The Economy: Steady as We Go

January 31, 1994

As the economic recovery moves nicely into an expansion phase of the business cycle, the current buoyancy could produce a double payoff if it dampens ardor for a so-called Balanced Budget Amendment and encourages Congress to keep chipping away at the deficit problem. Neither result can be assumed, however. The demagogic appeal of balanced-budget gimmickry is irresistible to too many members of Congress; habitual pump-primers never think the time is ripe for fiscal austerity.

Robert Reischauer, director of the Congressional Budget Office, estimates that if the budget were actually balanced by the target year of 1999, as a constitutional amendment supposedly would require, Congress would have to impose tax increases and spending cuts amounting to $600 billion. This is an amount larger than either the 1990 or 1993 deficit-reduction packages, both of which were in the $400 billion range. It would be of a magnitude that could throw the economy into a tailspin.

Far better would be a steady-as-we-go course that avoids both balanced budget mandates and an aversion to more of the fiscal discipline that has lowered deficit projections dramatically. It is vastly encouraging that the CBO now projects the fiscal 1995 deficit at $171 billion, as compared to its $284 billion forecast a year ago. But only four years ago, the prospect of a $170 billion deficit was enough to induce a proper fear of budgetary crisis.

Nothing is more tempting to Capitol Hill than an excuse to loosen the purse-strings. But even with Mr. Reischauer's encouraging figures, the national debt will go up to $6 trillion in the next decade unless steps are taken to rein-in mandatory government spending programs.

As for the economy itself, the 5.9 percent growth just reported for the last quarter of 1993 was a bell-ringer. Solid advances were recorded right across the board -- in construction, consumer spending, business investment, sales of durable goods. The economy produced 2 million new jobs for the year and may exceed that in 1994, thus raising the prospect that 6.5 percent unemployment will decline to 6 percent by year's end.

The added tax revenues and lower government benefit costs resulting from the recovery are one factor in the lower deficit figures. And while the Clinton package of tax increases and spending cuts is another key ingredient, the bottom line owes a great deal to an unexpected drop in the cost of bailing out sick banks and S&Ls, in lower cost-of-living adjustments (COLAs) and lower interest costs on the national debt.

CThe task now is not to relax or go hog wild in pursuit of political nostrums, but to build on the deficit discipline already in place.

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