Budget Deficit Shrinks While Washington Turmoil Expands
Economist Robert Eisner regards all the fuss in Washington about balancing the budget by 2002 as ''absurd.''Skip to next paragraph
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That's partly because budget experts have trouble predicting federal deficits nine months ahead, let alone seven years.
Last winter the Clinton administration's budget anticipated a deficit for the fiscal year ending Sept. 30 at $192.5 billion. It actually will come in about $30 billion less, reckons Cynthia Latta, an economist with DRI/McGraw-Hill, a Lexington, Mass., consulting firm.
The Feb. 6 Clinton budget says the deficit will be $194.4 billion in 2000. The Congressional Budget Office puts the figure at $288 billion.
''Nobody really knows what it's going to be,'' says Mr. Eisner, a professor at Northwestern University in Evanston, Ill.
An upward shift of 0.5 percent in real annual growth in the economy would probably wipe out the deficit. A 1 percent drop in interest rates would save about $35 billion a year. Tougher tax enforcement could raise extra billions. More stringent rules for Medicare or Medicaid would knock off billions in spending. Faster inflation would also reduce the deficit.
Nonetheless, the talk in Washington is of a ''train wreck'' as the Republicans in Congress and President Clinton clash over their differing programs to eliminate the deficit in the next seven or 10 years. ''I'm going to stick with my position,'' Mr. Clinton said Wednesday when asked about a comment by Senate majority leader Bob Dole that Republicans were in no mood to compromise with him.
But the federal government won't shut down. ''I'm expecting a great deal of sound and fury and not a great deal underneath it,'' Ms. Latta says. Most appropriation bills will probably be passed and signed. A couple of large ones could be held as hostage to the Republican effort to get a tax cut. Or the administration will run up against the statutory debt limit of $4.9 trillion.
At the end of August, the gross debt subject to the limitation stood at $4.881 trillion. Since the budget usually runs a small surplus in September, it could be November before the debt bumps against the ceiling. Certainly neither political party will want to hold up the $25 billion or so in Social Security pension payments due early in November.
Under the Constitution, however, the president has authority to keep the government running. Some discretionary spending might be withheld. A number of civil servants may have to take unpaid leave for a short time. Latta recalls the Statue of Liberty being closed for a few days in October 1990 in a similar clash.
Much may be made of the size of the debt as Republican members of Congress and the president try to blame each other for any delay in federal payments.
To Eisner, the $4.881 trillion gross figure is ''not relevant'' to the economy. It includes about $1.3 trillion of debt held by government accounts and another $370 billion or so held by the Federal Reserve. The Fed's holdings are basically free to the government since the earnings on that debt (minus Fed expenses) go back as profits to the Treasury. The government accounts, including $440 billion of debt in the Social Security Trust Fund, are reserves against future obligations, though only a small proportion of them. Here, analysts should take account of huge future federal revenues.
What is relevant is the $3.6 trillion of debt held by the public. That government debt is an asset for millions of Americans who own these federal securities either directly or in pension plans, mutual funds, and other investments. But 22 percent, or about $728 billion, of the debt is owned by foreigners. The tax dollars used to service that foreign-held debt go out of the country.
Conservative politicians and other critics of big government often like to use the gross debt number on a per capita basis - ''you owe $19,083'' as of Sept. 1. What is not noted is that on average each American owns approximately $16,200 of those securities, foreigners the remainder.
Eisner points out that the $160 billion deficit this year means that total outstanding debt is shrinking as a proportion of the national output of goods and services.
''Our deficit is peanuts compared to the ones in European countries,'' Latta adds.