Perot’s Bitter Pill for Deficit Raises Concern

Ross Perot, who has defied all rules of presidential campaigning, enters the fray again with a plan that defies all political wisdom on the economy--a blueprint of tax hikes and spending cuts that would slash into the federal deficit but also ripple painfully through a recession-racked society.

To stem the red ink, Perot would raise taxes and curb benefits for workers, retirees, motorists, bureaucrats, the wealthy, farmers, cigarette smokers and just about everyone else who now benefits from government policy.

Gasoline taxes would go up 10 cents a gallon each of the next five years. Employees with incomes above $55,500 a year would pay higher taxes, as would well-off pensioners. Elderly Medicare beneficiaries would be charged higher premiums for doctors’ services. Defense cutbacks would be greatly expanded. Government programs would be reduced 10% across the board and NASA’s space station project put on long-term hold.

“The people know that it is wrong to spend our children’s money,” the maverick Texan declared Thursday. “Nothing could be more wrong. We know that we cannot conscionably pass on a $4-trillion debt to our children. The people want this problem squarely dealt with. They want our financial house put back in order.”

Perot’s battery of proposals, which would make most mainstream politicians cringe, is based on his view that the $330-billion federal budget deficit is the destructive byproduct of a corrupt and paralyzed political system, and that the burden of ever-greater debt is intolerable. The deficit--and related $4-trillion national debt--are the very issues Perot accuses President Bush and Democratic nominee Bill Clinton of failing to face.

Indeed, the red ink symbolizes the government “gridlock” that the Texas billionaire said on Thursday inspired him to seek the White House.

Yet while most economists agree that the deficit is a serious, long-term problem, many also agree that now is not the time to burden consumers with higher taxes and lower benefits, and they fear that Perot’s plan could be a disaster for the fragile U.S. economy.

“When the patient is sick, you don’t make it worse,” cautions Irwin L. Kellner, chief economist at Chemical Banking Corp. in New York.

Perot has acknowledged the question of timing and has said he would like to launch the program in 1994 if a solid economic recovery has taken hold.

John P. White, the Eastman-Kodak executive who served as Perot’s issues director when the economic plan was put together earlier this year, maintained Thursday that it could be enacted even later than 1994 if hard times persist. “We didn’t just put the thing on automatic and say we’re going to do it willy-nilly,” he said. “It requires the right situation.”

Perot himself seemed to open the door to flexibility on his plan, saying on Thursday: “I don’t get locked into a blueprint” when it comes to business.

Some outside observers say Perot’s fix-it plan would go much further toward balancing the out-of-whack U.S. budget than anything offered by his campaign rivals.

Bush, for example, supports a constitutional amendment to put the government’s books in order but has avoided laying out the step-by-step measures he would take to do it. Clinton maintains he would cut the deficit in half over four years, yet his claim relies on assumptions of cost savings and economic growth that are widely viewed as too rosy.

The deficit is believed to harm the economy in several ways: It soaks up money that would otherwise be used for savings and investment to improve the nation’s productivity and, ultimately, its standard of living. Moreover, it bloats the mammoth national debt, which now requires annual interest payments of $200 billion--14% of government spending, according to the Congressional Budget Office. At current growth rates, by 1997 the interest payments will exceed the projected U.S. defense budget for that year.

“It’s a serious, long-term structural issue,” said Ross C. DeVol, director of U.S. long-term forecasting for the WEFA Group in Bala-Cynwyd, Pa. But, he added, it’s not a problem that must be solved right away.

Perot proposes accomplishing the task in five years, beginning in 1994, with sweeping cuts in spending and hikes in taxes--including some affecting the elderly--that traditionally have been viewed as politically suicidal.

Over the five-year period, he would slash defense spending $40 billion more than is already scheduled. Heads of all government agencies would impose cuts of 10% across the board while also coming up with another 5% in savings by wiping out “outdated” programs.

Perot would save $30 billion by raising taxes for about 18% of Social Security beneficiaries--individuals whose annual income exceeds $25,000 and couples getting $32,000. He would restrict cost-of-living hikes for federal retirees, a move that gains $13 billion. In addition, Perot would capture $142 billion by containing costs in Medicare and Medicaid, and $29 billion by repealing the $130,000 wage cap on payroll tax deductions for Medicare hospital insurance.

The whopping, phased-in hike in gasoline taxes would net $158 billion; certain employer-paid health insurance plans would be taxed, starting with premiums for individuals above $135 per month and for families above $335 per month, to gain $57 billion; the excise tax on cigarettes would be doubled to 48 cents a pack to gain $19 billion; and the top income tax rate would be lifted to 33% from 31%, affecting individuals earning more than $55,550 a year and couples earning $89,250, yielding another $33 billion.

Federal help for farmers would be scaled back substantially, to raise $17 billion, and some homeowners would pay more taxes, as the amount of principal eligible for the mortgage interest tax deduction would be shrunk to $250,000 from $1 million.

In his speech Thursday, Perot acknowledged the sweeping reach of his program and the discomfort it could cause and sought to put the effort in historic perspective: “Fair, shared sacrifice will be necessary to solve these problems,” he said. “Last time we all sacrificed together was in World War II.”

Yet Perot also managed to squeeze a few miscellaneous spending increases and tax breaks into his blueprint, revealing something of his philosophy and political priorities that go beyond eliminating the deficit.

He would boost research and development spending by more than $45 billion, devote an extra $40 billion to repairing the nation’s infrastructure, add $12.4 billion for early childhood development efforts--including full funding of Head Start--and increase aid to the cities by $11.4 billion. He would provide a 10% tax credit for certain capital investments, reduce the capital gains tax and provide a tax credit for firms that offer training for rank-and-file workers.

Overall, he maintains his plan would save $754 billion in five years and actually create a modest budget surplus in the fifth year.

“Whether you like the plan or not, the estimates of revenue savings were very explicit, and the values they used were exactly the ones being used by outside studies,” said Barry Bosworth, an economist at the Brookings Institution.

Perot’s strong medicine has prompted strong responses, mostly warning that the overall approach may be reasonable in a time of prosperity but would be very harmful under today’s shaky conditions. No one can forecast whether the economy will be brisk or struggling in 1994, for instance. A widely held belief among economists is that the government should increase spending during downturns, to boost business and put more income into the hands of worried consumers, precisely the opposite of Perot’s approach.

A. Gary Shilling, a private economist in Springfield, N.J., argues that only time can heal many of the economy’s wounds, such as the heavy debt loads lingering from the 1980s, and said the White House--regardless of who occupies it--is unlikely to provide a miracle cure.

Others said that it never seems like the right time to take the budget cure, and said that the nation missed an opportunity to fix up its balance sheet in the 1980s, when the economy was stronger.

“There always was some reason that deficit reduction wasn’t at the top of the policy agenda,” said David Rolley, senior financial economist at DRI-McGraw Hill in Lexington, Mass., which provided Perot with an analysis on his plan. “Besides, it’s painful. You have to take things away from people.”

The economic debate that Perot’s plan sparks is just a preview of powerful cross-currents that will buffet whoever wins the presidential election.

If employment remains weak, the pressure for short-term government spending to stimulate the economy--doing the opposite of what Perot advocates--is sure to intensify. At the same time, investors fearing a growing deficit could push up long-term interest rates, further injuring the economy.