WASHINGTON — Nobel Prize-winning economist Franco Modigliani told a congressional panel today that federal deficits must be cut immediately and not to rely on what he called a "Mickey Mouse" balanced-budget plan now before a House-Senate conference committee.
He said Congress should not be afraid to raise taxes in the interest of trimming the deficit.
Modigliani, a professor at the Massachusetts Institute of Technology, told the Joint Economic Committee that the nation's $200-billion annual deficits cause "an insidious kind of damage" that does not suddenly appear. Instead, the economy "will get worse and worse as you move on" unless the deficits are cured.
"My strong recommendation to you is cut the budget now and cut it deeply," he said. "Above all, don't be trapped in the taboo that taxes must not be raised. . . . American tax rates are not particularly high."
Deficit Reduction Plan
The Senate passed and is now negotiating with the House on a deficit reduction plan proposed by Sens. Phil Gramm (R-Tex.), Warren B. Rudman (R-N.H.) and Ernest F. Hollings (D-S.C.).
The plan would set specific deficit targets that grow smaller each year until fiscal 1991, when the budget would be balanced. If the targets were not met, automatic spending cuts would be imposed.
"Mickey Mouse, that's what the bill is," Modigliani said.
"The Gramm-Rudman plan is entirely inadequate to face the problem and is, in fact, actually mischievous in that it may lull you into believing that you have absolved your task and forget it till after elections.
"Rather than going through the painful exercise of cutting the deficit, it instructs future congressmen to cut the budget," he said, adding that "a future Congress can readily revise the law and perhaps instruct a yet future Congress to do the unpleasant job."
Modigliani, who won the Nobel Prize in Economics last week, suggested setting firm deficit targets soon and raising taxes automatically if spending cuts do not reach the targets.