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February 9, 1992
"U.S. is Pathetically Addicted to Deficit Spending"
San Jose Mercury News

By Timothy Taylor
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AMERICAN TAXPAYERS will pay less than three-fourths of what the federal government will spend this year, the lowest proportion since World War II. President Bush's recent budget predicts total 1992 spending of $1.475 trillion, with borrowing to cover a deficit of $399 billion.

Of course, budget deficits are nothing new. The government ran deficits seven years during the 1950s, eight years in the '60s, and every year since then. But the deficits since the early 1980s are different.

The United States borrowed heavily to fight World War II, and thus entered the 1950s with a national debt nearly as large as its gross national product. Although the nation added to that debt through the 1950s, '60s, and '70s, the additional borrowing stayed relatively small, and so the accumulated debt grew less rapidly than the overall economy.

When Ronald Reagan ran for president in 1980, inveighing against the spendthrift government of the preceding decades, the ratio of accumulated debt to gross national product had actually been declining for decades.

But in the early 1980s, four factors combined to create enormous budget deficits. Defense spending reversed its generally downward trend since 1950, and climbed. Income taxes declined. Social Security and Medicare payments continued their rapid rise. And federal interest payments took off.

A surge of borrowing resulted; even after adjusting for inflation, total federal debt held by the public increased by 130 percent from 1982 to 1992. Because debt has been rising far, far faster than the economy, the ratio of debt to GNP is also growing, now tiptoeing past 50 percent.

Although the 1992 deficit promises to be extraordinarily large even by the lofty standards of the 1980s, concerns about federal borrowing seem to have entered a denial phase. Yet the costs of the debt are certainly apparent, if you know where to look:

  • The government will pay $199 billion in interest this year, with about $120 billion of that attributable to the higher borrowing of the 1980s. Whether you'd like to refund that $120 billion as lower taxes or spend it on social programs, blame the budget deficit.
  • The standard prescription for ending a recession is to cut taxes or raise spending, but with a deficit already at $399 billion, those policy tools are not available. If you are frustrated with government's inability to address the recession, blame the budget deficit.
  • By soaking up available domestic savings, the deficit forced the U.S. economy as a whole into dependency on foreign borrowing. In 1980, U.S. investors abroad held assets that were worth $380 billion more than the assets that foreign investors held in America. By 1990, the assets of foreign investors in the United States were worth $412 billion more than the assets of U.S. investors abroad. The United States had become the world's largest debtor nation, and repaying that debt will be a long, slow drag on the U.S. standard of living for decades to come.
  • The deficit has limited the funds available for private investment. Despite massive borrowing from abroad, net private investment in the United States did not increase in the 1980s from the levels of the 1970s, which is hardly the way to keep pace with hard-nosed competition from Europe and Japan. All addictions have an element of the pathetic, and the United States is addicted to deficit spending. As the nation complains about high taxes and not enough money for social programs, about the length of the recession, about the decline in living standards and the threats to U.S. competitiveness, we might pause to reflect on how we elected the politicians of both parties who enacted the budget deficits that have contributed to all these problems.

Thankfully, a number of built-in factors seem likely to reduce the deficit in the next few years. An eventual economic recovery will mean more people paying taxes and lower government unemployment and welfare payments. Defense spending has already started dropping, and will continue. The recent drop in interest rates, if sustained, will reduce federal interest payments. In addition, the main costs of bailing out the savings and loans should soon be behind us. And the Social Security system continues to build up surpluses, which are loaned to the rest of the government and thus reduce the drain on private capital.

Yet these factors, taken together, offer only breathing space. The Congressional Budget Office projects that the ratio of total debt to gross national product will not rise through 1997, but will not fall, either. So other steps are needed to restrain federal borrowing.

On the tax side, I'd advocate jacking up the excise taxes on gasoline, alcohol and cigarettes substantially -- perhaps tripling them over five or ten years. Since excise taxes tend to weigh less heavily on the rich, I would also raise taxes on the wealthy. One method would create a 38 percent tax bracket for high earners; another might reform the corporate income tax so that it no longer encourages debt, and then raise the rates; a third approach would raise estate and gift taxes. These steps could raise perhaps $60 billion per year.

On the spending side, I'd accelerate cuts in defense, and reduce Social Security and Medicare payments to those who have more than, say, $40,000 per year in other income. Together with nips and tucks in smaller spending items, these steps could save another $50 billion.

But the political system seems to have booby-trapped itself in dealing with the budget deficit: We don't need to cut spending or raise taxes in good economic times like the mid- 1980s, because times were good; and we can't deal with the deficit in bad economic times like the present, because times are bad. I don't know how to break that logjam. The limited agenda described here, together with the built-in favorable trends, could reduce the deficit to less than $200 billion. That's not ideal, but at least the ratio of debt to GNP would decrease. At least the federal government would make some progress toward kicking its borrowing habit, and using taxes to cover its bills.

Chart shows total federal debt held by the public as a percentage of gross national product. Source: Office of Management and Budget (Fever chart)

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