Back to the budget
President Reagan's call to trim another $10 billion to $15 billion from the federal budget in the next fiscal year is probably more important in a psychological than an economic sense. Despite Mr. Reagan's wellhailed succes in getting his economic program through Congress, the economy has not yet responded. With interest rates at an uncomfortable high and budget deficits looming larger than forecast, the business community and Wall Street remain jittery. By picking up the budget knife once again, Mr. Reagan presumably hopes to reassure the public that he is determined to hold to his original economic targets and see his "supply side" strategy through. He can also pursue his passionate goal of reversing the trend toward bigger and bigger government.
That the impact of a further slash in federal spending would be largely psychological is borne out by the experience of other industrial democracies. Contrary to popular belief -- and the argument of supply-siders -- it is not expanding government and federal deficits that are the chief cause of inflation and other economic problems. Take those two industrial giants West Germany and Japan, for instance. In 1979 their federal deficits accounted for a larger percent of the gross national product that did the deficit in the United States, yet their inflation rates were less than one third that in the US.It also bears mentioning that government is smaller in the US in relation to the economy than in other economically successful industrialized nations. In West Germany government spending amounts to a higher percentage of the GNP than in the US.
Budget deficits, in other words, seem to incur adverse economic consequences such as higher interest rates largely because of a popular beliefm and expectationm that they have an impact. They do, of course, if the government prints money to cover them, but that is not the Fedral Reserve's present tight-fisted course.
This is not to say that US government spending should not be reduced further. It clearly will be easier to get Americans thinking in terms of efficiency, productivity, and financial order in their own lives if government itself is seen exercising discipline and integrity -- not spending more than it takes in. That is why the President is right on course in trying to bring about a balanced budget. If nothing else, this is a tidier and more straightforward way of doing things.
It is especially encouraging that Mr. Reagan is showing flexibility by looking for substantial cuts in the area of defense. Perhaps he anticipated this all along. In any case, many economists warn that huge new military expenditures could deprive the civilian sector of capital and engineering and technical personnel. The result would be higher inflation in some portions of the industrial sphere.
Moreover, it is doubtful that such massive military outlays are actually needed. There is little argument that the American defense arsenal, especially the conventional forces, must be stiffened. But the separate armed services, their eyes bulging at the financial cornucopia promised them, have weighed in with requests for weaponry of dubious utility. It can be counted a plus that budget stringency is now forcing the administration to look at these requests with a more professional eye and to make sure that what is ordered and produced fits the tasks at hand. it should be added that cutbacks in the military budget will not mean a reducation of military spending or a softening posture toward America's defense. They will simply mean edging back toward the solid increases already in the pipeline under the Carter administration.
Other areas, too, need to be looked at anew. Spending on agriculture, for example, is running ahead of ceilings, it certainly is time to end or reduce subsidies for the tobacco, sugar, dairy, and other farm industries. Social security will have to be reformed if the program is to remain solvent. Veterans' benefits are another fertile area for a bold cost-cutting hand. Nor can it be ruled out that the President, in order to meet his goal of a balanced budget in 1984, will resort to raising taxes again. One possibility is to reduce the third-year tax cut, the wisdom of which many people questioned from the outset.
Whatever he elects to do, President Reagan may not be as concerned about the enlarged 1982 budget deficit as one might think. It does give him the excuse to continue doing what he loves best -- cutting government down to size.