Deficits and the Middle- Class Welfare State


February 01, 1993|By CAROL COX WAIT

Howard Baker called it a riverboat gamble. We wanted to believe we could have higher government spending and lower taxes, and that economic growth would make it all come out right. But it didn't work.

We have been living on borrowed money for over a decade. The national debt is growing faster than the economy. If that trend continues, it ultimately will take 100 percent of the Gross Domestic Product (our total economic output) just to pay interest on the national debt.

That is obviously an absurdity. So we invoke Herb Stein's first law of economic theory: If something cannot go on forever, clearly it will stop. The question is when and how we will solve the problem.

We can do it now, on our own terms; or we can wait until some crisis forces us to act. But the price of delay could be very high indeed.

The Congressional Budget Office's Economic and Budget Outlook, released last week, paints an alarming picture of the future.

Under present policies the deficit will remain around $300 billion a year until the latter part of the decade. Then it takes off like a rocket. By the turn of the century, we will have deficits of half a trillion dollars annually -- and rising.

The really bad news is that these projections probably represent a ''best case'' scenario. They assume that the spending caps and pay-as-you-go provisions in the 1990 budget agreement will be enforced through 1995. The also assume continued economic growth and relatively low rates of interest, unemployment and inflation.

The projections moreover contemplate no more than the normal incidence of natural disasters, and no surprises -- no S & L bailouts, no Desert Storm-type military adventures and, most importantly, no major new social programs.

Some people still think the answer lies in more deficit-financed government spending to stimulate the economy. But economic growth in the fourth quarter of 1992 was already stronger than anticipated.

The residual effects of the recession are concentrated in only a few geographic areas of the country, principally on the West Coast and in New England. The only real justification for a stimulus package today is to provide a sweetener to help Congress swallow the bitter pill of real fiscal discipline.

Ideally, spending to stimulate the economy should be be confined to just those areas of the country that need it. But the administration will have to hold Congress' feet to the fire to prevent lawmakers from eating their desert (voting for the stimulus package) before finishing the main meal (deficit reduction).

There's no use pretending any stimulus package can be funded within the 1990 budget agreement. We are going to have to admit that any spending to stimulate the economy will add to the deficit problem, because what we add at one end will have to be cut at the other.

In the near term, rising health care costs will be the crux of the budget problem. The temptation is to think that controlling the health care costs will make the deficit go away. Would that it were so.

In reality, the choices we face in health care are but a microcosm of the hard choices we will have to make in order to balance the budget.

There are two ways to save health-care dollars: limit the choices people are allowed to make regarding treatment or charge people more for the choices they make.

There are, of course, many ways to limit choices and raise costs to individuals, just as there are many ways to cut spending and raise revenues. The problem is that our government doesn't' have a very good record of facing up to these kinds of decisions.

Even if we solve the health care problem, that will only get us about half way to bringing the overall budget deficit under control.

Most people realize that the tax burden on the middle class has grown significantly in recent years. What they may not know is that the middle class gets a lot more from government today than in the past.

For example, defense spending grew during the 1980s. But most defense-related work also provides employment for the middle class. That's who works in all those defense plants.

Conversely, programs for the poor total less than $100 billion a year. That's less than 6 percent of federal spending.

Similarly, the rich aren't big beneficiaries of government largess -- simply because there aren't that many rich people. The rich should pay more taxes. But we can't hope to end the deficit merely by raising taxes on the rich.

Pogo said it best: We have met the enemy and it is us. The middle class is the beneficiary of most government spending and the middle class pays most of government's bills. It will always be thus -- so long as we are fortunate enough to have a large middle class.

Resolving the budget deficit requires a balancing act. We need to figure out what the middle class is willing to pay for government services and what services it wants most. Then we need to eliminate services for which the middle class will not pay. Anyone who says there is another way out is leading you down the primrose path.

Carol Cox Wait is president of the Committee for a Responsible Federal Budget, a bipartisan citizen advocacy group.

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