For all the media circus about the federal budget, Washington is not likely to restore the nation's fiscal affairs to overall balance in the foreseeable future. The stock market has surged to record levels partly because investors assume good intentions on Capitol Hill will stanch the hemorrhage of red ink
from the Treasury. If investors are disappointed, stocks could be vulnerable.
None of the rival "balanced budget plans" - Depublican or Remocratic - take account of the impact of the next recession. The federal deficit is far more sensitive to economic growth than it is to political decisions on Capitol Hill. Budget planners recognize they can't predict the timing of the next downturn, so they project growth rates that supposedly reflect an average of both recession and recovery periods.That technique creates opportunities to play political games. The Congressional Budget Office found that President Clinton's plan to balance the budget in 10 years would not work. CBO said slightly slower growth rates would be more reasonable. With CBO's more conservative economic numbers, this most recent version of the administration's budget would still leave a deficit of $209 billion in 2005.
Real life is not an average. When the economy sours, the deficit will soar regardless of the intention in Congress. Budgeteers will go back to their drawing boards. History shows a recession is virtually inevitable in the 7 to 10-year cycle legislators are now considering.
Moreover, politicians so far have been unwilling to confront fully the burgeoning transfer payments that are the heart of the budget dilemma. Transfer programs mostly take money from people who work to give to those who do not. Federal transfer payments were $700 billion in 1994. State and local transfers came to $300 billion - mostly paid with federal grants. Transfers now come to about 14 percent of GDP, double the proportion in 1970.
By contrast, real federal purchases of goods and services were 6.2 percent of GDP in the first quarter of 1995, down from an average of 8 percent during the Reagan and Bush administrations, and the lowest since 1935.
Despite the fact that Congress already has cut federal purchases as a share of the economy to Depression levels, budget planners continue to focus on such programs - especially the Depublicans. Meanwhile, Social Security retirement benefits, by far the largest transfer program, are allegedly "off the table."
While there is no magic cure for the federal deficit, there are steps that would put the Treasury on the road toward sustainable balance. For instance, Congress could limit the long-term growth of transfer payments to the inflation rate plus the gain in population.
Freezing real per-capita transfer payments at current levels might not be sufficient to balance the budget, but it will surely be a necessary component of any successful effort. In the last five years, per-capita transfer payments, adjusted for inflation, rose at a compound rate of more than 4 percent.
The probability of action to cap real per-capita transfers appears close to zero. Not only is the $350 billion-a-year Social Security system out of bounds, but both the White House and leaders in Congress still claim they can protect the program as it stands today.
That is improbable. In a memo to Mr. Clinton, Alice M. Rivlin, director of the Office of Management and Budget, warned that "Social Security was currently projected to run out of money in 2013 . . . as the baby boom hits its rocking chairs." Ms. Rivlin added that if current laws remain in effect, the United States would run a deficit of $4.125 trillion in the year 2030, or 10.4 percent of the $39.7 trillion GDP the administration is projecting. To
put this warning in context, the federal deficit was 2.15 percent of GDP in the first quarter of 1995.
Demographic trends already in place will create the crisis. Census Bureau calculations show that the ratio of workers aged 16 to 64 (who pay taxes) to retirees 65 and older (who collect benefits) will decline from 5-to- 1 today to 3-to-1 by 2030.
An important subplot in the budget debate is the notion that for the last 15 years the gap in income between the rich and poor in America has been getting wider.
Washington Post reporter Steven Pearlstein presented reams of statistics to bolster this argument, but he forgot the most important figure: In the last 15 years, while the income gap was seemingly widening, government transfer payments totaled $8.8 trillion. At an annual rate, transfers rose to $980.7 billion in the winter of 1995 from $289.4 billion in first quarter 1980, an 8.5 percent rate of gain.
The fact that government shuffled $9 trillion of income from workers to nonworkers only to make the distribution of income less equal should lead policy-makers to pause and reflect. A cynic would suggest that perverse incentives in the transfer-payment process were creating problems they were designed to correct.
Obviously, voters will have the last word. Workers, particularly those in their 30s and 40s, understand they have little chance to recoup the real purchasing power of the taxes they pay to support today's retirees. In an echo
from the 1960s, they seem to be saying "Hell no, I won't pay," regardless of whether people appear to have "earned" their government checks. This is the real issue in the budget debate.