Pain in the Public Interest : Reagan’s Humiliation on Deficit, Tax Bills Is for the U.S. Good

Despite his celebrated unfamiliarity with the substantive details of policy issues, President Reagan is a remarkably accomplished politician.

The country, however, has no reason to regret the pain and humiliation suffered by the President when Congress enacted a deficit-reduction bill that he signed with great reluctance, while derailing a “tax-reform” bill that was the No. 1 domestic priority of his second term.

Both actions served the public interest.

One characteristic that has historically been associated with presidential greatness seems to be wholly missing from Reagan’s makeup. The genial fellow seems constitutionally incapable of asking the American people to sacrifice for the good of the country--or, indeed, of even recognizing that sacrifices may be necessary.

Maybe that helps explain Reagan’s continuing popularity. But it also explains the failure of the nation to deal realistically with the huge federal budget deficits that, if allowed to continue, will have calamitous effects on the economy.

Early this year the United States became a debtor nation--that is, we owe foreign governments and investors more than foreign borrowers owe us--for the first time since 1914. We are, in fact, in the process of making debt-ridden countries like Mexico and Brazil look like pikers.

Reagan came into office five years ago convinced, or so he said, that a tax cut could be had without interfering with his planned increases in military spending and without plunging the federal budget more deeply into the red. The President got his tax cut and the money for his military modernization program, which was in fact badly needed. But he also got the biggest budget deficits in American history.

Reagan seems convinced that he has pulled off the economic equivalent of the Indian rope trick. The economy has recovered from recession, inflation is way down and--although unemployment still hovers at just under 7%--millions of new jobs have been created.

The President, however, has not really repealed the laws of economics. He has been presiding over the progressive dismantlement of the U.S. economy--a fact that so far has been masked by the willingness of foreigners to finance our folly for their own selfish reasons.

Last year the United States bought $123 billion more from other countries than it managed to sell. In 1986 the trade deficit will go much higher. These dull figures translate into hundreds of thousands of lost manufacturing jobs. The resulting drag on purchasing power is a major obstacle to ongoing prosperity.

It is true that offsetting jobs have been created in the service sector, which includes such things as advertising, banking, insurance, restaurants and car washes. But, as economist Lester Thurow of the Massachusetts Institute of Technology puts it, “Much of America’s employment gain in fact has been in low-wage jobs that the average European worker would reject as unacceptable.”

The Japanese, though by no means the only source of the trade imbalance, are in fact the biggest factor. There are many reasons for the huge surpluses that the Japanese are piling up in their trade with the United States. First and foremost is the fact that they are efficient producers of high-quality goods. It is also a fact that the playing field is not level; the compulsion to stimulate exports while discouraging imports is deeply imbedded in Japanese culture and psychology.

But the American economic malaise is, to a major extent, home grown.

U.S. corporate managers, obsessed with the desirability of pumping up the value of their company’s stock so that their executive compensation plans will be more lucrative, think in terms of short-run advantage. American tax law, as it stands, rewards personal spending and corporate waste but penalizes savings and investment. And Reagan, despite his conservative credentials, is presiding over the biggest flood of red ink that the federal government has ever experienced.

Our enormous budget deficits have been financed, in major part, by foreign investors. The inflow of foreign money has kept the exchange value of the dollar artificially high, and that in turn has put U.S. producers at a competitive disadvantage both at home and in export markets.

The United States and its major trading partners agreed in September to take concerted action to lower the value of the dollar in order to narrow the U.S. trade deficit. Since then the value of the dollar has indeed fallen relative to the yen, and Japanese exporters are beginning to raise their prices--just what the doctor ordered.

Fundamentally, however, the value of the dollar cannot be kept down if U.S. interest rates remain high. Recent actions by the Federal Reserve Board have produced a sag in interest rates. But interest rates will go back up--thereby causing the dollar to rise again, hurting U.S. competitiveness--unless one of two things happens: Either the federal government must drastically reduce the budget deficit, thereby cutting its need to borrow from foreigners, or the Federal Reserve must increase the money supply without regard to the double-digit inflation that will almost certainly follow.

Obviously the self-interest of the American people is better served by controlling the budget deficit--and that means that Congress’ actions last week, however impurely motivated, were on the money.

The tax bill derailed by the House would have cut individual taxes and offset the lost revenues by corporate tax increases that would discourage badly needed investment in new, more productive equipment. Its defeat is a blessing.

The deficit-reduction provision, flawed as it is, is a ham-handed way of forcing Congress and the Administration to get down to business through some combination of spending cuts and tax increases.

Nobody enjoys paying higher taxes. But a free and democratic people should be capable of recognizing that re-ignition of inflation and the job-killing destruction of American industry are even worse.