Paying for Past Follies

December 15, 1990|By Daniel Berger

THESE TIMES cry out for deficit spending. In a recession, it makes sense to spend what you don't have, thereby making it, so that you can then pay it back. Not businesslike, somebody said? Find a business that doesn't do it, or something like it, some of the time.

Government spending on worthy projects or programs would keep people at work, lighten the load of entitlement claims, slosh the money around to retail and service businesses and do the actual good that a well-designed bridge or work-training program does.

In a foreign crisis requiring a demonstration of arms, also, it makes sense to fly the troops over before taking the time to raise the money, overwhelm the foe with a show of force and pay back the bills in more tranquil times, when those troops will be civilians paying the taxes to pay the cost of their having been soldiers.

The line of thinking I reflect here is called Keynesian, in descent from the late English economist John Maynard Keynes, and liberal, because it found a following in the British Liberal and Labor Parties and U.S. Democratic Party before the English Tories and U.S. Republicans began co-opting it.

There is a contrary variation on this view, however, holding that all times cry out for deficit spending. It promises that borrowed money will always enlarge the economy and bring in the tax revenue to pay for the debt. This is generally called supply side, as tinkering with the supply rather than the demand side of the economy, and conservative, for some reason.

The American people elected supply-side economics to power along with Ronald Reagan in 1980. It was spend, spend, spend, borrow, borrow, borrow, elect, elect, elect and forget the taxes. In a political sense this succeeded. The American people wanted to believe in it at the time.

Fiscally, it was a flop. The revenue did not materialize to pay the debt. The promise wasn't kept. The Democrats in Congress shouted about that, but were co-conspirators. Mr. Reagan dared them to raise the revenue and they would not. They agreed with him that spending should be cut, but disagreed about which.

The spending of the Reagan years was directed principally acountering the Soviet threat after the year 2000, with weapons that did not exist and might not work.

Now the assumptions are changed. The Soviet threat ianticipated to dematerialize. We need less-advanced weapons, easily transportable, that will work. But the portion of the budget that must be spent to retire the debt of past years gets bigger and bigger and bigger, so that we find ourselves sacrificing both guns and butter whether we want to or not.

With virtually all interest groups crying out against more debt, to curtail the mushrooming portion of the budget that goes only for past budgets, the president and the Congress finally agreed on a long-range budget-cutting program.

It raises some taxes and reduces some programs. Designed to (( cut $500 billion from deficits over the years 1991-95, it will, according to the congressional Budget Office, actually cut $496 billion, which is not bad.

But that's a notional $496 billion. It's cut from an estimate of what would have been spent otherwise, not from anything that exists. It does not mean that deficits will necessarily go down.

This is the right policy at the wrong time. The recession is setting in. Retailing is lousy, real estate is at a standstill, the savings-and-loan crisis threatens to swamp its rescuers, banks have lurched from excessive lending to none and some of the biggest are in dire straits. Instead of priming the pump, the budget plan of 1990 will depress the economy. It is designed for an overheated economy, which this ain't.

Thanks to the recession, revenue will come in under estimates, so the federal deficits will soar rather sink. The Congressional Budget Office says the deficit will rise from $220.4 billion to $253 billion to $262 billion before it starts to subside, but if the recession gets worse, those figures will be higher. That does not negate the estimate of deficit saved, which, you will recall, was notional.

If Washington is letting down the side, don't look to the states for help. Maryland is in whopping deficit even if things go well and Virginia is four times worse off, or more candid. Philadelphia is trying to roll over its debt with short-term notes. Pretty soon cities will be tempted to act like Latin American countries and not pay.

As a result, instead of priming the pump to fight the recession by thinking up public works, Maryland is going to postpone its transportation improvements and possibly lay off state workers, who will then demand entitlements instead of pay taxes. This thing feeds on itself.

Eventually, no doubt, the recession will come to an end. Some authorities say the latter part of next year. They are the optimists. And after it is over, we can debate whether the Keynesian nostrums we couldn't try would have done any good.

Any warfare in the Gulf would, by the way, make this equatioworse before making it better.

But even with peace, with policies that are right following a spending binge but wrong for recession, we will be adding to the national debt. This is the portion of future budgets that pay for past sins, or past virtues if any. The country cannot engage in right deficit spending now because the Reagan legacy mandates that it engage in wrong deficit spending, which pre-empts the deficit spending of which it is capable.

If I have any of this right, the deficit orgy of the Reagan administration was as bad as its critics said, and will harm the country for years to come.

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