Why liberals should hate the deficit.
It's good fun to see Treasury Secretary Donald Regan losing his temper at Council of Economic Advisers chairman Martin Feldstein and advising an amused Senate committee to throw away Feldstein's economic report to the President. One is tempted to say, Go it, Don! Go it, Marty!--and bad luck to both of you. Unfortunately, their dispute over budget deficits matters to the rest of us, particularly to blue-collar workers and the constituencies getting the worst treatment in the Reagan era--women, children, minority groups and low-income families.
As a result of 1981's huge tax cuts, the wild escalation in Pentagon appropriations and the consequent increase in interest on the ballooning Federal debt, this year's deficit is estimated to be $180 billion. Unless taxes are raised, Pentagon appetites curbed or both, that amount may well increase to $300 billion in the next five years. Deficits of that size are unprecedented. They worry Wall Street operators and economists of all persuasions, except for the small but vociferous band of supply-siders in the Treasury Department and at the editorial offices of The Wall Street Journal, who are encouraged by Eureka College's most eminent economics major, Ronald Reagan.
The conventional case against large and growing deficits is simply stated. If the recovery continues, consumer and corporate demands for credit will rise. So will Treasury's borrowing requirements. As early as the middle of this election year, Paul Volcker and his six obedient colleagues on the Federal Reserve Board might confront an unpleasant choice. Either they can meet private and public borrowing needs by printing money, thus setting off inflation, or they can refuse to enlarge M-1 and all the other Ms sufficiently to meet the demand for credit. In the latter case corporations will postpone new investments, construction will be depressed by punitive interest rates and the cost of servicing the debt will rise still higher. Wall Street nervousness since January has been permised on fears of renewed inflation or imminent recession.
Nor is that the end of the bad news. Real interest rates-- market rates minus inflation--are comparable to what they were in January 1981, when Jimmy Carter returned to Plains, largely because of the huge inflation premiums lenders have attached to their rates. Those rates have attracted large amounts of foreign money, which is needed for projects at home. That movement of capital has financed much of the Federal deficit and thus postponed, possibly until after election day, the clash between Treasury and private borrowing. If Reagan's luck holds, the Fed will not face it unpleasant choice between inflation and recession until early 1985.
In the meantime, however, foreign demand for dollars to invest in American securities and real estate has made the dollar so expensive relative to other currencies, notably the yen, mark and French franc, that American exporters are penalized and imports to the United States are stimulated. The trade deficit might soar to $130 billion or more by the end of this year. Here, a skeptic might interpose, What's wrong with foreigners' raising American living standards by selling us more than they purchase? Several things. For one, they may tire of the process, cease to invest in Treasury securities, take their money home and suddenly create a credit shortage. For another, corporations have found the overvalued dollar a tremendously convenient pretext for clamping a lid on wage increases and inflicting wage and benefit reductions on their employees in the name of restoring American competitiveness in world markets. For a third, unions historically devoted to free trade, like the United Automobile Workers, have been compelled to turn protectionist simply to preserve their members' jobs. Unfortunately, protection in one country invites retaliation by others and imposes unemployment on workers in industries that live by exports.
Giant deficits distort politics as well as economic choices. They restrain Democrats who seek to repair the damage Reagan has done to welfare, nutrition, housing, legal services and similar means-tested programs which benefit low-income families. The deficit makes traditional items on the liberal agenda such as public jobs programs and comprehensive health care seem wildly utopian. Thus it is that the presumptive Democratic Presidential nominee has retreated from the Kennedy-Gorman national health initiative, which would control hospital cost increases, and rarely, if ever, alludes to the Humphrey-Hawkins full-employment statute, enacted during Carter's tenure.
Reagan and his handlers took the popular side of the jobs issue in 1980. With some justification, Reagan excoriated the unemployment rate under Carter. Ironically, the President is now grabbing credit with both hands for a "sparkling recovery' from the deep and long recession that his policies created. Even after fifteen or sixteen months of economic expansion, unemployment is half a percent higher and a million more men and women are jobless than at the start of the Reagan Administration.
For the exceedingly cautious Fritz Mondale, budgetary disarray complicates campaign strategy. If he proposes increased spending for education, health care and job training, he will be challenged in the main event by Ronald Reagan to explain just how he will pay for them and simultaneously reduce the deficit. For Mondale to evade the issue would be politically costly. But a candid answer could be just as damaging. Taxes must go up. Defense spending must go down. If, as he may well be compelled to do, Mondale specifies the groups who should send bigger checks to the Internal Revenue Service, he will win no friends. Nor, given the President's astute manipulation of patriotic symbols, will a serious diet for the Pentagon necessarily thrill union members, particularly those in defense-related industries.
For decades, Milton Friedman has advocated that the government reduce taxes before cutting spending, on the theory that the only way to curb Congress's appetite for new ways to spend the public's money is to diminish the amount available for it to dispense. For those who believe that the homeless enjoy slumber in the fresh air and the affluent lunch at soup kitchens, deficits are an enormous comfort. They are a menace to liberal aspirations for full employment, decent low-income housing and universal health protection.
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|Date:||Feb 25, 1984|
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