Essay: How to Get the Deficit Under $100 Billion

Martin Feldstein, who wrote the Essay that follows, served from September 1982 to July 1984 as chairman of the Council of Economic Advisers in the Reagan Administration. One of the leading conservative economists, he nonetheless differed with the White House on several key budget and tax issues, in particular, what he saw as the grave danger posed by large deficits.

There is now widespread agreement in the U.S. that the budget deficit is the most serious problem facing the American economy. This year it will exceed $200 billion, nearly $1,000 for every man, woman and child in the nation. Without tough legislative action, the deficits will continue to increase and will reach nearly $300 billion a year by the end of the decade. If the U.S. is to continue to enjoy a healthy economic recovery and a rising standard of living, these huge deficits must be eliminated.

A $200 billion deficit this year means that the Government is adding $200 billion to our national debt--an increase that some day must be repaid or that we and our children and our children's children will have to pay interest on forever. The deficits projected for the next several years would increase the national debt by more than $1 trillion between now and the end of the decade. If this is allowed to happen, the increase in this decade alone will be greater than the entire rise in the 200 years since this nation began.

Any addition to the national debt increases the Government's future annual interest costs, even if the interest rates remain unchanged. A $200 billion increase in the national debt raises the Government's annual interest cost by some $20 billion a year. That makes the one-year increase in the Government's annual interest bill more than the entire cost of the food-stamp program. The interest that the Government pays on the national debt has soared from less than $130 per person in 1960 to more than $500 per person this year, and is heading to an annual total of almost $750 per person by 1989 even when expressed in constant 1985 dollars.

By raising interest costs on the national debt, large budget deficits make future tax increases inevitable. By 1989 nearly half of the income taxes that we pay will be used to finance interest payments on the Government debt.

Continued large deficits will also mean a slower rate of economic growth and a reduction in our future standard of living. Experience shows that the key to raising living standards is investment. New factories, offices and stores and new machinery and equipment increase the output produced by each employee. This higher productivity then permits the noninflationary increases in wages and salaries that enable employees to afford a higher standard of living. Budget deficits undermine such increases because they require the Government to borrow funds that would otherwise be available to finance investments in plant and equipment and in housing. The projected annual deficits of 5% of G.N.P. mean that Government borrowing would absorb more than half of these funds.