COLUMN LEFT / ROBERT POLLIN : It’s Perot vs. Our Living Standards : His budget-balancing scheme fails to address problems of growth, speculation, flight.

Ross Perot’s program for closing the federal deficit as a means of restoring the country’s economic health has already achieved the improbable--it has pulled Perot himself back from disgrace and restored him as a formidable political force.

But two miracles are more than one should expect from a single economic program. Perot’s plan, and variations thereof being pushed by such figures as Sen. Warren B. Rudman (R-N.H.) and Peter Peterson of Wall Street’s Blackstone Group, would only worsen the recession and aggravate the long-term decline of most Americans’ living standards.

The most obvious failing of a Perot-type strategy is the effect it would have on the recession. We in California are by now quite familiar with the impact of budget-balancing policies during the recession. State-related jobs and contracts have been lost, services have been slashed and fees have risen. The spending power of most Californians has fallen as a result. This discourages private sector investment and thus only deepens the recession.

But the errors of Perot-type policies do not stop here. They would also contribute toward worsening the gap between the rich and non-rich that has proceeded throughout the Reagan and Bush years. The Perot plan would reinforce this through austerity measures: cutting deeply into Medicare and Medicaid, raising gasoline taxes by 50 cents a gallon and taxing Social Security benefits for the middle class.

Perot would also raise income taxes on the wealthy, from 31% to 33%, and would reduce the deductability of mortgage interest payments on expensive homes. However, the lifestyles of the rich, unlike those of the middle-class and poor, would not be seriously affected by taxes on gasoline and Social Security or cuts in government-subsidized medical care.

Perot’s economists acknowledge that his program will initially produce declining living standards for the majority. However, they contend that as the federal budget moves toward balance over five years, the economy will begin a dramatic turnaround, the benefits of which will spread widely.

What brings the recovery, in the Perot view, is that eliminating the deficit will allow long-term interest rates--the rates at which businesses borrow to invest in new factories and machines--to fall sharply. During the last two recessionary years, the Federal Reserve has pushed short-term interest rates to their lowest level in 30 years. But long-term rates haven’t fallen with the short rates, and the budget-balancers claim that the only way to get the long rates down is to eliminate the federal deficit.

But getting long-term rates down actually depends much more on Federal Reserve policy and broad financial market conditions than on the federal deficit. Even Perot’s own forecasting model presents a range of predictions as to how much rates will fall after the deficit begins to close. The difference between the optimistic and pessimistic estimates depends on the response of Wall Street to the plan. But why should the non-rich majority of Americans, who don’t own stocks or bonds, be expected to sacrifice for the sake of improving Wall Street’s mood?

The Perot plan also implies that the high interest rates of the 1980s inhibited borrowing by private corporations. In fact, borrowing by businesses grew at an unprecedented pace over the 1980s, despite the high interest rates. The problem has never been getting businesses to borrow, but rather getting them to use their borrowed funds to finance productive projects. Over the 1980s, corporations as a whole used essentially all of their borrowed funds to engage in mergers, buyouts and other speculative activities.

But let’s assume that businesses will be lured by lower interest rates to invest in new equipment and factories. Not even this would ensure that the new productive investments would be located in the United States. In 1989, for example, the last year before the recession, 60% of the new jobs created in North America by U.S. multinational firms were in Mexico.

The federal deficit does need to be reduced. But this should come only after the recession has ended and as only one feature of an overall program for confronting our basic economic problems of slow growth, the dominance of speculation over productive activity and the flight of U.S. corporations to low-wage/low-tax havens. But neither Perot nor any other would-be budget-balancer has a credible plan for addressing these fundamental problems. As such, their proposals represent yet another assault on the living standards of the majority of Americans.