Perot deficit plan called effective but at high cost Recession's bad time to slash, some say

September 26, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- As he edges closer to re-entering the presidential campaign, Ross Perot says the attention paid to the federal deficit will determine whether he gets back into the race.

He contends that the economic plans of President Bush and Gov. Bill Clinton will not reduce the deficit, projected at $333.5 billion this year, and that only his economic program can do the job. He also suggests that the deficit is the country's major economic problem these days. Is he right?

The answers, according to many economists: Yes, his program would reduce the deficit; no, the deficit is not the major economic problem for today, but it will be for tomorrow.

"The country has two big problems, one of which is the recession, and immediate deficit reduction would make that problem worse," said Charles L. Schultze, senior fellow with the liberal Brookings Institution and former chief economic adviser to President Jimmy Carter.

"The long-run problem, which I think is more severe, is caused by the deficit, and over the long haul, yes, it is critical the deficit be reduced."

The Perot campaign has run its numbers through the econometric model created by DRI-McGraw Hill of Boston, a respected economic forecasting and consulting group also used by the Clinton campaign and the federal government.

"We have to be fairly neutral on this," said David Wyss, a DRI economist, who finished his analysis of the Perot program yesterday.

He found that of the three presidential campaign programs, only Mr. Perot's would reduce the deficit significantly during the term of the next administration.

"His plan actually is fairly realistic from an economic standpoint of reducing the deficit. From a political standpoint, it seems like a pretty good reason to get out of the race," said Mr. Wyss.

Mr. Perot has talked openly about the hard choices facing the nation and the pain involved in implementing his austerity plan, which would inflict some degree of hardship on all segments of society.

"I think a lot of people in the U.S. realize the medicine is necessary. It still doesn't taste good," said Mr. Wyss. "I tend to believe you really do need to be willing to suffer some pain. Everybody gets hurt. The program is pretty good at spreading out the pain."

Mr. Perot would increase Social Security taxes on upper-income recipients, increase the top federal income tax bracket from 31 percent to 33 percent, add 50 cents to federal gasoline taxes over five years and double the tobacco tax. Over five years he would raise $300 billion in new taxes.

He would reduce Medicare and Medicaid programs for the elderly and needy, lop 1.6 percent more off defense spending than the Bush plan, eliminate some programs, such as the space station, and reduce all other discretionary spending by 10 percent. He would also limit home mortgage deductions to interest on the first $250,000 of the loan.

His target: a budget surplus of $8 billion by 1998.

Such a dramatic austerity program would inevitably hurt growth. The DRI-McGraw Hill model suggested it would reduce growth in 1994 and 1995, the first two years of its possible implementation, by 0.5 percentage points to just below 3 percent annually, less than the recession-provoking impact predicted by its critics.

Its analyses of the Bush and Clinton economic proposals, which both stress economic growth and job creation through either private or public investment, found that neither would reduce the deficit significantly over a four-year term. The calculations did not include either candidate's proposals for containment of health care costs -- major elements in their claims to be able to cut the deficit -- because they were considered "too vague."

There are totally conflicting analyses of the Bush and Clinton plans. The conservative National Center for Policy Analysis said the Clinton plan would increase the deficit by $113 billion rather than halve it in four years, as the candidate claims.

The liberal Economic Policy Institute said that Mr. Bush's plan to reduce the deficit by 40 percent over five years would founder because the $200 billion spending cut he proposes would reduce economic growth by at least an equal amount.

Mr. Perot's plan may seem radical, but many of his ideas were taken directly from the Congressional Budget Office's annual compilation for Congress of possible ways to cut the deficit. Of a list of 19 ideas in a position paper sent by the Perot campaign to CBO Director Robert D. Reischauer, 16 came directly out of the CBO book.

Mr. Reischauer, noting that the CBO does not evaluate political economic programs, said: "There is not a whole lot of different options one can think of [to reduce the deficit.] There is not somebody who is suddenly going to say, 'Oh, I know, if we only cut this or that it would be less painful for the American public and easier to do politically, and why didn't we think of it before?' There is nothing like that out there. People have looked at these issues for years."

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