More dogged arteries may lie ahead. Last Thursday the senate OK’d a plan to transform this year’s $177 billion federal deficit into a balanced budget by 2002. The House approved a similar scheme a week before, along with lower taxes. Those are no small feats, coming after 14 years of empty talk about dealing with the deficit. But while the details are still to come, the early evidence is that some of the budget busting is self-defeating. Balancing the budget is meant to unleash investment that will kick the economy onto a higher plane. But to make their numbers, congressional Republicans have targeted government investments in transport, science and education. Says Robert Reischauer, until recently the head of the Congressional Budget Office, “If that’s what turns out to be, watch out.”
Politically, the GOP’s focus is on getting to zero, a nice round number that voters can grasp. Economically, though, the crucial issue is not how much the federal government borrows but how much the economy invests. The deficit is a problem because the Feds are tapping a huge share of the nation’s savings, not to create more wealth tomorrow but to pay medical bills and social-security benefits today. The whole point of budget balancing is to change that picture. Interest rates should fall, which should boost private investment, which would lead to faster growth. By 2002, according to the Congressional Budget Office’s ballpark guess, the economy would be about 0.5 percent larger than it is today-about $140 for every man, woman and child in America. But if the Feds cut back their own investment, many of the advantages of budget balancing vanish. Says Van Dorn Ooms of the Committee for Economic Development, a business group, “It does make a difference how you cut the deficit.”
No question: a lot of what passes for government investment can’t pass the smell test. Only politics can justify the Bud Shuster Highway near Altoona, Pa., named for the chairman of the House Transportation Committee, or the Tip O’Neill Library, which the late House speaker bestowed upon his alma mater, Boston College. But many investments have extraordinary pay-offs-benefits that economic analysis has a hard time measuring. WIC, which supplies juice and formula to infants and nursing mothers, is a bargain if it makes for a healthier work force two decades from now. Even the libertarian cyberjocks who cruise the Internet have to acknowledge that federal research dollars launched the hottest business venue of the 1990s. Key upgrades in air-traffic control, according to government estimates, could pay for themselves in just three years in the form of fewer delays.
Fine, say congressional Republicans. Let the private sector take up the slack. The showcase project, Toll Road Corp. of Virginia’s private 14-mile turnpike near Washington, will open this fall. But private capital won’t or can’t step in everywhere. Industry already shoulders most of the nation’s scientific research. Federal matching grants have encouraged companies to invest in leading-edge research with long-term promise but no short-term return; killing off federal funding will mean less private-sector research spending as well. Subsidized student loans? Yes, upper-middle-class families don’t need the subsidy. But market interest rates, the direction of the House budget plan, would remove a big incentive for people to continue their schooling–and leave the economy with a less educated work force.
The real motive for cutting so deep into government investment is political. Neither party wants to slice big-money programs for the elderly. Despite controversial changes, the Republicans would allow Medicare and Medicaid to swallow a growing share of the budget. Social security remains untouched. “Federal assistance to the elderly subsumes more than 50 percent of total federal spending in both balanced-budget proposals,” advises the Committee for a Responsible Federal Budget. Eliminating the deficit without harming the elderly sounds great. But watch out for pot-holes on the Beltway.
