Tags: These | Are | Not | Reagan | Deficits

These Are Not Reagan Deficits

Wednesday, 11 February 2004 12:00 AM

That's the question posed by Linda Bilmes, an assistant secretary of commerce in the Clinton administration, who teaches budget and financial management at Harvard's Kennedy School of Government -- and her answer is in the negative.

Writing in Tuesday's Washington Post about "The Truth About the Reagan Deficits," Bilmes insists that in these times deficits do matter, and that the Bush deficits are not the Reagan deficits.

Wrote Bilmes, "Fans of Reaganomics note that former President Ronald Reagan's spending spree followed a formula similar to President Bush's: tax cuts combined with a major boost in defense spending."

The strategy worked, but Bilmes says there are big differences between the Reagan deficit policies and those now pursued by Bush. Times and circumstances are vastly different.

"The current Bush deficit is equal to 4.5 percent of gross domestic product," she notes, while Reagan's grew beyond 5 percent. The result in the aftermath in the 1990s, however "was not a fiscal train wreck but rather a sustained economic boom that enabled President Clinton to balance the budget and even to generate a surplus by 2000."

President Bush, she writes, is hoping the nation will outgrow its recent deficits as we did in the Reagan era, but she maintains that Bush is wrong.

"Unfortunately, history is not about to repeat itself," she warns. "The ability to recover from the 1980s deficits was the result of three historical "flukes" that happened at the same time: a huge demographic bulge, an extremely strong dollar and a sudden peace dividend."

The baby boom was the first of the flukes, she said, explaining that when Reagan took office, the boomer generation had already entered the workforce and was approaching peak earning years."

As a result, "the peak earning years turned into peak spending years. Savings dropped, consumer credit rose and boomers snapped up new cars, cool appliances and second homes as if the good times would never end."

Moreover, while the affluent workforce ballooned, the percentage of the population aged 65 and above remained stable. By 2000, however, it had gone up to 12.4 percent of the population from the 11.3 percent it had been 20 years earlier when there were more high-earning workers to support a fairly stable number of retirees. Congress was thus able to increase the amount of "entitlement" payments (Social Security and Medicare) and to leave eligibility criteria intact."

"The contrast with the upcoming 20 years, however, is stark. By 2020 the over-65 percentage of the population will have grown to more than 16 percent while the working-age population will have declined. The fastest growth is among the very elderly (those over 85). Social Security, Medicare and other entitlement programs (such as veterans' benefits) already account for more than half of federal spending. In addition to this, the Bush administration has added a hugely expensive prescription drug benefit for the elderly. If no changes are made to eligibility for the programs, she warns, they will, by 2020, "gobble up virtually all federal tax revenue."

Moreover, she doubts that the extremely strong dollar that existed during the post-Reagan era is likely to be repeated. Reagan's tax cuts in 1981, she recalls, arrived at a time when double-digit interest rates and tight monetary policies existed and made U.S. stocks and bonds hugely attractive to foreign investors. This made it easy to finance the deficit. The stock market also soared, making boomers feel they could have it both ways -- swelling 401(k) plans and a new Mercedes in the driveway."

None of this is true today, she wrote, noting that today "the mood is more sober. Foreign investors' love affair with the United States is over. With short-term interest rates lower than they have been in a half-century, the dollar is weak and getting weaker. At the same time the Treasury will have to find buyers for an ever-increasing supply of bonds to fund the deficit."

Finally, Reagan's buildup of the military differs from that arising out of the current war on terrorism. While there is one similarity in that, then as now, U.S. intelligence failed to predict events, in 1980 and almost no one outside the Soviet Union foresaw the coming collapse of the "evil empire.

But it happened Clinton was able to cut back the size of the military and to plow that "peace dividend" into balancing the budget. Looking ahead at the continuing war on terrorism, on the other hand, "the amorphous nature of al Qaeda, the cost of rebuilding Iraq and the continued homeland security challenges confronting the United States, make it foolhardy to count on this kind of peace dividend again," said Bilmes.

Bilmes foresees "red ink spreading as far as the eye can see. Moreover "conventional calculations of the budget deficit include the money being paid into Social Security today. Because there are currently more working-age contributors than claimants, the Social Security account is in 'surplus.'

Strip that out, she wrote, and the true underlying deficit figure is more like $720 billion than the $521 billion quoted in this week's speeches.

The way out of this dilemma, she wrote, would hurt involving as it would such politically dangerous steps as junking the Bush tax cuts; cutting defense spending; getting out of Iraq and Afghanistan quickly; upping the eligibility age for Social Security and Medicare, and negotiating with the drug companies to require lower prices for Medicare drugs (as Europeans and Canadians have done for decades).

"But as in a 12-step program, the most important first step is simply to face the truth: Those deficits will not go away by themselves, the Reagan magic will not return, and we must take action to fix the problem," she concluded.

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That's the question posed by Linda Bilmes, an assistant secretary of commerce in the Clinton administration, who teaches budget and financial management at Harvard's Kennedy School of Government -- and her answer is in the negative. Writing in Tuesday's Washington Post...
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Wednesday, 11 February 2004 12:00 AM
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