At last. After nearly two decades of profligate living and failed promises, Washington is showing signs of fiscal discipline. The stunning rally in the bond and stock markets partly reflects a growing belief that serious efforts are under way to bring the federal budget under control by the
Bitter controversy swirls on Capitol Hill over the right approach. The best road map so far is the plan put forward by Senator Pete V. Domenici (R-N.M.), who rightly defers any tax cuts until the budget is balanced. Conservative House Democrats are also proposing a fiscal plan that doesn't include tax cuts. In sharp contrast, the plan devised by Representative John R. Kasich (R-Ohio) has some unacceptable spending cuts to preserve about $350 billion in tax reductions. Sadly, the White House is a no-show even though President Clinton fought courageously, and at great political cost, during the critical first round of deficit slashing in 1993.
Clinton is making as big a mistake as the House Republicans. He has the power to nudge a congressional majority toward a genuine deficit-reduction blueprint modeled on Domenici's plan--with some changes, to be sure. At the moment, the proposed spending cuts go too far in hammering the poor, and there isn't enough equality of sacrifice. For instance, the earned income tax credit, an aid to the working poor, is targeted to become less generous, while corporate tax subsidies remain essentially unscathed.
Proposals to abolish the Commerce and Energy Depts. look like a wrong turn, too. Yes, Commerce is an unwieldy dinosaur. However, considering the new world of global competition, it would be better to radically downsize Commerce. A stripped-down, renamed International Trade Dept. could also consolidate under one roof 32 different trade and export agencies now scattered around Washington. Unrelated Commerce functions, such as the National Weather Service, could be privatized.
The Energy Dept., much like Commerce, is a bureaucratic hodgepodge. Yet getting rid of the department without finding a place for many of its functions is wrong. Nuclear waste sites must be cleaned up and nuclear bombs built. Perhaps these tasks should be handled by Defense. The three weapons laboratories managed by the Energy Dept. could be consolidated into one laboratory at Los Alamos, N.M. The civilian national labs, along with other government institutes for basic and applied research, could be transferred to the National Science Foundation or sold to the private sector.
The government's health-care system is in desperate need of an overhaul, and deficit-cutters are right in wanting to open up the system to competition. But their ambitious goals for reducing the growth in Medicare and Medicaid spending seems unrealistic.
Will so much deficit cutting lead to a recession? Many government employees at all levels will lose their jobs, and much stimulative spending will stop. But the Federal Reserve Board can easily run a looser monetary policy to offset the fiscal contraction. With a balanced budget, interest rates should be about two percentage points lower than they would otherwise be, according to DRI/McGraw-Hill. In that case, long-term bonds would yield about 4.5% in an environment of 2% inflation and no deficit. A fall in interest rates to that level would create a lot more income, jobs, and wealth than tax cuts.
The big economic surprise around the turn of the decade could be the dramatic improvement in America's savings rate. The drain of a budget deficit on national savings could disappear or at the very least shrink into insignificance. The boomers will be investing more to pay for retirement. Higher savings fuels investment spending, which in turn boosts productivity and corporate profits. Living standards rise. Now is the time for a creditable budget plan. The payoff is huge.