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February 20, 1996
"Resist Temptation, Keep Hacking Away at Deficit"
San Jose Mercury News
By Timothy Taylor
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NEGOTIATIONS OVER the federal budget are so bogged down that President Clinton's proposed 1997 budget is a 20-page handout. Yet there's a sniff of optimism in the air about the actual budget deficit.

The deficit for FY 1996 looks like it will come in at about $154 billion. The deficit has been declining for four years since 1992, when it bottomed out at $290 billion.

In comparison with other major industrialized nations, the U.S. deficit doesn't look so bad. According to the Paris-based Organization for Economic Cooperation and Development, the budget deficit for all levels of American government combined will be 1.5 percent of gross domestic product in 1996.

For comparison, the projected 1996 deficit in Germany is 3 percent of GDP; in Canada, 3.1 percent; in the United Kingdom, 3.8 percent; in France, 3.9 percent; in Japan, 4.8 percent; and in Italy, a whopping 6 percent.

This news is all good and welcome, but in a partial way, like when a patient's fever falls from 104 degrees to 102. Just because there's an improvement doesn't mean one can afford to lose perspective.

Other countries also have a cushion, because they have a higher savings rate. Household savings in the United States are 4.5 percent of income; in much-maligned Italy, to choose a counterexample, savings are three times that level.

When other countries borrow, they are largely borrowing from their own citizens. Their deficits may be too large, but at least the bulk of the interest payments are going to their own citizens. As some economists say, they owe it to themselves.

Since the U.S. economy doesn't save enough to supply its own capital needs, it relies on foreign investors. The United States has been the world's largest debtor country for almost a decade now; U.S. foreign liabilities exceed U.S. foreign assets by more than $800 billion.

Comparing the 1996 U.S. deficit to other industrialized countries isn't quite fair for one other reason: it neglects whether a nation's economy is in a period of growth or recession.

Recessions increase budget deficits, both by cutting tax revenues and by increasing the need for social expenditures. Back in 1991-'92, when the U.S. economy was in recession while most of the other major industrialized countries were doing fairly well, the U.S. budget deficits (as a share of GDP) were higher than theirs.

Now, it's been almost five years since the trough of the U.S. recession. But Japan has been hovering in or near recession for several years; Germany has been bearing the costs of reunification; and the European economy as a whole seems in danger of negligible growth this year. Little wonder that their projected 1996 deficits exceed ours.

The economic theory of how to manage the budget in good times is not complicated; basically, is says to make hay while the sun shines. In other words, when the economy is proceeding reasonably well and the deficit has been dropping naturally, that's the time when society should have the freedom and energy to attack the deficit even more fiercely.

This logic seems a little too sophisticated for our political system. Instead, when the economy sinks into recession and the deficit blossoms, we wring our hands and say we can't do much about it. Then when the economy recovers and the deficit fades, we sit on our hands and say that given the favorable trends, there's no need to do much about it.

But the deficit will bloom again. Another recession will arrive sometime in the next few years. Early in the next century, the aging of the baby boom generation will make the current structure of spending and taxes unsustainable.

By the standards of the last 15 years, the budget deficit is relatively low in 1996. Paradoxically, that is exactly why taking steps to reduce it further should be such a high and immediate priority.

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