Academic journal article ABA Banking Journal

Deficit Ball Drops in Bush's Court

Academic journal article ABA Banking Journal

Deficit Ball Drops in Bush's Court

Article excerpt

Deficit ball drops in Bush's court

Can President Bush and the Democrat-controlled Congress agree on an effective plan to reduce the massive Federal budget deficit?

Ideological differences and President Bush's "no new taxes" campaign pledge are stumbling blocks to the reduced deficit needed to calm the jittery stock and bond markets and halt the dollar's slide. Deficit can't stay. Fed Chairman Alan Greenspan has made a compelling case for budget cutting. Although he took the same line as past Federal Reserve chairmen, Greenspan stressed that the long-term corrosive impact of the deficit is rapidly turning into the short run.

"It is beguiling to contemplate the strong economy of recent years in the context of very large deficits and to conclude that the concerns about the adverse effects of the deficits on the economy have been misplaced," the Fed chairman said. "But this argument is fanciful. The deficit already has begun to eat away at the foundations of our economic strength."

Greenspan noted that the effects of the budget deficits over the past several years have been muted by two factors: slack created by the economy's rapid expansion, and the fact that the deficit has shrunk (as a portion of gross national product) in the past few years.

Today, the national deficit is about 3% of GNP. Since World War II, the deficit has exceeded 3% of GNP only in the 1975 recession period and in the recent period beginning in 1982. Negative effects. Greenspan said that one reason the deficits of recent years are threatening is that they have been accompanied by little private saving. Net personal and business saving in the U.S. in the 1980s is about 3 percentage points lower than it was in the `50s, `60s, and `70s. Government deficits have been quite common among other major industrial countries, but private saving rates in most of these countries have exceeded the deficits by very comfortable margins.

"Under these circumstances, such large and persistent deficits are slowly but inexorably damaging the economy," the Fed chairman said. "The damage occurs because deficits tend to pull resources away from net private investment. And a reduction in net investment has reduced the rate of growth of the nation's capital stock. …

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