Deficits Do Our Dirty Work of Avoiding Hard Choices

I confess to being weary of writing about budget deficits. It’s not only that people don’t know what to believe anymore, but I’m not sure what to tell them. There’s a mutual disengagement from this subject, which may explain why the deficits haven’t been a decisive issue in this presidential campaign. They bore and bewilder most Americans.

The blame for this confusion lies heavily with those alarmists (not me) who have been loudly screaming for years that failure to fix the deficit would lead to economic catastrophe. Each time one of these frightening forecasts hasn’t come true, the public has become a little more desensitized to the whole issue. The debate has focused obsessively on the deficits’ possible adverse economic effects. As long as these aren’t obvious, no one wants to do the dirty work of raising taxes or cutting spending.

This is understandable, but only because the debate is totally backwards. A budget should be an instrument for political choice. Government programs should be popular or important enough to be supported by a roughly equal amount of taxes. The discipline of matching spending and taxes means--at least in theory--that legislatures pass only programs whose popularly perceived benefits exceed the added public burden. The deficits signify that we’ve abandoned this useful discipline.

They are not merely Ronald Reagan’s doing. Deficits endure because both liberals and conservatives find them convenient. There’s a shared fear that, if push comes to shove, their side will lose. Conservatives fear that defense spending will be savaged and taxes raised. Liberals worry that social programs will be gutted. No one wants to talk about these choices, so they shift the discussion to economics.

Deficits have become this decade’s all-purpose answer to any economic problem or question.

Yes, the deficits pumped up spending. But much of the added stimulus (perhaps 75% between 1982 and 1986) was accounted for by the higher trade deficits. The recovery was powered mainly by the energies of a free-enterprise system: businesses trying to expand profits and markets; individuals trying to better themselves. Budget deficits don’t explain all economic events of the 1980s, or even most. Many other influences are at work--inflation, the health (or sickness) of other nations, the public’s mood and so much more.

Everything intermingles. Between 1981 and 1984 the trade deficit jumped nearly $85 billion. The increase wasn’t simply the result of higher government spending. In this period, the U.S. economy clearly had plenty of spare capacity to meet the added demands of both higher government and private spending. Unemployment averaged 8.5% and factory utilization only 77%. The trade deficit exploded because the dollar’s sharp rise on foreign-exchange markets made imports more competitive and U.S. exports less competitive.

But, you may say, the budget deficits caused the dollar’s rise. Sorry. That theory, once popular, hasn’t stood the test of time. The budget deficits in ’84 and ’87 were about the same. But in ‘87, the dollar was nearly 30% below its ’84 level. Just what sends exchange rates up and down isn’t well understood.

I have belabored the ambiguous economics of deficits to make a point: The continuing effort to build popular outrage against the deficits by cataloguing their economic evils is an exercise in futility. This doesn’t mean the deficits don’t have effects. It’s just that we don’t always know what they are or when they occur. Wild exaggerations of their alleged ill effects have inevitably led to public disillusionment. It’s a case of deficit burnout.

Deficits are mainly a political, not an economic, problem. You should conceive of them as a tax. If the government spends more, someone else--consumers, businesses--will spend less. The Reagan era has obscured this reality because the trade deficits have allowed us to live temporarily beyond our means. This era of easy living is now ending. As the trade deficit drops, Americans will have to satisfy more of their spending from what’s produced at home.

Somehow the tax of the budget deficit will be exacted. If we balance the budget, we will make the choices explicitly: Spending will be cut or taxes raised. If we tolerate high deficits, the choices will be made invisibly and randomly. Higher interest rates, inflation or some other mechanism will squeeze private spending to make room for government spending. Judging from the presidential campaign, neither party is eager to make the choices explicitly. They prefer to let the deficits do the dirty work.

The danger is less to the economy than to our national self-esteem. The budget deficits are a sore on the body politic. They symbolize indecisiveness, even a lack of political maturity. They mean we can’t decide what’s important and what isn’t. Even though the public disdains the choices involved, the longer the choices are avoided, the more the public becomes contemptuous of national leadership. The damage is not so much to our GNP as to our collective sense of self-worth.