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January 12, 1989 FEDERAL budgets of the past don't just wither away and disappear when their year is over. Money borrowed in the past must be repaid. Past spending increases become entrenched interests, which are very difficult to reverse. The budget is like a luxury ocean liner; the direction it was headed in the recent past has a lot to do with its direction in the present. On the surface, the 1989 budget Ronald Reagan is leaving behind for George Bush bears some resemblance to the one he inherited from Jimmy Carter. For example, government spending in 1981 was equal to 22.2 percent of GNP. In 1989 the size of the government pie was about the same, at 21.8 percent. But the similarity is only apparent. In fact, decisions made in the middle of Reagan's presidency have left budgetary land mines waiting for the Bush years. The chart below should help to illustrate the potentially explosive problems. Two magic numbers are helpful in interpreting the chart. The overall rate of inflation since 1981 is 35 percent. The total growth of the economy, counting both inflationary and actual economic growth, has been about 70 percent since 1981. Thus, any category that has increased more than 35 percent has had more than a cost-of-living adjustment, and any category that has grown more than 70 percent has grown faster than the economy as a whole. The main trend of federal budgets during the Reagan years has been that the big categories are taking a bigger share of the pie. Defense, Social Security, and interest payments were about 60 percent of total spending in 1981; they are nearly 70 percent today. Each of these three monster categories carries over some powerful momentum from Reagan's presidency, making it difficult to change direction. For defense, the problem is that the enormous spending increases in Reagan's first term allowed the armed forces to hire people and start plans for developing new weapons and equipment. However, defense budgets were substantially reduced in Reagan's second term. The result, according to Lawrence Korb of the Brookings Institution, is that the Defense Department has $400 billion of programs in the works from the early 1980s but only $300 billion to spend in keeping those programs going. Thus, defense budgets in the next few years will have to choose between smaller, less ready armed services or reducing programs for new weapons. Just keeping defense spending where it is will require some painful cuts and adjustments. The problem with Social Security and Medicare is that when any politician ventures to consider them part of the budget, 30 million elderly voters throw a tantrum. But a country with ever more elderly people and ever higher medical costs can't simply avert its eyes from $319 billion in spending. A good first step would be for people to accept that talking about ways of saving money in these programs is not the same as stealing food from the mouths of your grandparents. The problem with high interest payments is that they are the price of high spending already undertaken during Reagan's presidency. During most of Reagan's presidency government spending was 23 or 24 percent of GNP, well above the level either in 1981 or today. (Remember, 1 percent of this year's $5.2 trillion GNP equals $52 billion in higher government spending.) The only way to reduce interest payments dramatically would be to make the debts of the government worth less with a burst of high inflation. But that solution would be worse than the problem. So here are the dimensions of George Bush's budgetary box: He can try to tackle the three monster categories. But no one can control interest payments, Social Security and Medicare are politically untouchable, and just holding defense spending where it is will require painful retrenchment. He could raise taxes. My preferred options would be to raise the income tax on the very wealthy and raise the gasoline, cigarette and alcohol taxes for everyone. But the clearest promise of the presidential campaign was Bush's pledge not to raise taxes. If Bush sits still, the three monster categories will eat up an ever larger share of the budgetary pie, which would force most other categories of spending -- environment, transportation, anti-poverty, education, law enforcement, research and development, and so on -- to be cut. That is the path proposed in Reagan's just-released budget for 1990, and not many bouquets have been thrown its way. In the end, I suspect that the federal budget will continue to reflect the preferences of the American people. Americans support higher spending, lower taxes and lower budget deficits. But when the inconvenient realities of arithmetic force them to sacrifice one of the three, majorities seem to form to keep spending up and taxes down, whatever the cost of deficits in the future. Ronald Reagan inherited a lot of economic problems from Jimmy Carter, but he also inherited a budget situation flexible enough to let him make some real choices on tax and spending priorities. George Bush has inherited fewer economic problems, and different ones, from Reagan, but he will step into his first year with almost no budget flexibility at all.
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