No, The Budget Deficit Is Still Problem No. 1

For all George Bush's invective against a do-nothing Congress, the fact remains that one thing is blocking decision-making at both ends of Pennsylvania Avenue: the budget deficit. Yet some economists contend that Washington should now be set free to gorge on even more debt. Let the government inject some fiscal stimulus to energize the sluggish economy, the argument goes. We'll worry about the deficit later.

Unfortunately, allowing Washington to run up the tab any further would only harm an already damaged economy. The first problem with the argument for stimulus is that the U.S. is not in a recession. If the economy were sinking fast, policymakers might be justified in shouting: "Damn the deficit. Full speed ahead." But the truth is, the economy has grown for five straight quarters, and rose at a 2.1% annual rate in the first half of this year. It's just that this growth isn't fast enough to create new jobs.

RASPBERRY CHEER. Besides, the federal government offered a dose of stimulus in fiscal 1992, which ends Sept. 30. Increases in spending caused the deficit to swell to $310 billion, up from a record $269 billion in fiscal 1991. Since that extra $41 billion didn't create any private-sector jobs or coax consumers out of their shells, an additional burst of government spending isn't likely to help, either. True, new investment in highways, schools, and hospitals sounds great. But how long would it take for the money to work its way through the pipeline? Bush sent a stimulus proposal to Congress in January, then vetoed it after Congress added a tax hike on the rich. And do we trust Congress to keep a $25 billion fiscal package to just $25 billion?

Even if the President and Congress could agree on a plan, Wall Street would greet it with raspberries. Bond traders have finally adjusted to the idea of low inflation, and their more modest price expectations have allowed long-term interest rates to fall. A deal to bust the budget would reignite inflation fears and send long-term interest rates soaring again.

Long-term rates are too high as it is, and Washington's enormous credit demands are to blame. Even though the inflation rate since early 1991 has slipped from 5% to just 3.2%, the yield on a 30-year Treasury bond has come down only about one percentage point, to 7.25%. "If Washington's $310 billion suddenly disappeared from the credit markets, we wouldn't have a problem getting long-term rates really low," says William C. Dunkelberg, chief economist for the National Federation of Independent Business.

The country would be better served if Washington followed the example of consumers and businesses. After piling up record amounts of IOUs during the 1980s, both have sworn off borrowing. True, using income to pay down debt leaves less money for new spending. That's why demand has all the vitality of a garden slug. But in the long run, the economy will be healthier for shedding the baggage of past borrowings. That's why lower rates are so important. Without them, this process of reliquification is retarded. And until companies feel more secure with their cash-flow prospects, they are not going to hire.

`CALAMITY.' Washington, though, has not grasped this notion of just saying no to spending. And ignoring the deficit now will only worsen our predicament later, especially with the prospects of shortfalls in excess of $300 billion heading into the next century. Lyle E. Gramley, consulting economist for the Mortgage Bankers Association of America and onetime Federal Reserve governor, votes for the hard choices. "I would rather suffer now to avoid calamity down the road," he says.

Moreover, calls for greater fiscal help are inappropriate when the Federal Reserve can still carry the ball for a few more yards. Lacy H. Hunt, chief economist at Hongkong & Shanghai Banking Corp., argues that the central bank could forgo targeting the federal-funds rate and instead speed up growth in the money supply, which has fallen below its target growth rates for four years. Hunt says the Fed should pump reserves into the banking system to stimulate money growth. Another option would be more creative use of the Fed's portfolio of Treasury securities. The central bank could nudge down long rates by buying bonds with longer maturities.

Lower long-term rates would jump-start the economy better than added government outlays ever could. Calling for Washington to go on a debt binge is a bad idea, especially when millions of households and businesses are working off their own debts. If we've learned nothing else from this torpid recovery, we should at least remember that until Washington cuts up its credit cards, the economy will suffer.

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