Risking the Ax, Economist Martin Feldstein Speaks Out for Chopping the Deficit
The Congressional Budget Office says that the deficit will come in just under $200 billion again this year, and the current prospect is for an accelerating deficit in coming years. Do you agree?
Yes, I think that's a fair assessment. If there is no policy action, the figure could soon be well over $200 billion, even with a solid rate of growth, falling unemployment, falling inflation and falling interest rates.
How did we get ourselves into this box?
The main reasons are that the economy suffered a longer recession than anybody expected in 1981 and 1982 and that inflation came down very rapidly. The high rate of inflation of the late 1970s had pushed people into higher tax brackets, so when inflation collapsed, the Treasury no longer reaped the benefits of inflationary increases in tax revenues. And we also didn't get all of the spending cuts that the Administration had proposed in its earlier budgets.
Are there any benefits to the economy from such huge long-term deficits?
There's no question that the tax cuts this year and the increase in the deficits that came with them stimulated consumer spending, helping the recovery in its early stage. The real problem is not with deficits in 1983 or 1984, but with the prospect of continuing and increasing deficits into the indefinite future. That's what worries so many economists and so many citizens.
What specifically do those huge deficit projections do to the economy?
They have two quite different effects. Large deficits use up the nation's savings. That keeps interest rates high and means less money is available for financing plant and equipment, housing and capital investment. The deficit outlook also has serious consequences in the near term by keeping the dollar too strong. That hurts our exports and makes it easier for foreigners to sell in the U.S., further depressing our own industries.
At some point, won't the increased interest charges on growing debt overwhelm our ability to finance them?
The growing debt adds substantially to interest costs. Our nearly $200 billion in national debt accumulated in 1983, for example, adds roughly $20 billion a year in permanent annual interest charges. If we add one trillion extra dollars to the national debt over five or six years, the extra interest on that would be roughly $80-to-100 billion a year forever. To put that in perspective, simply financing those extra $80 billion would require a tax increase of nearly 20 percent. Unless we decide to retire that debt, we will keep paying interest forever and ever.
The new budget assumes that the economy will grow 4 percent a year through 1990. With big deficits, is that realistic?
In a word, no. It's only achievable if Congress takes actions over the next two years that substantially reduce the deficits over the next five years.
Has the upcoming political campaign made the President unwilling to tackle the deficit problem?
It's true the changes proposed for calendar year 1984 are rather modest. But looked at over the next five years, there are proposals for more than $200 billion in cumulative deficit reduction measures. It's just a first step in getting the deficits down. More will be needed. The President's budget message last year contained measures that would have reduced the projected deficit by more than half, but Congress refused to deal with it. You're right that in an election year, there's no point in proposing measures Congress will ignore again. We'll have to wait until 1985.
Might 1985 be too long to wait?
I think it's very important for Congress to act this year on the proposals that the President has made now. It's important for people to understand that this is just a first step, that we'll have to come back and do more things, tough things, in 1985. If that's understood, we can continue to have a healthy recovery.
If we are in a downturn by 1985, then might the tough measures you talk about—spending cuts and higher taxes—be politically impossible?
That's true, and it's a real risk?