Deficit... What Deficit?

The US federal government is already running in the black.

By one measure, at least, the federal budget deficit has already vanished, and the United States enjoys a surplus.

With revenues swelled by a vigorous economy and a booming stock market, the budget deficit this fiscal year should run $30 billion to $40 billion, experts say.

But that's not the whole story. In the year ending Sept. 30, an inflation rate of about 2 percent will cut $80 billion from the purchasing power of the $4 trillion in federal debt owed by the public.

Subtract that $80 billion from a $40 billion deficit, and the bottom line on the budget - in real terms - no longer looks red.

To economist Robert Eisner, the fuss in Washington over the budget deficit is "much ado about nothing."

The Northwestern University economist expects the official deficit to disappear in "a year or two" as the economy grows.

Others are less optimistic. Cynthia Latta, an economist at DRI/McGraw-Hill, a Lexington, Mass. consulting firm, anticipates a $65 billion deficit next fiscal year.

Congress, she notes, is boosting spending, not cutting it. The cost of entitlements, such as Medicare, continues to grow. And with economic growth slowing, revenues will not rise so fast, she adds.

Nonetheless, because the deficit is small, the ratio of outstanding federal debt to total economic output is shrinking. So, in real terms, is the amount of debt owed, in theory, by each man, woman, and child.

"By any measure, federal debt is going down," Mr. Eisner says.

"It's wonderful," says Arthur Laffer, a "supply-side" economist who advised President Ronald Reagan.

Many Democrats blame Mr. Reagan for doubling the federal debt in eight years.

"So, shoot me," jokes Mr. Laffer, now chairman of Laffer Associates, an investment advisory firm in Sorrento Valley, Calif. He defends the Reagan cuts in marginal tax rates that helped boost the deficits in the 1980s.

He sees them as necessary to "refurbish" an economy then suffering from high inflation and unemployment, plus hosts of tax shelters and regulatory problems.

Laffer is well-known in economic circles for the "Laffer curve," a theory that tax cuts stimulate economic activity which generates enough revenues to cover much if not all of the revenues lost from the cuts.

"We ran large deficits at a time when you should run deficits," he says. "Now, 15 years later, we are doing fine."

Laffer notes that if the federal government's books took account of capital expenditures, such as those on buildings, in the same way as states and companies, the budget surplus would be huge.

Depreciating capital assets this waywould add $300 billion to the federal budget, figures Laffer, who was also an economist in President Nixon's budget office

Economists don't expect the budget package negotiated by congressional Republicans and the White House this week to affect the economy.

"It's small potatoes in a $7 trillion economy," says Joel Slemrod, a tax economist at the University of Michigan, Ann Arbor.

Even the cut in the tax on capital gains, from 28 to 20 percent, is not expected to do much. Capital gains tax rates, he notes, have been low during some past recessions and are relatively high today during an economic and stock market boom. The "bang for the buck" is "not all that high."

Mr. Slemrod sees no underlying philosophy in the tax package. It is "a patchwork for key Democratic and Republican constituencies," he says.

Republicans, for example, get the capital gains tax cut sought for many years.

"There are no clear standards as to who deserves tax breaks," says Slemrod. So the politicians are deciding who gets these benefits, "as they should."