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August 29, 1989
"The S&L Bailout may be Just a Temporary Thing"
San Jose Mercury News
By Timothy Taylor
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IF you're the sort who likes trying to catch magicians in the middle of their illusions, it's time to start watching Congress and the federal budget deficit. Sometime in the next few months, it's a pretty good bet that the Gramm-Rudman deficit targets for 1991 will recede from view.

If the past is any guide, Congress and the president will change the targets to avoid missing them. After all, the political purpose of Gramm-Rudman always has been to give politicians something to endorse that sounded tough on budget deficits, so they could sidestep the issue of actually dealing with them.

Back when Gramm-Rudman passed in December 1985, for example, it decreed that the deficit would be reduced from $180 billion to nothing in five equal steps, thus leading to a balanced budget by 1991. Some cynics called it the Incumbents Re- election Act of 1985, because even though the budget deficit for 1986 turned out to be $221 billion, every incumbent could point to Gramm-Rudman as proof that they were getting tough on the budget deficit.

By September 1987, it was pretty clear that Congress wasn't going to get close to the Gramm-Rudman target of a $108 billion deficit for 1988, much less to a balanced budget by 1991. So Congress moved back the target so that the budget wouldn't have to be balanced until 1993.

Ever notice how the balanced budget always seems to stay about five years in the future?
This fall, congressmen are again preparing for elections. (To incumbent politicians, there are only two kinds of years: years of running in elections and years of preparing to run in elections.) Unless they change the Gramm-Rudman targets this fall, their opponents will be able to use them as a weapon next fall.

The opening drum roll setting the stage for this year's budgetary sleight-of-hand came in two sets of budget deficit projections released in the last couple of weeks, one from the non-partisan Congressional Budget Office and one from the White House's own Office of Management and Budget.

Both reports agreed that the 1990 budget (for the fiscal year beginning October 1, 1989) will be very close to the Gramm-Rudman limit of $110 billion; the CBO says a few billion over, the OMB says a few billion under. The difference depends on what Congress does in the next month or so and how the economy performs in 1990.

But the only way to get close to the $110 billion limit was to juggle the books. The biggest stunt so far has been to spend as much as possible of the cost of bailing out the savings and loans before October 1, since spending before that date counts as fiscal year 1989, not 1990.

Because of this strategy of saving money in 1990 by spending it sooner, the 1989 budget deficit appears likely to end up near $170 billion, up from $155 billion in 1988. But this doesn't violate the revised Gramm-Rudman law -- which required a $136 billion deficit in 1989 -- because Gramm-Rudman refers to the deficit predicted by the OMB, not the actual deficit.

Even if Congress and President Bush manage to wiggle in under the 1990 deficit target, the 1991 Gramm-Rudman target of a $64 billion deficit looks unreachable. The CBO report projects that, under current law, the 1991 deficit will be near $140 billion.

In fact, that $140 billion is even worse than it looks, because the federal budget deficits in the late 1980s are very different from earlier ones. Up until about 1984, the Social Security trust fund affected the budget deficit very little. It gained or lost a few billion dollars in any given year, but that was all. As the nearby chart shows, the budget deficits in 1984 and 1985 are just about the same with or without counting the surplus in the trust fund.

However, the chart also shows that if the growing Social Security surpluses are set aside, the 1991 budget deficit would have been in the same league with the monster deficits 1985 and 1986. The only reason that overall deficits have shrunk since Gramm-Rudman was enacted is the decision to build up a Social Security surplus and count it against the deficit.

Borrowing the Social Security surplus is a perfectly good way to reduce federal borrowing from the private sector economy and the rest of the world, but it doesn't help increase national savings so that the economy will be better able to support future retirees.

But even with the Social Security surplus and the world's most creative accounting, it will take a sudden, uncharacteristic burst of courage from federal lawmakers to get anywhere close to the 1991 Gramm-Rudman deficit target.

The underlying problem, I'm afraid, is that the U.S. political system responds better to crises than to the long- term harms of budget deficits. By running huge deficits, the United States is continuing to consume more than it produces and piling up additional debts to the rest of the world. Those debts can only be repaid by reducing the American standard of living in the future.

At their current size the deficits are economic poison, but the current dosage is slow-acting and good-tasting, and it weakens rather than kills. Playing with the Gramm-Rudman targets has worked as a political distraction, but it's not proven to be much of an antidote.

This table shows the reported federal deficit and what the deficit would have been were the surplus in the Social Security trust fund not used to reduce it. Figures are in billions.

Year Federal
1984 $185 $186
1985 $212 $222
1986 $221 $239
1987 $149 $170
1988 $155 $194
1989 $170 $224
1990 $116 $180
1991 $141 $215

Source: Deficit up to 1988 and Social Security figures from Historical Tables, Budget of the U.S. Government, Fiscal Year 1990. Deficit from 1989 to 1991 from Congressional Budget Office.

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