Cato Policy Analysis No. 13 August 10, 1982

Policy Analysis

The Reagan Budget: The Deficit that Didn't Have to Be

by David Boaz

David Boaz is vice president for public policy affairs of the Cato Institute


Executive Summary

The stalemate over the federal budget has given us all plenty of time to consider the budget in its entirety. The simple fact remains: The budget is too large. The federal government is too expensive and too powerful. That point, however, seems to have been lost in congressional discussions. Members of Congress and the administration are charging "spendthrift" or "callous to the poor" -- and all for what? For two or three percent of the federal budget. The narrow parameters of the budget debate are rarely noted; it's more interesting, perhaps, to portray it as a titanic struggle over fundamental issues, even though the actual point of dispute is whether to increase the defense budget by 6.5 percent or 8 percent (plus inflation) and whether to increase transfer payments in July or October.

The problem, unfortunately, is larger than that. If we're lucky, 1983 expenditures will come in at just under $800 billion. At that rate, expenditures will have risen $143 billion in just two years. The following chart shows the growth rate of federal spending in the past 20 years.

Table 1
Year Federal Spending Percent Change Percent Change Since 1961
1961 $97.8 - -
1965 118.4 21 21
1969 183.6 55 88
1973 245.6 34 151
1977 400.5 63 310
1981 657.2 64 572
1982 est. 742.3 13 659
1983 est. 827.0 11 746

(Source: Budget of the United States Government, 1983; Congressional Budget Office estimates)

Spending has already risen more than 500 percent since 1961, and it will undoubtedly rise more than 700 percent by 1983. The increase has been continuous in both Democratic and Republican administrations, with the budget roughly doubling under Kennedy-Johnson and more than doubling again under Nixon-Ford. The 64 percent increase in four years under President Carter was only slightly more rapid than the 117 percent in eight years under his Republican predecessors. Of course, inflation accounts for some of the rise, as Table 2 demonstrates.

Table 2
Year Federal Spending (constant 1981 Dollars) Percent Change Percent Change Since 1961
1961 297.3 - -
1965 341.3 15 15
1969 455.5 34 53
1973 502.6 10 69
1977 601.1 20 102
1981 657.2 9 121
1982 est. 690.6 5 132
1983 est. 719.7 4 142

(Source: Budget of the United States Government, 1983; Congressional Budget Office estimates; Bureau of Labor Statistics)

While the rise in spending seems not quite so dramatic when we account for inflation, the fact remains that federal spending has more than doubled in real terms since the Kennedy administration, and the increases are not significantly different today from their earlier levels. Indeed, the real increases between 1981 and 1983 are likely to be larger than the increase from 1980 to 1981, President Carter's last full budget.

In any case, it is not altogether clear that the government should be given the benefit of the doubt in this issue by adjusting for inflation. A government, after all, that demands more revenue because inflation has eaten away its spending power is rather like a man who kills his parents and asks the court for mercy on the grounds that he is an orphan. Government, through its monetary policies, causes inflation, and most people pay the price. If government actually saw its spending power decline by the rate of inflation, we might see a quick end to inflation.

The point of these depressing numbers is simply to illustrate the severity of the problem -- to put it in perspective. There has been a mammoth increase in the size and power of the federal government in the last 20 years (which is certainly not to say that the federal government was small enough in 1961, but only to show relatively rapid recent growth).

Today the situation continues to deteriorate. While the average American's standard of living has been dropping for the past five years, government spending in real terms is still growing. Budget plans proposed by the House and Senate Budget Committees call for even more revenue and expenditures than President Reagan's proposal.

Soaring military spending for overseas commitments and the refusal to make significant cuts in most major domestic programs have created the worst deficits in American history. The administration optimistically projects deficits of $104 billion in 1983 and $84 billion in 1984, allowing itself to at least claim to be "on the right track." The Congressional Budget Office offers a somewhat bleaker picture: deficits of $116 billion in 1983 and $105 billion in 1984. One of the most disturbing aspects of the situation, of course, is that the estimates are getting worse. Last September, for instance, the Office of Management and Budget predicted a 1983 deficit of $72 billion. Its April prediction was $102 billion. At the end of July Treasury Secretary Donald Regan offered a projection of $110-$114 billion.

The political reaction to all this would be amusing if it weren't so serious. Liberal Democrats who scoffed at deficits for decades, blandly reassuring us that "we owe it to ourselves," have suddenly discovered the virtues of a balanced budget. Every night they appear on the network news to denounce the Reagan deficits. However much we may speculate on the political motivation behind their newfound concerns, there is at least the possibility that they have gotten older and wiser. Unfortunately, we can't say that for the conservatives who have suddenly lost their concern over deficit spending. Some of the most respected conservative economists in America, who happily went to work for the most conservative president in many years, have found themselves repudiating their lifelong positions. William Niskanen, a member of the Council of Economic Advisers, told a December 1981 conference sponsored by the American Enterprise Institute that "in general, concern about the deficit has been misplaced....There is no direct or indirect connection between deficits and inflation." The Council's chairman, Murray Weidenbaum, said that the real concern was not the size of the deficit but its gradual reduction.

Unfortunately for the White House, the public seems not to be buying its new arguments. Interest rates, which reflect the expectations of millions of borrowers and lenders, remain at historically high levels. The president misunderstands the nature of the economy when he appeals to a small number of "Wall Street leaders" to bring interest rates down. As long as those millions of borrowers and lenders anticipate that excessive deficits will lead either to the crowding out of private borrowers or to monetization and inflation, even dedicated Reagan supporters on Wall Street would not be able to force interest rates down. The stock market, which similarly reflects the expectations of millions of traders, has also been in the doldrums throughout the budget stalemate.

People around the country seem to understand what no one in Washington will admit: The budget is out of control. The growth of government is out of control. We seem to have lost our perspective in the last 20 years, as government has taken on more and more functions, and members of Congress have made more of the budget "uncontrollable" in an attempt to absolve themselves of blame for its growth. The program proposed in this paper is not just a list of budget cuts. It is something that needs to be done to solve our national crisis.

With all the heated arguments about Reaganomics in the last year and a half, the following may seem a startling assertion, but it is true: There is no Reaganomics. There is a new style of rhetoric in Washington, a lot of talk about tax cuts, getting the government off our backs, reducing the size of government. But it is all talk. Taxes and spending are going to be higher every year. The rhetoric is different. The policies are the same.

The change that we need in order to reduce the size of government and get the economy growing again is to balance the federal budget at a lower level.

At least in the short run, the deficit can be reduced by either budget cuts or tax increases. However, the recent growth in federal spending has been accompanied by tremendous increases in the individual tax burden.[1] People have a right to spend their own money, a right which is being increasingly denied them as inflation moves them into higher tax brackets. Taxes have also clearly depressed the performance of the economy in the last decade as profits and incentives were reduced. Moody's Investors Service recently warned that raising taxes was not the way to balance the budget:

Efforts to balance the budget via higher income taxes could have a devastating effect throughout the economy. The expected drop in interest rates could well be meaningless in the long run if the economy's underpinnings continue to deteriorate -- as we would expect them to do under greater tax burdens....The worst-case scenario might be that higher taxes would substantially deepen the recession and result in even greater budget deficits, thus leading to economic shambles.

If we reject higher taxes, then we have only one alternative for reducing the deficit: spending cuts. So far, most of the talk about spending cuts in Washington has been just that: talk. The Reagan administration's own prediction is that federal spending will increase by about $73 billion in 1982 and by another $37 billion in 1983. Spending in FY 1983, the first real Reagan budget, will be about $110 billion higher than President Carter's last full budget. Outside estimates, of course, are for even higher spending. Though the headlines have been full of proposed cuts the last few months, Congress's First Budget Resolution calls for even higher spending than in the Reagan budget.

What we need, however, are budget cuts. For the sake of both individual freedom and economic prosperity, we need to reduce the size and power of the federal government. That can only be done by making real and significant cuts in federal spending.

Though no member of Congress seems willing to propose real budget cuts, there is evidence of public support for such a move. A recent Sindlinger and Company poll showed that 40 percent of the public thought the federal budget had been cut "too little" with only 19 percent saying "too much."[2] And a 1980 poll by the Opinion Research Corporation asked people, "How likely do you think it is that the overall size and cost of U.S. government can be cut substantially?" Twenty-six percent answered "very likely" and 31 percent said "somewhat likely." Asked how much the then projected $616 billion for 1981 could be cut, 29 percent said at least $100 billion and 33 percent said $50 billion.[3] One would assume that the numbers would be at least as high for a budget that is now approaching $800 billion.

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