CAMBRIDGE, MASS — Was the budget compromise worth saving? George Bush's bully pulpit didn't work when he tried to convince the nation in a televised address Tuesday night that it was all for the best. No one ever supposed that Bush had the charisma of Ronald Reagan, or his predecessor's capacity for using oratory to sway public opinion. But perhaps there were other reasons why Congress found it so easy to resist Bush's pleas and his arm-twisting. The plan gave too much to the rich and the military, without solving the underlying problems of the U.S. economy.
If the alternative to this flawed agreement is no deficit-reduction agreement at all, isn't it worth doing? According to Alan Greenspan, chairman of the Federal Reserve Board, the plan would have brought down interest rates and promoted economic growth. So we all benefit in the end--even if today's sacrifices may not be as equitable as they might be. Administration economists agreed.
The problem with this logic is that it's built on quicksand. The economic projections underlying the plan assumed that oil prices would fall, that America would stay out of a recession, that the costs of the savings-and-loan bailout won't escalate and that the world won't be experiencing a credit crunch. All these assumptions are dubious, to say the least. They run counter to every observable trend.
If oil prices continue their upward climb, and if Japan and Germany continue to use up their spare cash, interest rates will stay high and go higher, regardless of the budget accord. We're in a world economy now, if you hadn't noticed. U.S. interest rates don't depend solely on how much money is left over after the U.S. government and U.S. consumers and corporations stop spending. U.S. interest rates depend on how much is left over after governments, consumers and companies all over the world stop spending.
Cutting America's budget deficit by $34 billion--what the compromise sought for next year--is like taking a bucket of sea water out of the Pacific. It doesn't have much effect on the tide.
Meanwhile, the U.S. economy is likely to continue its downward slide--so even the $34 billion cut is optimistic. Welfare and unemployment insurance costs are likely to rise precipitously. The federal government will have to bail out some big banks and insurance companies, as well as more S&Ls. And tax receipts will shrink. My best guess is that the deficit-cutting agreement would have ended up reducing next year's budget deficit by $24 billion--hardly a figure to write home about.
The irony is that cutting government spending and raising taxes right now, by even this relatively small amount, is the wrong tonic for a weakening economy. Consumers and corporations are already holding back, as high oil prices and their own massive borrowings scare them away from the market. It's the lesson that John Maynard Keynes should have taught us a half-century ago: Unless government picks up the slack, we could face an even deeper and longer recession.
But what about the budget deficit? Isn't it a big problem? Yes, but we should have got serious about reducing it three years ago--when the economy was riding high. Maybe we can safely raise taxes and cut spending a few years from now, when world interest rates and oil prices have come back down to earth and the U.S. economy is more buoyant. But not now.
In fact, cutting the budget deficit is so important over the long term that it might even be worth rewarding the wealthy and the denizens of the Pentagon with huge windfalls, if that's the price of getting an agreement.
But it's not worth that price right now, when all we get in return is a sluggish economy and a pail of seawater.
The best thing that could be said for the defeated budget accord was that almost every major Washington lobby hated it. Farmers, truckers, liquor manufacturers, cigarette manufacturers, the makers of yachts and advocates for the elderly are still hollering. Conservative Republicans are angry that the compromise didn't include a capital-gains tax cut, and that Bush has so obviously reneged on his "no new taxes" pledge. Liberal Democrats are upset about proposed cuts in domestic programs like Medicare and farm subsidies.
If everyone's angry, it must have been fair.
But not quite everyone is angry, and it's here that we have cause for concern. The folks most content with the terms of the long-awaited budget compromise were two groups who expected to take a big hit--who should have taken a big hit--and didn't.
First, the very wealthy. Yes, they'd have to pay a tiny surcharge on their yachts and jewelry, and wouldn't have quite as many deductions as before. But even if these inconveniences were included, their effective tax rate would have jumped only a tad--from 28% to 29%. Champagne was flowing: The so-called bubble--that allows higher-income earners to pay a lower marginal rate than the 33% paid by those below them--continues to bubble away.