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Plain Speaking on the Deficit

October 31, 1985

Prof. Franco Modigliani is one of a rare breed: an economist with the gift of plain speaking. Asked the other day what was wrong with the Gramm-Rudman budget-deficit reduction plan, from the standpoint of good economics, he said: "It completely fails to get the job done."

The 1985 Nobel Prize-winner then added his own prescription for the deficit problem. Cut the deficit deeply now, by $100 billion. Do it with budget cuts and tax increases. A 10% tax increase would raise half the amount needed. In addition, quick action would hasten the decline of the deficit by bringing down interest rates, he said. Interest on the national debt has itself become a major contributor to the budget deficits.

Modigliani and Ronald Reagan share a trait of putting things simply. But when it comes to taxes, spending and the deficit, the Massachusetts Institute of Technology professor has sound common sense on his side. He believes we ought to pay for what we want from government. If the people want a big defense establishment, for instance, they should be prepared to pay for it.

The President, on the other hand, insisted Tuesday that the fastest way of raising tax revenue was to cut taxes. He persists in the belief that the nation can grow its way out of the deficit if only we reduce domestic spending some more and cut taxes again. That is the same kind of logic that got us $200-billion-a-year deficits in the first place.

Reagan chided Congress the other day for inexcusable dithering in its efforts to shape the Gramm-Rudman proposal into a workable deficit-reduction plan by the end of the week. The problem is that there is nothing much you can do with Gramm-Rudman to turn it into a sensible budget-reduction vehicle. In particular, it postpones any tough decision-making for at least a year (i.e., beyond the next election). When the plan kicks in, it would presumably mandate a series of $36-billion annual deficit reductions. The Senate is insisting on passage of the Gramm-Rudman bill as its price for approving an increase in the national debt to $2.08 trillion. Without such action, the government will have to stop spending money, perhaps as early as Friday.

Professor Modigliani said it is difficult to measure the possible effect of Gramm-Rudman on the economy because it does nothing now and nothing next year. By the time the first $36 billion comes, it will "be a little late, when everything has gone kaput left and right," he said.

In simple but eloquent sentences, Modigliani made his case for major deficit-reduction now: "We owe that to our future generation, to our children, to our grandchildren. We owe it to our farmers. We owe it to our industrial workers. We owe it to the industrial corporations. We owe it to the people who have money in banks which may go bankrupt. We owe it to the rest of the world where the debtor nations are about to go broke. We owe it to the rest of Europe, which is in terrible economic shape."

When his questioners kept pointing out that Congress' struggle with Gramm-Rudman was more a political problem than an economic one, Modligiani kept coming back to plain common sense: It doesn't do the job.

Congress and the Administration should convert Gramm-Rudman to the Modigliani plan without further dither or political grandiloquence. As the candid professor might say, "Just do it."

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