Those toiling to balance the budget by the year 2002 liken the exercise to climbing Everest. Actually, it should be as easy as roller-skating downhill, given the sizzling economy, which is on the way to refuting Will’s Two Laws of Economic Understanding. They are: All news is economic news and all economic news is bad.
That is, everything, from the weather to whatever affects the public’s mood, affects economic behavior. And anything, from high employment to low imports, can be construed as evidence of underlying or impending difficulties. For example, manufacturing output has doubled since 1970, but because of improved productivity, manufacturing employment has declined slightly. There. Something to be sad about. Something to lead the evening news with.
However, it is difficult to discern the lead lining on today’s silver clouds. Last Wednesday the government said that last quarter the rambunctious economy grew at an annualized rate of 5.6 percent. Normally such good news would depress investors and the stock market because Alan Greenspan, sniffing “irrational exuberance” and the danger of inflation, might raise interest rates. Instead, the market jumped 46.96 points because inflation was still unseen even by Greenspan’s gimlet eye.
Twenty years ago inflation was considered democracy’s systemic disease: democracy caused inflation (with deficit spending) and could not inflict the pain necessary to halt it. But Reagan halted it by putting the country through the worst contraction since the Depression, and two years later carried 49 states.
Today many factors damper inflation: the competitive nature of a global economy; deregulation of domestic industries (trucking, banking, airlines, telecommunications, agriculture); weak upward pressure on wages (only one in seven workers is unionized); new shopping habits (eight years ago 37 percent of merchandise was purchased at discount stores; today about 50 percent is); quality improvements outstripping the price increases of products (The Economist notes that $7,000 buys a personal computer twice as powerful as a $4 million mainframe of 15 years ago). And there is room for new efficiencies in the economy, as with tort reform. (Girl Scouts must sell 80,000 boxes of cookies just to pay their liability insurance.)
Last quarter’s growth was fueled by a 6.4 percent surge in consumer spending, almost double the 3.4 percent increase of the previous quarter. The theory has been that aging baby boomers, concerned about the parlous condition of Social Security, would save more and consume less. Now comes the “wealth effect” of the rising stock market that has increased in value $3 trillion since 1994. Forty percent of Americans now own stock, and economists calculate, perhaps conservatively, that for every dollar the market increases in value, three cents spills into consumption. That means a $90 billion increase in consumption since 1994.
Economic growth will push GDP above $7 trillion this year and shrink the deficit to $75 billion, the smallest deficit as a percentage (1.4) of GDP since 1974. In this happy context the president and his congressional interlocutors are posing as heroes for (supposedly) devising a way to eliminate the deficit in five years, by which time the federal budget will be approximately $2 trillion. But the bargain they probably will finally strike assumes that the current expansion will continue until 2002, making it the longest since the Civil War–since the coming of industrialism arrived.
Granted, America has learned much about the management of–or, to put the point more modestly and precisely, about how to avoid discombobulating–a modern economy. Between 1890 and 1945, the economy contracted 5 percent three times, 10 percent twice and almost 15 percent twice. Since 1945 the most serious contraction, that of 1982, was less than 3 percent. Again, one of the ladders that today’s budget-balancers are assuming is brisk and uninterrupted growth for another 60 months.
The budget bargain will give Republicans a fig leaf of an achievement–a hodgepodge of tax cuts. Some, such as the president’s credits and deductions for college tuition, will violate conservative principles by complicating the tax code and conditioning relief on taxpayer behavior the government favors. The tax cuts, balanced against various increases, will be misleadingly said to be worth about $85 billion over five years. Even that would be just $17 billion a year from a budget approaching $2 trillion, at a time when government at all levels is siphoning up a record 34.8 percent of GDP. In exchange, the president gets to reignite government growth, with at least $80 billion in new social spending –more than he dared seek last year–and a passel of new or revived entitlements. They start small; so do infant elephants. The era of saying “the era of big government is over” is over.
An unenthralled Phil Gramm says only 8 percent of projected deficit reduction comes from changes in programs; 92 percent comes from assumptions–about higher taxes, a lowered consumer price index, etc. There seems to be a consensus for assuming that the economic growth projections of the Congressional Budget Office are not optimistic enough, and for assuming that the calculation of the CPI will be adjusted downward. Such CPI adjustment will reduce entitlement spending a bit, and, because tax brackets are indexed, will raise taxes about $20 billion. Ah, consensus. Which Margaret Thatcher called:
“… the process of abandoning all beliefs, principles, values and policies in search of something in which no one believes, but to which no one objects; the process of avoiding the very issues that have to be solved, merely because you cannot get agreement on the way ahead. What great cause would have been fought and won under the banner ‘I stand for consensus’?”
