Only Austerity And Time Could Make Perot's Plan Work

One things certain about the much-awaited Perot plan for cutting the federal budget deficit: If it were ever implemented, screams would be heard from one end of the country to the other. The plan would hit almost everyone in the pocketbook, with cutbacks in medicare and medicaid, limits on the mortgage deduction, higher income-tax rates for high-income households, and big jumps in gasoline and tobacco taxes. But the plan would likely produce a budget surplus by 1998. Would the gains from eliminating the deficit be worth it?

Maybe. Econometric simulations done by DRI/McGraw-Hill at the request of the Perot organization show some big benefits. By 1998, long-term interest rates would be more than two percentage points lower. Housing starts and exports would rise, and business investment in 1998 could be as much as 5% higher. While that may not sound like much, over a few years it could add up to a significant boost in U.S. productivity and output. Says John White, issues director for the Perot Petition Committee: "It gets us back to where we need to be to be competitive as a world power."

The key to achieving these gains, however, is credibility: whether the bond market believes Washington is finally serious about cutting the deficit. If the newly elected President has a clear and believable planand investors take him at his wordinterest rates would immediately fall, thereby boosting investment (charts). "The more credible the plan is," notes David Resler, an economist at Nomura Securities International Inc., the more favorably the bond market will react. In that best of all possible worlds, the budget deficit could be eliminated without costing any jobs. But if investors take a skeptical attitude and wait for concrete evidence of a smaller deficit, interest rates won't start falling until 1995, and there could be a loss of 650,000 jobs as the higher taxes and spending cutbacks slow the economy.

Even if the markets are convinced that Washington is committed to wiping out the deficit, Americans would still have to make sacrifices for the long run. According to the DRI/McGraw-Hill analysis, the Perot plan would depress consumer spending for years. In 1998, when the budget would finally be balanced, personal consumption would be about 2% lower than it would have been without cutting the deficit. It would be well into the next century before the benefits of higher investment and higher productivity showed up as increased consumer spending, which ultimately is what really concerns people.

That's a long time alongside the four-year cycle of electoral politics. And thats one reason why a balanced budget may be impossible in this decade.

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