No time for gimmicks.

Yes, there is 'waste, fraud, and abuse' to ferret out. But unless we--Left and Right alike--face up to the growing demands of federal entitlements, the deficit will grow till it eats us alive.

How bad is the deficit, really, and how did we get to this point? The total deficit figures--the ones everyone uses, measuring the gap between total revenue and total expenditure--are frightening enough. But, as the General Accounting Office (GAO) has told Congress, they only partly measure the problem, since they include the mitigating trust-fund surpluses, especially Social Security's, which is off-budget. When we strip away the Social Security surplus, what emerges is downright appalling. The soaring size of the on-budget deficit, indicated as a percentage of on-budget revenue, shows how badly fiscal discipline has collapsed--despite (or because of) the tax increases of 1982, 1983, 1984, 1986, and 1990 (see Table 1, next page).

Gross interest on the debt, including interest on the Treasury debt in the Social Security and other trust-fund surpluses (which net interest subtracts), now claims over a third of on-budget revenue--something one associates with banana republics. As its share of spending has grown, it has become a force driving spending and deficits higher. That is, our deficits are feeding on themselves.

Some economists argue that on-budget-deficit and gross-interest figures exaggerate the problem. But we must remember that Social Security's surplus is an obligation of the Treasury, which it must ultimately meet with resources extracted from the private sector. As the GAO and others have warned, when Social Security eventually liquidates its surplus to pay benefits, the Treasury will have to pay that debt by taxing or borrowing from the public. The on-budget deficit measures the borrowing the Treasury does now; the real significance of the Social Security surplus is that it represents borrowing (or taxing) that the Treasury must do later.

As we are belatedly realizing, entitlement spending is the primary engine driving outlay growth; hence, it is the root of our deficit problem. It has been growing faster than the total budget and far faster than the economy, and now dominates total outlays (see Table 2, page 29).

'Spending Cut' Gimmicks

Instead of honestly confronting the entitlement crisis, President Clinton is ducking it. True to the liberal myth that Reagan's tax cuts and defense buildup caused the deficits, Clinton stresses tax increases and disarmament. And the result of punishing the Reagan "villains"? Projected deficits for 1994-97 total $1,241 billion. Clinton's plan--assuming it works--envisions net deficit reduction of $325 billion. This leaves $916 billion of deficits, averaging $229 billion a year, hardly better than Bush's 1989-92 average of $233.4 billion. The moral of this math: Entitlements are the real villains, Clinton isn't attacking them, and we won't achieve sound finance until we do.

Some of his "spending cuts" are sheer gimmicks. He claims cuts of $10.5 billion through eliminating 100,000 federal jobs. But bureaucratic expansion to administer his national-service, job-training, and job-creation programs, etc., will offset this.

He also claims cuts of $16.4 billion in interest costs by shifting from long-term to short-term Treasury securities. But flooding credit markets with short-term debt means greater demand for short-term credit, meaning higher short-term interest rates. So much for these savings.

Worse, this gimmick is pregnant with potential disaster. If new government borrowing uses short-term debt and if interest rates rise--and we can hardly expect short-term rates to remain low forever--we will be stuck rolling over massive amounts of increasingly costly short-term debt rather than having, as we do now, a substantial part of the next few years' borrowing in long-term securities with today's reasonable rates locked in. Interest costs will leap accordingly.

And when is a tax hike a spending cut? When Bill Clinton says it is. He calls the $29.2 billion in expected revenues from taxing Social Security benefits to the wealthy elderly a "spending cut." When Republican senators questioned him on this, Treasury Secretary Bentsen, who is old enough to know better, defended this legerdemain by arguing that the government is in effect taking back its benefits. [TABULAR DATA OMITTED]

Unfortunately, in opposing Mr. Clinton, conservatives risk being seduced by their own gimmicks that attempt to deal with deficits without confronting what causes them.

Conservative Nostrums

A war on waste and fraud is especially appealing; who likes waste? Ronald Reagan's Private Sector Survey on Cost Control (the Grace Commission) made hundreds of suggestions that would "cut over $424 billion in wasteful spending over three years," or so a mailing from J. Peter Grace that I recieved last year claimed. "This plan could almost eliminate the entire federal deficit! [his emphasis]." Perhaps this was so at the time the Grace Commission reported in the 1980s, when deficits were below $200 billion, but it is not remotely true now. Last July, Grace moderated his claims: eliminating waste would "reduce the cumulative 5 year deficit by $270 billion." The CBO projects $1,538 billion in deficits for 1994-98. If we saved Grace's $270 billion, 1994-98 deficits would total $1,268 billion--better, but still catastrophic.

That cutting waste is an evasion emerged when Grace's letter explicitly tried to sell a war on waste precisely because it avoids tough spending cuts:

Are they painful cuts in social or defense programs?

NO! [His capitals.] Our job was to cut waste. Our proposals don't cut program benefits.

Whatever the merits of eliminating waste it won't address the underlying problem of out-of-control entitlement spending. Nor will it affect the demographics of an aging population that spell the doom of Social Security and Medicare.

Other conservatives advocate the line-item veto--presidential authority to veto specific items in appropriations bills--as a wonder weapon of spending control. In the wake of Clinton's plan, calls for a line-item veto are rising again. Senator John McCain argues that while not a whole solution to the deficit, "there can be no answer without the line-item veto."

Unfortunately, this veto would apply only to discretionary spending. It wouldn't go where the trouble is: interest and entitlements, now gobbling over half the budget. Also, line-item cuts are by definition picayune: the endive research grant, the Lawrence Welk musuem. Last year's budget spent $1,381.8 billion; the deficit was $290.2 billion. We simply can't cope with things this big by chasing chicken feed.

Skepticism is also in order about another conservative favorite, a Balanced Budget Amendment (BBA), reintroduced in Congress February 4. Senator Orrin Hatch (R., Utah) declared, "Only the fiscal discipline of a balanced-budget amendment can return sanity to an out-of-control federal budget process." Alas, the BBA too is open to gimmickry.

Much depends on how the budget is defined. Social Security is already off-budget. Given Medicare's huge and exploding expense and its popularity, politicians would have compelling reasons to move it off-budget too, and could rationalize this by arguing that Medicare is partly financed with a trust fund. The increasingly likely bailout of pension insurance could be farmed out to off-budget enterprises, as the FSLIC bailout was. Thus a narrowly defined "budget" might be balanced, while off-budget the Treasury was bleeding to death.

Sure enough, last summer House Majority Leader Richard Gephardt endorsed the BBA idea, saying that "in these extraordinary times, extraordinary measures are required." But his version exempted Social Security from the budget to be balanced, "a far better, more thoughtful, and effective [sic] approach," he claimed, than Congressman Stenholm's proposed BBA. "No member of Congress...can posture as a friend of the elderly while voting against our amendment." So much for extraordinary measures.

Secondly, a BBA fosters the delusion that to say it is to get it done. The difference between BBA and a balanced budget is the difference between declaring a war and winning it. The latter requires the pain that we have so far evaded.

Congress's Attempt

CONGRESS'S own gimmick unfortunately remains popular among conservatives: Gramm-Rudman-Hollings (GRH), which was to balance the budget by 1991, using automatic spending cuts if its deficit targets were missed. Since former Reagan budget director James Miller has already proposed bringing such a scheme back, it's worth examining at length the failure of GRH.

GRH exempted Social Security, veterans' benefits, Medicaid, AFDC (Aid to Families with Dependent Children), WIC (Women, Infants, and Children), food stamps, and other entitlements from automatic cuts; it limited Medicare cuts. The 1987 revision of GRH exempted Social Security and poverty entitlements, and limited Medicare cuts to 2 per cent. The supposedly stern "across-the-board" cuts were confined to less than half the board, and not the half driving the deficits.

At first glance, late-Eighties deficit figures indicate success for GRH, but closer scrutiny reveals otherwise. Breaking down changes in the deficit into changes in revenues and expenditures reveals that the fall in the deficit from 1985 to 1989, and the particularly sharp fall in 1987, were due mostly to increases in revenues swamping the spending increases. The 1987 revenue surge combined the effects of Eighties economic growth with a one-time gain from the 1986 Tax Reform Act, which offset its rate cuts with a broader tax base by eliminating many deductions and tax shelters, and increasing corporate taxes. Revenue from personal income taxes rose $43.6 billion in 1987; corporate tax revenues rose another $20.8 billion. Also, the Social Security tax hikes voted in 1983 were yielding big revenue growth. When the recession shriveled revenue growth while spending kept soaring, deficits exploded again (see Table 3, page 32).

True, Norman Ture claims that "Contrary to the widespread assertion that if failed of its purpose, GRH was amazingly effective in slowing the growth of federal outlays," pointing out that in fiscal 1985-89, total outlays in real terms (1987 dollars) grew only 1.4 per cent a year, and even in current dollars only 4.86 per cent, versus 8.69 per cent in 1981-85. This restraint was good as far as it went. But Ture's argument claims too much. GRH did "fail of its purpose," which was not to slow the rate of spending growth but to gradully liquidate the deficit via specific deficit targets explicity written into the law.

Only the 1987 target was met. When it became clear that the others wouldn't be, Congress simply loosened them (see Table 3, page 32). Even these limits were routinely evaded with shabby tricks like postponing paychecks, while Social Security surpluses masked growing on-budget deficits.

And even this modest restraint was too stern for Congress, which replaced GRH with the 1990 Omnibus Budget Reconciliation Act. Alas, OBRA yet again flinched from confronting entitlements. The vaunted spending caps applied only to discretionary spending; Medicare could not be cut by more than 2 per cent to enforce a deficit target; Social Security was exempted from suquestration altogether. The supposedly tough pay-as-you-go entitlement limits applied only to new entitlements or expansions of existing ones; they did nothing to contain the mushrooming costs of current programs.

Bringing back Gramm-Rudman-Hollings, then, is no answer.

Growing Our Way Out

Rather than take up their cross, some conservatives flee into a supply-side fantasy that economic growth will generate tax revenues sufficient to balance the budget, or at least reduce the deficit sharply, allowing them to skirt unpopular spending cuts.

The temptation to tout growth is understandable, given Clinton's painful tax strategy. Jack Kemp has already framed the issue as "Taxes vs. Growth," in the February 19 New York Times, and Wall Street Journal editor Robert Bartley is blithely crowing: "As for the dread deficit, with moderate spending restraint and good incentives, we can grow out of it" (WSJ, Feb. 24). But it is a delusion that growth alone can a vert the oncoming fiscal crisis. Growth would help revenues, but not enough to cover runaway spending. As Norman Ture's figures demonstrate when examined from another angle, if you hold discretionary spending to little or no increase but fail to control entitlements at a time when they account for half of the budget, total spending will rise at a rate of almost 5 per cent annually.

Growth, moreover, depends on investment, investment depends on savings, and the savings just aren't there. Our gratification-oriented population is not only saving less and less as a share of national income, the deficit is guzzling more and more of those dwindling savings. In the 1960s, financing the deficit took roughly 2 per cent of national savings; in the 1970s, 19 per cent; in the 1980s, 48 per cent; and in 1990, the deficit gobbled 58 per cent. Net national savings--what's left of net private savings when public-sector deficits are subtracted--fell from 7.1 per cent of GNP in the 1970s to only 3.1 per cent in the 1980s, and more recently below 2.5 per cent. Is this silver of GNP supposed to finance the investment for the supply-side growth miracle?

The Hour Is Late

The problem is dire, the hour is late, and "moderate spending restraint" is not nearly enough. Even if more sensible economic policies do produce brisk economic growth, the revenue gain from growth is likely to be swammped by the needs of the entitlement programs.

In 1988, Peter Peterson and Neil Howe warned that entitlements would be unaffordable by 2000. They calculated that if policy remained unchanged, under "most likely" assumptions, entitlement spending would hit 12.5 per cent of GNP in 2000, total outlays would be 25.2 per cent, and the national debt would equal 68.5 per cent of GNP. Peruse the 1992 GDP shares in Tables 1 and 2, mindful of the minuscule difference between GNP and GDP. We've already almost reached the projections for 2000 which would make entitlements "unaffordable," only four years after those projections were made.

Our two biggest entitlements, Social Security and Medicare, are running trust-fund surpluses, but we will not enjoy this reprieve much longer. As baby-boomers retire in 2010-2030, the retiree population will rise faster than the number of workers paying Social Security and Medicare taxes, driving the number of workers supporting each beneficiary from 3.3 in 1991 to about 2 by 2035, for Social Security, and from 4 now to 2 by 2050 for Medicare's Hospital Insurance. Demographics, then, will drive the costs of Social Security and Medicare above their revenues. They will run deficits, as Social Security did in the late Seventies, and we will close the gap by draining the trust funds, forcing the Treasury to borrow more from the public. Total deficits will exceed on-budget deficits, then, even before the trust funds are exhausted.

Medicare's board of trustees reported in April that Medicare's Federal Hospital Insurance Trust Fund will run out by 1999, under the assumptions they deem most likely. Thus, as the 1992 report stated, "the trust fund is projected to become exhausted even before the major demographic shift begins to occur."

In April, Social Security's trustees reported that because the share of workers awarded disability benefits has risen in the past ten years while the beneficiaries whose benefits terminate have decreased, the Disability Insurance trust fund will run out in 1997, perhaps as soon as 1995. The bulk of Social Security, Old-Age and Survivors Insurance, faces trust-fund exhaustion in 2044, or 2025 under pessimistic assumptions.

Meanwhile, health-care costs will be raising the costs of Medicaid and veterans' benefits too. Given all this, total deficits of $700 to $800 billion are virtually certain long before 2030.

It necessarily follows that only radical entitlement reform will avert a fiscal disaster. We cannot not restore sound public finance without radically tightening eligibility rules and scaling back benefits. Reforms should include repealing the benefit liberalizations voted in the 1970s; imposing a rigorous means test (of 94.3 million households receiving means-tested non-cash benefits in 1990, 82 million were above the poverty level); confining veterans' health benefits to service-related ailments; eliminating multiple dipping in government pensions; and radically restructuring Social Security, Medicare, and Medicaid.

Apres Nous...

But the Entitlement State will tempt politicians to flout sound finance as long as it exists. Rather than grasp the nettle, President Clinton is pursuing taxes and spending-cut gimmicks. And barring tyrannical cost controls--which almost certainly would not work anyway--any national health plan will worsen our disastrous prospects.

Unfortunately, conservatives have done little better. Reagan muffed his chance to tackle entitlements. Bush ruled out touching Social Security, and proposed limiting growth of other entitlements to the sum of the inflation rate, population growth, and an additional 2.5 per cent. Kemp recently proposed the same sans the 2.5 per cent extra. Conservatives are the rightful owners of the sound-finance issue, but we won't recover it from Clinton--or avert financial calamity--with such gimmicks and Band-Aids.

For students of history, there's something eerily familiar about all this. In 1783, King Louis XVI appointed Charles Alexandre de Calonne comptroller-general to rescue his foundering finances. Calonne discovered that France had a debt of 646,000,000 francs, rising by 50,000,000 francs a year, with only 360,000 in the treasury. Ruling out tax increases and spending cuts, Calonne fled into gimmicks: a lottery; sale of offices; asking the Church for money in exchange for suppressing Beaumarchais's edition of Voltaire. He left the royal household's soaring expenses alone. Hoping that improved infrastructure would make the economy grow and produce more revenue (sound familiar?), he poured money into public works, making the debt grow faster. At last, in August 1786, Calonne told Louis that France faced financial ruin. That year's spending, he claimed, would be 587 million livres, with revenue of 475 million, for a deficit of 112 million, almost 25 per cent of the revenue (we're doing worse; see Table 1). Since 1776, the government had borrowed 1,250 million livres, and from 1786 to 1794 would have to repay 50 million in short-term loans each year (still want to shift to short-term treasuries, Mr. President?). Meanwhile, debt-service costs would take nearly half the annual revenue (we're getting there; see Table 1). Louis's last resort, like Clinton's, was higher taxes. For this, he eventually convened the States General. The rest is history.