Perot's bad economics


ROSS Perot, from beyond the political tomb, has proffered a plan for eliminating the deficit. Coincidentally, he is joined by a new bipartisan coalition of budget-balancers, led by former Sen. Paul Tsongas, D-Mass., and retiring Sen. Warren Rudman, R-N.H.

These worthy defenders of the fisc, none of whom is putting himself before the electorate, have won praise from commentators and editorialists for having the courage to make hard choices,etc., etc. But defining budget balance as necessary-if-painful economics is based on a mistaken understanding of the economy.

It is a good thing -- and no accident -- that none of these people is an active presidential candidate. And despite the effort of non-candidates Perot, Tsongas and Rudman to make budget balance a litmus test for the November election, Governor Clinton, President Bush -- and the commentators -- would be wise to resist the bait. Mr. Perot's program, if enacted, would only deepen the recession.

The usual analysis of America's economic plight runs like this: To grow, America needs more investment. To invest more, we need to save more. The savings rate is too low because the government deficit soaks up too much of the available supply of savings. And the deficit is too big because neither party has the courage to cut entitlements or raise taxes. Therefore, growth demands a good dose of austerity: less consumption, more saving, fewer government services and more taxes. Hence, bad-news bears like Mr. Perot and Mr. Tsongas are heroes.

Ugh! This familiar homily is bad economics, and worse political history.

Consider first the political history. In truth, the federal budget has been in chronic deficit since the early '80s for one reason: Supply-side economics failed.

President Reagan's great tax cut of 1981 was supposed to generate so much investment, growth and new revenue that the budget would be back in balance by 1984. But instead it blew a big hole in the tax base, without improving economic performance. By 1992, real per capita economic growth had slowed nearly to zero, tax collections stagnated and the deficit widened.

Blaming the deficit on "entitlements" is also nonsense. The biggest entitlement, Social Security, runs a budget surplus. Most domestic spending was cut during the 1980s, not increased. The only out-of-control entitlements are Medicare and Medicaid, but medical inflation is a casualty of the administration's refusal to support a universal health care program -- which would control costs by providing a more comprehensive entitlement.

Economically, the claim that deficit reduction would restore growth has cause and effect reversed. America now suffers from slow growth for a variety of reasons, including the weakness of our banks, the lingering costs of the real estate blowout of the 1980s and the failure of many of our corporations to compete effectively in global markets.

Today, the demand for investment capital is so low that despite the big deficit, the Treasury has no trouble funding the public debt -- and at rates lower than at any time since the early 1960s. Banks have actually been cutting back on commercial loans, and buying government securities.

Raising taxes or cutting government spending in an economy like this one would only depress purchasing power further, deepen recession, and give business even less reason to invest. An austerity program would also depress tax collections, widening the very deficit it intended to cut.

What the economy needs is a growth program, not a program of austerity. Investment drives economic growth, not savings. When the economy is too depressed or the banking system too wounded for private business to lead investment, public outlay must lead it. More public investment, even at the price of a bigger public debt, is necessary on the short term, as Mr. Clinton and a broad group of economists have proposed.

Once a higher growth rate is restored, the deficit shrinks because economic activity increases and so do tax collections. When the economy returns to robust health, some trimming of the deficit would make sense; it is only during a boom that public borrowing begins to "crowd out" private investment.

But Mr. Perot's target -- a budget surplus by 1998 -- is far too deflationary. With a 3 percent rate of economic growth -- the normal rate during the 1950s and 1960s -- a budget deficit of 3 percent of gross national product leaves the national debt stable as a stable fraction of GNP. A sustainable deficit is $150 billion to $200 billion, not zero.

Mr. Perot's one constructive contribution is to identify candidates for tax and budget reform. He proposes cost controls on Medicare, as well as steeper reductions in military spending. He would tax a larger share of the Social Security income of the affluent and would impose higher gasoline taxes and a slightly higher top marginal income tax rate.

This revision of taxing and spending priorities is sensible enough -- but the money gained should be used to restore investment, not to balance the budget. Mr. Perot was a flop as a man on horseback. He's not much better as a budget analyst.

Robert Kuttner writes a column on financial matters.

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