While President Reagan was island-hopping his way to Tokyo, the federal debt continued to rise at the rate of more than $50 million a day. But the economic mood these days is upbeat. Interest rates are down. Inflation seems to be under control. Unemployment is stable. The word from the White House is to stay the cheery course and the deficit is bound to work itself out. But this attitude ignores a festering sore that continues to feed on the underbelly of the economy.
To finance the deficit, we do two things that chip away at all this good economic news: We eat up our own private savings and put ourselves on an imprudent diet of foreign investment. In recent years, the government has given away billions in tax incentives to promote savings and investment, but there has been no rise in the private savings rate.
Economist Barry P. Bosworth of the Brookings Institute writes in the current issue of The Brookings Review: "It is now about time to conclude that those policies have failed." If the country is serious about increasing the national savings and investment rates--and therefore, its productivity--it must do so by cutting the deficit.
Against this backdrop, the U.S. Senate has taken only a timid step toward deficit-reduction in adopting its 1987 budget resolution on an unusually strong bipartisan vote of 70 to 25. The measure reduces President Reagan's unrealistic defense demands by $19 billion, makes modest cuts in domestic programs and proposes $13.1 billion in new revenues, including about $6 billion earlier included in the Reagan budget. By its action, the Senate retreated from a more realistic formula adopted by the Senate Budget Committee under Chairman Pete Domenici (R-N.M.): a $295 billion defense budget compared with the Reagan demand of $320 billion (still an $8 billion increase) and new revenues totaling $18.7 billion.
The Senate did so at the insistence of Majority Leader Robert Dole (R-Kan.), who has his eye on GOP fortunes in the 1986 and 1988 elections and seems to be much more receptive to the White House budget fantasies than in the past trench wars of Pennsylvania Avenue.
As Air Force One winged its way across the Pacific last week, the President left behind a letter demanding more domestic cuts, stating a rigid position on defense and a reiteration of the steady White House drumbeat of no new taxes. But anyone who has paid any attention to David Stockman, the former Reagan budget chief, knows this is the same old illogical formula for deficit spending.
The President lectured Congress again, saying the government should live within its income, just as American families must, adding, "I am not prepared to change my course by agreeing to new taxes and deep cuts in defense spending that jeopardize this economic progress." Beyond being just stubborn, the President is wrong. American families are not living within their means. Consumer debt has soared. As the Brookings' Bosworth points out, "The United States has been in the midst of a self-indulgent national consumption boom, financed by net borrowing abroad." The bill will come due before long and the unhappy result is likely to be an erosion of all those rosy economic statistics.
Phoning in from Tokyo, White House spokesman Larry Speakes said the Administration would work with the Democratic-controlled House of Representatives to get more of what it wants. If that fails, the President will veto any "budget-buster" appropriations bills as they reach the White House. That same hollow threat has gone unfilled for five years now as the White House declined to back up its budget-cutting rhetoric with action.
The House, in fact, should return at least to the Domenici formula of greater defense reductions and more revenue.
That is the only way to end this binge of living off the nation's credit cards.