Minus Again in America

The American people rather like the current system of getting $1 in services for 80 cents in taxes,” said Rep. Willis D. Gradison Jr. (R-Ohio), a member of the House Budget Committee, at a federal taxation forum. Americans are, after all, conditioned to buying on credit, presuming that future income will cover current consumption. That may explain, in considerable part, the continuing popularity of President Ronald Reagan. On the threshold of its sixth fiscal year, the Reagan Administration embodies the spirit of American consumerism. Elected on a platform of thinking lean, it was unable to confront the reality that thinning the budget and reducing taxes was irreconcilable with a hearty appetite for defense spending. When, in August, 1981, Budget Director David A. Stockman projected $100-billion-plus annual deficits, the President, according to Stockman, replied: “We can’t give up on the balanced budget. Deficit spending is how we got into this mess.” But the President refused to take realistic action to balance the budget.

Until 1974, the White House, through the Office of Management and Budget, dominated the balancing act, even though the Constitution places primary responsibility for taxing and spending in the House of Representatives. Then, in the wake of Vietnam and Watergate, Congress established its own budgeting capability, the Congressional Budget Office.

While this served to counterbalance OMB, it further complicated already complex procedures. After the President submits his budget in January, the CBO makes its own estimates. The House and Senate Budget Committees then establish the financial parameters for the upcoming fiscal year’s programming. Thirteen authorizing committees in each chamber undertake enactment of legislation, all but a tiny percentage simply a continuation of current programming. Once authorizing legislation is passed, the House and Senate Appropriations committees--each with 13 subcommittees reflecting the 13 authorizing committees--apply themselves to funding. If, as is frequently the case, there are discrepancies among the various committees, the budget is subject to a “reconciliation” measure, intended to align the numbers.

The process is supposed to be completed by Oct. 1, the beginning of the federal fiscal year. Often, however, party differences stall an appropriations bill. In order to keep the government running, Congress must then pass a “continuing resolution” to keep departments operating at the previous year’s level. Reps. Robert A. Roe (D-N.J.) and Al Swift (D-Wash.) have described “a budget process that is so complex it is incomprehensible to almost everyone. Most of the members do not understand it beyond a superficial level. The press does not understand it. The business community does not understand it. And, most important of all, the general public does not understand it.”

This incomprehensibility, combined with the persuasive powers of an enormously popular President (who himself had difficulty grasping the complexities), helped bulldoze a reluctant Congress into passing the 1981 budget and tax bills born out of chaos and drawn with smoke and mirrors. Using a hand calculator, Stockman committed an $80-billion error that resulted in a 10% annual increase in defense expenditures instead of the 5% promised by the President. Yet once committed, the miscalculation might as well have been written in stone. At the other end of the equation, the tax cut presaged a five-year loss of revenues totaling between $650 billion and $700 billion. Annual deficits averaging more than $200 billion since 1983 have been the result. But the true state of affairs, masked by surpluses in Social Security and smaller trust funds, is considerably worse. Outside the much-maligned trust funds, the federal government has been spending $3 for every $2 it takes in--in 1985 it was collecting only 63 cents for every $1 it paid out.

Abandoning hope that the President would act to solve the deficit, Congress last December resolved to strengthen its own budgeting procedure and insulate itself to some extent from White House pressure. The Gramm-Rudman-Hollings Act set a 1991 target for balancing the budget, gave the budget committees enforcement in addition to advisory powers and provided for automatic sequestering of funds if targeted reductions weren’t met. Although the U.S. Supreme Court held one clause--endowing the Comptroller General with sequestration powers--unconstitutional, the fallback provision placing responsibility for sequestering on Congress itself was sustained. The choices facing lawmakers are, in fact, so unpalatable that Budget Committee staffers refer to Gramm-Rudman as “the Anti-Incumbency Act of 1985.”

But while Congress debates $100-million programmatic cuts or $1-billion tax preferences, these pale in significance to the budget-balance effect of small changes in economic activity or interest rates. Economic projections are supposedly accurate within 3%. But 3% of a gross national product amounting to nearly $4 trillion constitutes more than $100 billion.

The transitory nature of projections is exemplified by the $21.5-billion increase in the estimated deficit since June, when Congress, over White House objections, pared the President’s budget to a $142-billion deficit, $2 billion below the Gramm-Rudman mandate. The new increase confronts Congress and the President with a dilemma they must address within 10 days.

In accord with Gramm-Rudman, Congress should pass and the President sign a resolution sequestering $20 billion, half from defense and half from non-defense spending. (Defense spending is about twice as much as the non-defense spending to which Gramm-Rudman applies, so the cuts would be about 5% for defense and 10% for non-defense.) But such across-the-board reductions would be anathema to the White House and Congress alike, so both are looking for a face-saving way out. The only escape hatch available is to apply the one-time windfall of $11 billion from the tax-reform bill to reduce the deficit to $153 billion, then declare that this falls within the $10-billion margin of error permissible under Gramm-Rudman. To catch the $11-billion windfall, the tax bill will have to be enacted immediately. A further complicating factor lies in a pending $3-billion appropriations bill that would pierce the limit, regardless of creative accounting. And even if some kind of manipulation patches things together this year, reducing the deficit to next year’s goal of $108 billion appears beyond reach.

Despite presidential rhetoric about curbing the role of government and reducing taxes, the Reagan Administration has continued the expansionary trend in federal spending--now accounting for nearly one out of every four dollars of GNP, a greater percentage than at any time since World War II. Whether one likes it or not, the federal government is the engine driving the economy, especially in a high-tech state like California.

In the public sector, federal funds represent $14.7 billion (29%) of the $51 billion in state expenditures, excluding bonding. In the private sector, California, with about 11% of the nation’s population, receives 18.8% of defense spending and 10.3% of non-defense spending. Los Angeles County is the recipient of more than half and the Southern California area accounts for 76% of the state total. Aerospace--56% of its output for the military--is virtually a captive industry of the Defense Department; communications and electronics depend upon the Pentagon for one-third of their orders. Approximately 650,000 jobs in the state are defense-related.

California’s economy, then, is tied to decisions in Washington. In the short run, the state--especially the region embracing Los Angeles and San Diego--has been a major beneficiary of Administration policies. But the bills run up on the credit cards are going to come due, eventually.

First, were the American economy operating in only a national setting, the policies of the past five years would have been impossible to sustain without generating inflation. As the excess of outlays over revenues gave Americans money to splurge, military and consumer orders would have competed with each other. Supply would have been unable to keep up with demand. Wages and prices would have spiraled upward.

The United States has been spared such inflation because the military buildup has occurred in the context of a peacetime global economy. Consumer spending, instead of creating internal pressure, has flowed outward to Japan and other countries. In 1983, following a near-tripling of the federal deficit during the prior three years, the trade deficit began soaring toward its estimated $175 billion this year.

Second, under the general heading of returning power to local government, the Administration embarked on a devolution of programming but without accompanying revenues, which were instead shifted to military expenditures. Measured in constant dollars, grants to state and local governments in such areas as education, housing, labor, transportation and environmental protection have been reduced by a third since 1978. Theoretically, states and localities have the choice of maintaining these services at prior levels by taxing themselves. But since the combined burden of income and social security taxes on individuals is now significantly higher than ever before, enactment of more local taxes would represent not a shift in taxes but an increase.

For example, the general revenue-sharing program that was eliminated this year provided Los Angeles annually with $80 million, used for hospital operation. Now the city faces the options of reducing services, diverting money from some other purpose or raising additional revenues--a difficult endeavor under the strictures of Proposition 13. Yet Los Angeles at least is in a position to make a choice; smaller and less affluent communities which have been using the money for such necessities as fire and police protection have no such options.

The state lacks the wherewithal to help since it faces its own dilemma in the Gann limitation initiative, passed in 1979. Except for adjustments caused by inflation and population increases, Gann froze taxation at 1979 levels and mandated that all excess revenues be returned to taxpayers. But Gann did not foresee the declining federal role, the surge in schoolchildren or a healthy economy with low inflation producing additional revenues without increasing the tax burden. In accordance with the Gann limitation, the state will have to rebate $1 billion in badly needed revenues next year. The combination of Proposition 13 at the local level, Gann in Sacramento and Gramm-Rudman in Washington will require some of the most painful fiscal reevaluation in decades.

Third, and most important, is the effect of the Administration miscalculation on the future of the American economy. Interest payments on the national debt, as reflected in constant dollars, have doubled since 1980. The increase, in fact, comes within $7 billion of equaling funds for national defense. The $61 billion that has been added to financing costs represents funds not available for reducing taxes or expanding services; quite the opposite, it is money extracted from the general economy and channeled to the more affluent sector, where there are resources to invest in the debt. The situation is not novel. Wherever in the world, past or present, national debt has grown unchecked, citizens have ultimately become alienated from government.

An optimistic scenario holds that we have seen the worst of the problem, that economic expansion will increase revenues and attenuate the deficit. But a shortfall of such dimensions should never have occurred. Stockman knew better. OMB knew better. CBO knew better. Many legislators from both parties knew better. Reagan apparently did not. And the losses that followed--when a President used his popularity as a way to stampede a government into a course fraught with peril--is a lesson we are still learning.