Perot's economic 'plan' would be is poison for the economy

Robert Kuttner

October 05, 1992|By Robert Kuttner

IN THE race or out of it, Ross Perot has a knack for making the political conversation come to him. Just as he lured top-level emissaries from the Bush and Clinton campaigns to court him in Dallas, Perot is making the issues come to his home turf as well.

Mr. Perot is trying to turn the election into a referendum on who has the most courageous plan to fix the economy by eliminating the federal deficit. That, of course, would be Ross Perot.

For the most part, press coverage has played into Mr. Perot's hands by treating him as a brave if eccentric Paul Revere. Mr. Perot's budget plan has been widely characterized as smart if painful economics, but heroically difficult politics.

If anything, the opposite is true. Mr. Perot's plan is terrible economics -- while its astute political subtext is that only Ross is gutsy enough to deliver the painful truth about how to cure the economy. Politically, the plan is certainly astute enough to gull much of the press.

Mr. Perot's plan would eliminate the federal deficit over a period of five years, starting Jan. 1, 1994. A mechanical formula would steadily raise taxes and cut spending by some $754 billion, until the deficit reached surplus by 1998.

There are two basic problems with this economic strategy. The first is timing. The economy is now so weak that deficit reductions during, say, the next two years would only deepen the recession, constrict economic activity, reduce revenues and require even larger tax increases in order to produce a given cut in the deficit.

The second problem is that Mr. Perot proposes the wrong goal -- budgetary surplus. Once the economy is in a robust recovery, it does make sense to trim the deficit. But it does not make sense to reduce the deficit to zero, because some of the deficit goes for capital outlays, which are a form of investment.

The more realistic alternative is to increase public borrowing in the short term, as a stimulus to recovery, and reduce the deficit once a recovery is attained. But unlike the huge deficits of the Reagan-Bush years, all of the new borrowing should be used to increase investment.

The economy needs investment in order to grow. But in a deep recession private investors are reluctant to commit capital because they see few customers. Public investment has the virtue of bridging over the private sector's reluctance to invest.

One of Mr. Perot's mistakes -- echoed in most debates about deficits -- is his complete inattention to what the deficit buys. The accumulated deficits of the Reagan-Bush era are a drain on the economy -- not because they represent government borrowing, but because of how they have been used.

A huge structural deficit exists today mainly because the tax cuts of the 1980s blew a large hole in the government's revenue, but did not produce higher rates of savings or investment. For the most part, the deficits went to buy wealthy people tax relief. Had they gone instead to purchase better education and training, more public infrastructure, more research and development, the economy would have grown faster and the accumulated debt would be less onerous.

New debt to increase consumption or to provide further tax loopholes would be stupid debt. But new public borrowing aimed at increasing investment would help power a recovery.

Instead of Mr. Perot's slash-and-burn cure, a sensible budget policy for economic recovery would include the following:

* A federal "capital budget" that separates capital outlays from current spending, so that we know just how much of the budget represents investment and how much represents consumption. The consumption portion of the budget should be kept in rough balance over the business cycle. But it is legitimate to use long-term debt to finance long-term investment, just as households and private businesses do.

* A commitment to gradually eliminate the "consumption" portion of the deficit as the economy is restored to high growth. Instead of specifying that the deficit be cut by a given amount on a particular date, Congress should tie automatic tax increases to a restoration of growth.

* A public-investment strategy for recovery, as well as a permanent anti-recessionary program of standby public works. When unemployment hit a certain rate in a particular region, federal funds would be automatically released for public infrastructure spending. Once this program were established, states and localities could pre-approve projects that would be taken off the shelf and implemented as the economy softened.

Mr. Perot deserves credit for one thing -- his surprisingly progressive list of proposed tax increases. He advocates a gradual hike in the gasoline tax -- 10 additional cents a year for five years -- as well as a $250,000 cap on the mortgage-interest deduction, a limit on tax-deductible business lunches, as well as higher income taxes on the wealthiest 4 percent of households and the best-off 18 percent of retirees. This is the right list, but he is proposing overkill.

Perhaps, as a billionaire, Mr. Perot can appreciate that it is the rich who can afford new tax hikes. But where his empathy fails is in his assumption that America needs a drastic cold bath. Most Americans took that bath in the 1980s.

Robert Kuttner writes a regular column on economic affairs.

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