Deficit-reduction is wrongheaded cause

Robert Kuttner

October 04, 1993|By Robert Kuttner

THE Concord Coalition recently released its "Zero Deficit Plan," which proposes to eliminate the federal budget deficit by the year 2000. The plan's sponsors, former Democratic senator Paul Tsongas of Massachusetts and Republican Warren Rudman New Hampshire, also unveiled a "Debt Clock," mounted on a trailer, to be hauled around the country for photo-ops to underscore the peril of the rising national debt.

The coalition was intended to be a grassroots group, sounding a national alarm in the spirit of Paul Revere ("The deficit is here!") -- hence the name Concord Coalition. It is an epic case of well-meaning people pursuing a perverse goal.

For one thing, the deficit is already on a downward course. With the 1993 budget accord in place, the non-partisan Congressional Budget Office now forecasts that the deficit will gradually

decline from its present level of 4.3 percent of gross domestic product to 2.5 percent of GDP by 1998.

At that level, the national debt begins shrinking relative to the growth of the real economy. In other words, the great deficit crisis is basically over.

If you think investors are deterred by the fear of rising deficits, "crowding-out" of private investments by government borrowing, or renewed inflation, please explain why they are lending money to the Treasury for 30 years at a fixed interest rate of 6 percent. The fact that interest rates have been declining for three straight years suggests that deficits are a much-exaggerated peril. If anything, the danger is that we will overshoot in our zeal to reduce the deficit and deflate the economy.

Last week, the National Association of Business Economists (NABE) predicted annual growth rates of just 2.3 for all of 1993, and 2.7 for 1994. This is not enough to reduce unemployment. William C. Dunkelberg, the group's president, forecast "slow growth as far as the eye can see."

In this economic context, further deficit-reduction is the last thing the economy needs. Indeed, if growth continues to be sluggish, the Clinton administration should revive the idea of public investment financed by public borrowing, as a form of economic stimulus.

This approach, which would temporarily increase the deficit, will be resisted by deficit-hawks such as former senators Rudman and Tsongas. But it is better medicine for the economy than further deficit reduction.

President Clinton will also be fighting for his political life in his bold effort to win health reform. Here again, he runs into the conventional wisdom that deficit-reduction should be the top priority.

In formulating his health package, Mr. Clinton overruled his top -- economic advisers when he embraced a broad program of health security for the middle class. His advisers had proposed instead a stopgap approach to cover only the uninsured and the unemployed. They said the administration needed every spare penny for deficit reduction and was in no position to propose a bold new entitlement program.

But it is the idea of health care as a universal entitlement that gives the plan its political legs, as well as its economic savings.

For the Concord Coalition, entitlements are the problem. The group proposes scaling back Social Security and Medicare benefits to households with incomes that exceed $40,000, and hopes to reap more than 40 percent of the projected deficit cuts by reductions in Medicare and Social Security.

This counsel is also perverse. For one thing, the Social Security accounts have nothing to do with the deficit. Social Security is self-financing and runs a current budget surplus of about 1.5 percent.

For another thing, illness is no respecter of income. A family earning $40,000 is by no means rich. A serious illness can wipe out whatever discretionary income the family has. Indeed, an elderly individual with only Medicare and without supplemental coverage typically can spend thousands of dollars out of pocket just on the normal ailments of old age.

The very idea of an entitlement reinforces the necessary consciousness that we all have certain basic needs in common as citizens. It is this consciousness that Mr. Clinton has rekindled with his health-care reform. Properly administered, entitlements are beneficial to the cohesion of society. It is no accident that Social Security and Medicare are our most popular programs.

Deficit-reduction as the highest economic objective is wrongheaded economics and perverse politics. Its time has come -- and gone.

The sponsors of the Concord Coalition are well intentioned; they think they are helping save their country. Mr. Tsongas has been a public figure of idealism and personal courage. Mr. Rudman was a senator of real character and integrity. But when there is so much civic education needing to be done, it is a shame to see so much energy spent on such a wrongheaded cause.

Robert Kuttner writes a column on economic matters.

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