The What, When, How Of Balancing the Budget

THE fuss over the federal budget is complicated by the three issues it involves: whether to balance the budget, how to balance it, and the national and international repercussions of the first two.

Whether to balance the budget is not cut and dried. Many people would just as soon leave it as it is. If we encourage economic growth now, they argue, the budget will magically come into balance at some future time.

But history tells us that's not so. The budget hasn't been in balance for more than a quarter-century. It could have been in balance, of course, every year (including this one) had there been the political will to do it, but that will was (and may still be) lacking. This is what makes agitation for a proposed balanced-budget amendment to the Constitution such a transparent exercise in hypocrisy.

How to balance is simple. The government spends too much and taxes too little. But there are a host of intractable sub-issues. Since the Reagan administration, taxes have been in such ill repute that one hesitates even to mention the word in polite society. Public opposition to taxes is considered so virulent that both the Clinton administration and the GOP Congress are making tax cuts part of their budgetary policy. Surely this is going the wrong way.

Perversely, the public isn't only opposed to taxes, it's devoted to large spending programs. But if the budget is to be balanced, it has to be done by reducing precisely these programs - programs that cost hundreds of billions of dollars instead of tens of billions of dollars.

Who benefits?

To a considerable extent, the federal government has become a mechanism for recycling money and resources. The principal beneficiaries of this recycling are older Americans (Social Security and Medicare); the poor, who may or may not be elderly (welfare, Medicaid); and defense contractors. Both parties in Congress have used national security as an excuse to provide weapons that the Pentagon doesn't want as a means of keeping defense contractors employed.

The Republican idea of giving the states block grants to take over welfare and Medicaid would not affect the dimensions of the problem or the resources required to solve it. States are already feeling the results of federal budget-cutting: As federal programs are reduced, pressure rises for state programs to be increased. Cities and counties feel the same pressure. This does not produce a net decrease in public spending.

Balancing the budget can also provide a cover for attacking, or even ending, a number of programs that the Republicans don't like but that have little budgetary impact - all in the name of the economy. The National Endowment for the Arts and the Environmental Protection Agency are two examples.

There are ways to make Medicare less expensive. Benefits could be taxed as income to the recipients. Deductibles and co-payments could be increased. These measures could be related to the income of the beneficiary so that they would not be unduly burdensome. Many vocal people won't like this.

Far-reaching repercussions

Whatever is done about the budget will have repercussions at home and abroad. Nationally, a balanced budget will mean a redistribution of income, or at least a rearrangement of the pattern of income payments.

To the extent that the balance is achieved by reducing spending, there will be more money in aggregate in the private sector, because the government will no longer be borrowing to finance a deficit. Government borrowing transfers money from private to public uses just as surely as taxes do. The difference is the government pays interest on what it borrows, and lending to the government is a voluntary act (while paying taxes is not).

Internationally, there will be other adjustments following the cessation of government borrowing. A significant portion of the deficits in the 1980s and 1990s was financed by foreign capital, which was attracted by relatively high interest rates and a strong dollar. The strong dollar, in turn, contributed to trade deficits by making American exports expensive for foreigners and imports cheap for Americans

Without the necessity of attracting foreign capital, we will have more freedom in managing our international economic policy.

But there must be the political will and the courage to make it happen - through taming the budget and particularly the groups that have an interest in government spending. The precedents aren't encouraging. In the last three presidential elections, there have been only three candidates who were clear-headed about this: Walter Mondale in 1984, Bruce Babbitt in 1988, and Paul Tsongas in 1992. All three were killed politically.

The question now is, can Clinton, Dole, and Gingrich do together what none of them could do separately?