The Mythology and the Reality Pertaining to Budget Deficits

By Samuelson, Robert J. | American Banker, January 29, 1986 | Go to article overview

The Mythology and the Reality Pertaining to Budget Deficits


Samuelson, Robert J., American Banker


IT'S BUDGET TIME AGAIN. WASHINGTON has resumed its obsession with budget deficits. You will hear much that is confusing and wrong. The foremost myth is this: Closing the deficits requires a massive retrenchment of government or huge tax increases. Don't believe it. The truth is that a combination of modest tax increases, selective cutbacks in domestic spending, and a further slowdown of the defense buildup would quickly shrink the deficits.

Deficits have become a stubborn political problem only because we have made them so. Deflating the deficcits involves paying a little more, receiving a little less. It's a thurndestorm, not a typhoon. You would never know it from Washington's clamor and clatter. Deficits have created a high-pitched political schizophernia. Closing them is essential, but doing so would be unbearably painful. Debae over Gramm-Rudman-Hollings -- the law that supposedly requires a balanced budget by 1991 -- has simply raised the rhetorical hysteria to new heights.

Politics is about conflict and choice. The conflicts and choices engaged by the deficits are relatively ordinary. Compare them with some landmark legislative events of our era: passge of the Civil Rights Act (1964), medicare (1965), and the environmental legislation of the 1970s. All these involved basic change in the ways the nation conducts its affairs. Can the same be said of trimming guaranteed student college loans -- to cite one proposed spending cut -- or raising taxes 6%?

From the outset, budget deficits have inspired a colossal mythology. Consider:

* Myth: President Reagan created the deficits by cuting taxes and raising defense spending.

* Reality: Any President would have faced unpopular choices. By the late 1970s, the budget had reached a political impasse. In 1979, defense spending (as a proportion of gross national product) was the lowest since 1948. Taxes were at postwar highs. Interest expenses on the federal debt were held down by undesirable low -- inflationary -- interest rates. An aging population and high health cae costs were automatically raising Social Security and Medicare spending. The consensus was to raise defense spending and reduce inflation. President Reagan's agenda sharpened the conflicts, but he did not ceate them. Even with his tax cut, the tax burden in 1985 equaled the 1970s' average.

* Myth: High budget deficits caused high interest rates, leading to the dollar's high exchange rate and the huge trade deficit.

* Reality: The 1980s' high interest rates mainly reflect a deliberate decision by the Federal Reserve to raise rates to halt the 1970s' inflation. Rates rose well before large deficits emerged. A study by economist Frederic Mishkin of Columbia University attributes most of the rate rise to Federal Reserve policy. …

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