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Why Can't Those Deficit-Reduction Plans Reduce the Deficit?

THE BALTIMORE SUN

Washington. -- "Balancing the budget," according to Ronald Reagan, that sage of the homespun one-liner, "is a little like protecting your virtue: You just have to learn to say 'No'."

But it seems that being so negative doesn't come naturally to either presidents or national politicians. So, even as Congress wields the budget knife with more vigor than President Bill Clinton dared to suggest, one has to wonder just how successful the latest attempt to cut the deficit will be.

A little history: The last time the federal budget was balanced was in 1969. Each decade since then, the federal deficit -- the excess of government outlays over receipts -- has grown. In the 1960s it was 0.5 percent of gross national product, the total value of goods and services produced in the nation. In the 1970s, 2.1 percent, in the 1980s 4.3 percent, and in the first two years of this decade it has been running at 5.3 percent.

There is a gathering momentum here that will take some stopping. Mr. Clinton is not the first modern president to dedicate himself to the Sisyphean task.

President Jimmy Carter was there before him, but ran up the national debt by a total of $227 billion between 1977 and 1980. The first term of President Reagan, committed to balancing the budget, reducing taxes and building up defenses all at the same time, added another $600 billion, and the second term $739 billion more. Under George Bush, one-time critic of Mr. Reagan's "voodoo economics," the nation's overspending got even worse, for a deficit total of $934 billion during his stewardship.

Now comes Mr. Clinton with the firm commitment to cut the deficit by $145 billion in fiscal 1997. His original figures turned out to be miscalculated, and Democrats in Congress have had come up with $67 billion in new cuts over the next five years to make an honest man of him and show their budgetary zeal in a period of public parsimony.

The bottom line is this: Under the current Clinton plan, even though the deficit should be cut increasingly each year through fiscal 1997, it will still actually grow by a cumulative $1041.4 billion, the highest four-year increase ever.

Why?

Why is the government so incapable of getting its books balanced? Why, despite all the good intentions of capping spending, cost containment, and improving efficiency, does the federal deficit keep on growing?

Historically, there have been obvious explanations for short-term debt: wars when the fighting machine has to be financed; recessions when government revenues fall and outlays on social programs increase.

But what has been happening over recent decades appears more persistent, less attributable to events than to process.

One theory is that the national purse strings are now held by so many committees in Congress that it's impossible to get them all pulled tight at the same time.

In a recent study for the Hoover Institution at Stanford University, John F. Cogan, deputy director of the Office of Management and Budget in the late 1980s, wrote: "As the committees observe one another dipping deeper and deeper into the pool of money they all must share, they begin to see the futility of practicing fiscal restraint and the wisdom of raising expenditures on programs within their jurisdiction.

"The result is each committee reaps the full political rewards of higher expenditures on its programs but bears only a portion of the adverse political consequences of financing higher expenditures. In the end, the available revenue pool is exhausted and the government must resort to borrowing from the public."

Studying the nation's budget over the past two centuries, Mr. Cogan found that the more tightly centralized spending jurisdiction in Congress, the smaller the deficit was likely to be. In the period 1790-1835, when single committees in both the House and Senate were responsible for appropriations, budget surpluses were the order of the day. Recession in the early 1840s produced a string of deficits before the nation returned to surpluses in the 1850s. The Civil War brought new spending pressures, but these were matched by fiscal restraint.

Then, in 1877, came a politico-economic watershed.

The House started stripping the Appropriations Committee of its central control, transferring the spending authority to individual standing committees. The Senate eventually did the same.

In 1885, during a debate on the dispersal of spending authority, Samuel Randall, who had been both Speaker of the House and chairman of the Appropriations Committee, uttered this prescient warning: "If you undertake to divide all these appropriations and have many committees where there ought to be but one, you will enter upon a path of extravagance you cannot foresee the length of or the depth of until we find the Treasury of the country bankrupt."

The committees went on a spending spree, transforming the 40 percent budget surplus of the 1881-1885 period into a deficit by 1894. Federal spending was 100 percent greater at the end of the 19th century than it was in 1886.

For nine of the first 16 years of the 20th century, the budget was in deficit, eventually forcing Congress to set its mind to reforming the budgetary process. The effort was distracted by World War I, but in 1920 the House voted for more centralized appropriations authority. The Senate followed two years later.

There then followed what Mr. Cogan called a period of "remarkable fiscal restraint." The apparently irresistible increase in government spending was halted, and from 1920 to 1930 the budget produced a series of constantly increasing surpluses.

Congress eventually found a way around the renewed centralized spending authority, however. Starting in 1932, it created a series of corporations -- the Reconstruction Finance Corporation, the Commodity Credit Corporation, the Tennessee Valley Corporation and others -- which were able to borrow directly from the Treasury, which, in turn, could borrow from the public.

Over the years, new entitlement programs came on stream, giving recipients legal rights to escalating benefits. Since 1930, the federal budget has been balanced only eight times. By the 1970s, budget busting was really back in style, and the annual deficit became a fixture of the fiscal landscape.

Once more, Congress tried to put its house in order. In 1985 and in 1987 the so-called Gramm-Rudman-Hollings legislation established fixed annual deficit targets with the aim of balancing the budget in five years. If the targets weren't met, an across-the-board sequester of funds was to be imposed to eliminate the excess spending. Certain programs, such as Social Security, veterans' health benefits and payments on the national debt, were excluded. But the good intentions were repeatedly frustrated by economic setbacks, and the political price of making the necessary cuts rendered the targets unattainable. The deficit targets were constantly adjusted upward, and the sequester was only actually imposed twice.

Under the original legislation, the budget should have been balanced in 1991. The deficit that year was actually $322 billion. When the legislation was reworked in 1987, the balanced budget target slipped to fiscal 1993. The 1993 deficit is now expected to be $331.9 billion.

The Congressional Budget Office concluded: "The new budgetary procedure . . . proved incapable of forcing the President and the Congress to agree on the substantial tax increases or spending cuts that were needed to meet the deficit targets. Instead, policy-makers turned to budgetary gimmickry and unrealistic assumptions to avoid the strictures of the law."

Government tried again to crack the deficit nut in 1990 when the Bush administration and Congress came up with the Budget Enforcement Act. It was designed to lower the deficit, cap federal spending, curb inflation, stabilize the economy and reassure the financial markets. No small order.

It has worked in as much as the situation would be even worse without it. But its original overall goal of reducing the deficit by a cumulative $500 billion by fiscal 1995 remains illusory. It has certainly imposed spending restraints, but the major explosion in federal outlays these days is from the entitlement programs, over which Congress has no year-to-year control.

The Congressional Budget Office, on whose projections the Clinton administration has based its economic program, says the current growth of the deficit can be attributed largely to two factors: the growth of entitlement outlays, particularly on Medicare and Medicaid, and interest on the national debt.

According to the CBO, both Medicare and Medicaid are likely to grow at 10 percent or more a year, almost doubling their cost as a percentage of gross domestic product from 3.7 percent today to 6.9 percent in 2003. Politically, the entitlement programs have proven the hardest to cut. For example, a trial balloon on freezing the annual cost-of-living-adjustment for Social Security recipients was shot down by leading Democrats in the Senate before the Clinton administration could even get it properly aloft.

According to the CBO, the other current major deficit-factor -- net interest paid by the government -- will grow from 3.2 percent of GDP to 4.5 percent in 2003, most of it due to the government's growing debt load from the enduring and accruing deficits. As of March 5, the debt stood at $4.2 trillion. The interest paid on it in fiscal 1992 was $292 billion, or almost $1,200 for every man, woman and child in the United States, money which could otherwise have been invested in economic growth -- or deficit reduction.

With the best efforts of a Democratic president and Congress, there is no balanced budget in immediate sight, just the hope that the deficit will eventually get smaller rather than larger. Originally, the Clinton plan would have cut a total of $324 billion off the annual deficits over the next five years, but Congress is working on legislation to lop off as much as $500 billion. In fiscal 1997 the deficit is projected to be less than $200 billion, down from the earlier projection of $346 billion, but the figures are hostage to economic growth and health care reform.

Given recent budgetary trends, that would be progress indeed.

But mark these works from John Cogan's study for the Hoover Institution: "Without consolidation, the budget process will continue to lack accountability and the national debt will continue its relentless upward march. Without consolidation, special interests will continue to dominate congressional spending decisions at the expense of the general interest. And without without consolidation, as the 1919 House Select Committee on the Budget put it, 'true budget reform is impossible.' "

Gilbert Lewthwaite is economics correspondent in the Washington Bureau of The Sun

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