NEW YORK — For weeks the eyes of the world were fixed on the congressional and Administration budget conferees. A crisis of confidence, said many observers. Last chance to fix the deficit, said others. On some days, little progress was reported and on those days the nation--or at least the media--shuddered. Would the conferees make significant budget cuts and so restore confidence to the shaken financial markets? Finally, the conference presented its results, and last week Wall Street neither crashed nor soared. It yawned.
What Reagan said of the majority report on the Iran-Contra affair--that they labored and brought forth a mouse--could be said with more justice of the budget negotiators. With $23 billion in cuts already assured by the Gramm-Rudman-Hollings Act, a month of face-to-face talks involving the most senior U.S. political leaders resulted in only $7 billion of additional 1988 cuts. More cuts were promised in 1989, after the election. We shall see.
The $7 billion was more illusion than reality. Federal budget estimates are just that--estimates. A strong economy means more income and fewer expenses for the Treasury, and a recession means the opposite. Seven billion dollars, less than 1% of federal spending, is simply too small a number to have any significance. In October, the deficit was $5 billion larger than originally estimated--virtually wiping out the ballyhooed $7 billion.
Although Washington presented its budget talks as an emergency response to the stock market meltdown, budget talks were in the cards long before Oct. 19. Across-the-board cuts totaling $23 billion under Gramm-Rudman were scheduled if Congress and the President could not agree on a deficit-reduction program by Nov. 20. Under Gramm-Rudman, cuts were to be equally divided between the military and domestic budgets. Since the President was unwilling to accept $11.5 billion in defense cuts and Congress felt the same way about domestic programs, tough negotiations were anticipated long before the market crash.
While legislators and Administration officials welcomed the chance to pose as the nation's saviors in an economic crisis, the market downfall had little to do with the decisions reached. The deal's general outlines--slightly higher taxes and slightly lower spending levels--had also been clear since Gramm-Rudman was enacted. It has been evident since 1981 that politicians of both parties lack either the vision or the courage to attack portions of the federal deficit that make the most trouble.
Republicans would like to cut middle-class entitlement programs but they fear the wrath of voters. Democrats dream of pruning what they regard as unnecessary weapons programs but they too lack the stomach for the resulting political fight. It will take more than a stock market crash to break this logjam.
In any case, it is far from clear that the federal deficit had anything to do with the crash. The deficits, after all, have been mounting for years and during most of that time stock prices rose regardless of the federal deficit. In fact, the federal deficit had begun to shrink in the months before the crash and the Gramm-Rudman process insured further cuts were on the way.
It is also unclear that cutting federal spending is the wisest course in the wake of a crash. The time to cut the deficit was 1984 and 1985, when the economic expansion was young. Now that the expansion is 59 months old, and the threat of recession looms on the horizon, cutbacks in federal spending or major tax increases could bring on a recession. The last President to cut federal spending in the wake of a market crash was Herbert Hoover.
What markets want from the U.S. government is decisiveness. The twin deficits--budget and trade--frighten investors around the world but not as much as the third deficit: the leadership deficit. The inability of U.S. political leaders to address either the budget or trade question has led to a loss of faith in the future of the U.S. economy.
Since the first quarter of 1985, when the trade deficit stood at $25 billion, the dollar has steadily dropped and, just as steadily, the trade deficit has grown--to $40 billion in the most recent quarter. In an eerie imitation of Hoover, economists have been saying for two years that an improvement in the balance of trade was "just around the corner."
Perhaps. But devaluing the dollar to balance the trade deficit is using a blunt instrument for a delicate task--like a tire iron for brain surgery. Making U.S. goods cheaper in foreign countries makes them easier to sell, but it also means we must sell more goods to pay for imports.
The falling dollar also raises the cost of capital for U.S. companies. Investors want higher interest rates to compensate them for the risks of holding a weak currency: American blue chip corporations have to pay twice as much interest as German and Japanese companies to attract investors.