer prices already had increased by 13 percent in 1979, and the trend was toward even faster increases. The inflation reduced individuals' real average gross weekly earnings by about 4 percent in 1979.^[2] Consequently, the public's pain threatened to become the president's trouble. In mid-October 1979 a Gallup poll showed that only one-third of the respondents approved of Carter's job performance (with half

disapproving) and that two-thirds listed inflation as the nation's most important problem.^[3] Conventional wisdom said that one way to reduce inflation was to reduce the federal budget deficit.

Whether the deficit increased inflation or not, inflation did increase the deficit. Social security and the other pension programs were slated for large increases in fiscal 1981, mandated by law to compensate their beneficiaries for the 1979–1980 inflation. Costs of medical programs could be predicted to rise as the price of health care soared, along with fuel costs for the military and food costs for school lunches; in many such ways inflation would increase the cost of providing in FY81 the same services provided in FY80. Price increases were accompanied by (somewhat smaller) wage hikes, thereby increasing collections from income and other payroll taxes. The burden on many taxpayers increased as their nominal wages crept up into higher tax brackets but their real wages (what they could buy) remained steady or declined because prices rose more quickly. This automatic tax hike angered voters. Yet even higher tax payments from "bracket creep" could not make up for the automatic increases in entitlement funding and the desired jump in military spending.

The dilemma for Democrats was to reconcile the seemingly irreconcilable: cutting deficits caused by inflation in order to reduce inflation, while increasing defense spending and diminishing the tax burden. Something had to give; in 1981 the Reagan administration risked higher deficits to build the military up and keep taxes down. But in 1980 Jimmy Carter went the other way.

By all reports, Carter, who introduced the "zero base budgeting" reform system in Georgia, truly believed in the fiscal responsibility and control that a balanced budget represents.^[4] This belief, moreover, was reinforced in the political-economic arena. His Republican challengers naturally were denouncing deficits, but so were Democrats: California Governor Edmund G. (Jerry) Brown, Jr., supported a constitutional amendment calling for a balanced budget; even Senator Edward Kennedy condemned deficits, announcing in late January that he favored "the steps that have been taken by the Congress to insure that we're going to achieve a balanced budget next year."^[5] Most Americans agreed that a balanced budget was desirable; in March 1980, for example, a Gallup Poll reported respondents supporting by more than four to one a constitutional amendment requiring balanced budgets.^[6]

In addition to the lasting symbolic power of a balanced budget in American political history—as a sign that things were right and government could govern—support for balanced budgets had two contemporary sources. One was a deep, widely held suspicion that the federal government wastes money—fifty-two cents on every dollar, according to

the median respondent in a November 1979 Gallup Poll.^[7] In the public mind, an unbalanced budget stands for and allows wastefulness. The second source was a widespread belief that government deficits fuel inflation. Although the link is neither direct nor predictable, and is possibly even mistaken when overwhelmed by other factors, most economists believe that deficits work more to increase than to decrease prices. The March 1980 Gallup Poll showed that the public, by more than a four to one margin, agreed that deficits were more likely to raise prices. In January 1980, government waste probably had not changed, but inflation was increasing dramatically. Politicians, therefore, seized on deficit reduction as something they could do about inflation.