One economist's look at US deficit and how it can be brought under control
Washington — The United States, says Alice M. Rivlin, is saddled with ''a set of budgetary policies which no country in its right mind would have chosen.'' At least, she adds, not a country that wants to regain its competitive edge in world markets and to increase domestic savings and investment, essential for future growth.
''Over future years,'' Dr. Rivlin says, ''government will be using a substantial portion of private savings'' - a policy that she regards as neither principled nor sound, especially in a period of economic expansion, when by all logic deficits should be shrinking.
Given the existing policy mix, she says, ''the deficit as a whole will not decline. Federal spending will grow as much as tax revenues,'' leaving a prospective deficit of $200 billion or more each year into the late 1980s.
After eight years as director of the Congressional Budget Office (CBO) and now as director of economic studies at the Brookings Institution, Dr. Rivlin speaks with urgency.
''It is terribly important to get some (early) action on the deficit. If we wait until after the (1984) election, we may have a weakening economy - making it much harder either to cut spending or raise taxes,'' she says.
Lulling policymakers into a false sense of security - that they can safely wait until after the election - is the fact that the US economy right now is doing remarkably well.
Inflation is down, unemployment is falling, productivity is up, and, Dr. Rivlin says, in the short run ''we are not going to be in a serious economic situation.
''The US has a tremendous resource base,'' she says, ''a well-educated work force, and an adaptable economic system. We came through the shocks of the 1970s with remarkable resilience.''
Most economists would agree. They also would agree that the future soundness of the US economy will be undermined if deficits pile up unchecked at the present pace.
Apart from deficits, Dr. Rivlin cites three ''major sets of worries'':
* Productivity, or output per worker, ''has slowed dramatically'' in recent years, as it has in most industrialized nations. ''Can we get back on a productivity growth path, perhaps at something like 2 percent a year?''
* Great industries and their workers, most visibly autos and steel, are being left out as the economy adapts to changing circumstances.
* Dr. Rivlin finds ''an increasing concentration of poverty in groups like women with children and among the unskilled.''
For the moment, however, action on the deficit is at the top of her list, as it is with some key lawmakers, notably Sens. Robert Dole (R) of Kansas, chairman of the Senate Finance Committee; Pete V. Domenici (R) of New Mexico, head of the Senate Budget Committee; and Rep. Dan Rostenkowski (D) of Illinois, chairman of the House Ways and Means Committee.
''If nothing is done (to reduce the deficit),'' Dr. Rivlin says, ''there will be more consumption and less investment at any given level of economic growth.''
Economist Alan Greenspan calls this process a ''gradual erosion of smokestack America,'' a starving of the long-lived asset base of the economy.
Politics aside, Dr. Rivlin says, ''it should not be all that hard to make a start on the deficit. The arithmetic is not all that stringent.''
Fifty billion dollars worth of additional taxes by 1986, she says, would still leave tax rates lower than they were in 1981. Defense spending could be trimmed and still come in above the level of 1981.
That would leave to be handled the mushrooming growth of entitlement programs - chiefly social security, civil service and military pensions - which are now indexed to inflation as expressed by the consumer price index (CPI).
''The easiest way would be to cut back on the indexing formula,'' Dr. Rivlin says. Benefits would grow, not at the full CPI, but at CPI minus 2, 2.5, or 3 percent. If the CPI, for example, measures inflation at 4 percent, benefits would grow by 2 percent, depending on the formula chosen.
A huge roadblock to reducing the deficit is President Reagan's insistence that he will veto any tax increase and that he will not cut the growth rate of defense spending. House Speaker Thomas P. O'Neill Jr. (D) of Massachusetts, meanwhile, asserts that Congress will pass no benefit cuts until the President gives the lead on tax hikes and defense trims.
''If the President really believes that tax increases are simply no good,'' Dr. Rivlin says, ''then we are pretty well stuck. Our system works pretty well when you have a strong president who wants to solve a problem. He can usually pull Congress along with him. What we have now, so far as the deficit is concerned, is a failure of presidential leadership.''
She suggests a two-stage process to depoliticize the deficit issue. Congress would call for a bipartisan commission to study the problem and report early in 1984. Almost everyone agrees that, with research on the issue already done, the commission's report would center on trimming defense outlays, capping entitlement payments, and raising revenue.
Such a commission, in Dr. Rivlin's view, ''would take the heat off Congress and the President.'' An earlier bipartisan commission on social security fostered changes in the troubled system without political backbiting.
''To get swift action, the options are limited and do not include restructuring the tax system,'' she says. An interim option to produce more tax revenue would be to delay or reduce indexation of income taxes, scheduled to begin in 1985.
All this would lead to a second stage - fundamental overhaul of the US tax system, with a shift toward taxing consumption more and savings and investment less.
Such a shift is advocated by a wide range of experts, including Republican economists like Alan Greenspan and Rudolph G. Penner, who succeeded Dr. Rivlin as director of the CBO.