The Federal Deficit

Once upon a time, there was a country that had almost everything. Businesses in this blessed land often made so much money that they could afford to pay robber-baron wages to mere managers. The medical system offered first-class care to most citizens while turning physicians into millionaires. The Social Security fund distributed inflation-indexed payments to the elderly, regardless of need. No new weapon was too costly for the military. The civilian space program, in spite of some setbacks, was dazzling. The farms produced more food than the people could possibly consume. Best of all, these and many other benefits were provided or subsidized by the government at far less than their overall cost. The nation had problems -- poverty, homelessness, drugs, declining cities -- but on the whole, what a place it was!

Once upon a time. In America. In the '80s.

Welcome to the '90s. The bills for the good times are long overdue, and politicians are thrashing about, wondering what went wrong. By how much did federal spending outstrip revenues in the past 12 years? Several measurements are possible. For example, cumulative budget deficits over the period added more than $2 trillion to the national debt. Or you can look at the annual record and watch the deficits mount. In the Reagan-Bush years to date, the average annual deficit has been about $200 billion. In six of those 11 years, the actual amount was well in excess of $200 billion, and this year -- despite the much ballyhooed 1990 "budget agreement" between Congress and the White House -- it will explode to some $400 billion.

Economists prefer to think of federal deficits in terms of their percentage of the gross domestic product. But here too, the news is not good. Back in the days of Presidents Kennedy, Johnson and Nixon, deficits generally hovered at a relatively harmless 1% or 2% of gdp, except for a brief uptick to 3% at the end of the Johnson Administration to help pay for the Vietnam War. In contrast, during the Reagan-Bush years, the deficit's share of gdp shot up to between 3% and 7%, meaning that government red ink was weighing far more heavily on the economy -- even on a rapidly expanding one -- than ever before in peacetime, sopping up credit that would otherwise have been available to the private sector and driving up interest rates. Even if this year's estimated deficit of $400 billion turns out to be a one-year ceiling-breaker caused by the recession, much of the underlying deficit is becoming self- perpetuating. This year 14% of federal payments -- or about $200 billion -- will go not for goods or services but merely for interest on the $3.9 trillion national debt. Since the bipartisan Congressional Budget Office projects annual deficits of $200 billion to $300 billion or more during the first decade of the 21st century, taxes to finance the rolling debt are almost certain to be much higher on tomorrow's workers than on today's.