US has licked inflation, oil blockage; but who's minding the deficit?
The United States has had three economic crises since 1973. It has solved all but one of them: the dilemma of the budget deficit. After the 1973 Arab oil embargo and the quadrupling of the oil price, we entered a period of economic adjustment because of the petrodollars flowing out of the country and the need to find new sources of energy, to reduce oil consumption, or both.
This crisis was resolved by a combination of helpful governmental actions, private incentives to find new energy sources, and, eventually, a major slowing of the world economy starting in about 1979.
The second crisis was the inflation brought on by the adjustment to the oil shocks. This crisis was solved largely by the persistence of the Federal Reserve. President Carter appointed Paul A. Volcker as head of the central bank, and President Reagan wisely reappointed him in 1983.
Mr. Volcker and the Fed did not alone end inflation, but their resolve was by far the most important cause. Even now inflation can't be forgotten, though the recent decline in long-term interest rates could not have happened without market participants becoming convinced that inflation will not reignite for several years.
The third crisis -- the budget deficit -- is upon us, and it does not appear as critical as the two others.
Last year Congress passed the Gramm-Rudman-Hollings Act, which is supposed to lick the deficit by 1991. One has only to glance at the debates in Congress in recent weeks to know that Gramm-Rudman will probably not work.
Because of the massive 1981-83 personal tax cuts, along with the major buildup in defense spending -- both of which a knowledgeable Congress and President jointly undertook and which the public largely supported -- we have today's deficits of close to $200 billion a year.
The national debt has doubled in just five years. (So far foreigners have been financing our deficits; this has turned us into a major debtor nation.)
The impasse over the budget deficit between Congress and the President is easy to describe. Mr. Reagan does not want to yield on defense spending; Congress does not want to yield any more on domestic programs. As long as Reagan is President, a major tax increase is not in the works. The Supreme Court may void Gramm-Rudman -- or Congress may simply find it can't live with the law.
It seems most likely that the deficit will be allowed to run until the public becomes more aware of the damage the ballooning federal debt is doing.
There are a couple of reasons this crisis is not being handled properly. One is that it is not yet as obvious as were gasoline lines in 1974 or 21 percent interest rates at the end of the Carter years. Another is that, not being as obvious, there isn't yet any major institutional push, private or public, to solve it.
The energy crisis had the resolve of government behind its solution, even though much of the solution lay in private hands. The inflation crisis was handled largely by the Federal Reserve.
In the case of the budget deficit, those institutions that could do the most to rally the public to a solution -- Congress and the White House -- clearly don't have it as their top priority.
Congress is preoccupied with putting out smaller fires, the problems that bother its particular constituencies. Reagan would like to have a balanced budget; but he wants more defense spending first and a shrinking domestic involvement by government second. There are only so many priorities any president can hope to push simultaneously and be successful. The balanced budget hasn't made it to the top by a long way yet.