Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream. - book reviews

National Review, Feb 21, 1994 by William A. Niskanen

Facing Up: How to Rescue the Economy from Crushing Debt & Restore the American Dream, by

Peter G. Peterson (Simon & Schuster, 411 pp., $22)

PETE PETERSON, a son of Greek immigrants, has written a major puritan sermon on the theme "How to Rescue the Economy from Crushing Debt and Restore the American Dream." His subthemes: Don't borrow to finance consumption. Save for a rainy day. Think of the children. We are all sinners and we must all sacrifice.

These maxims merit reinforcement, especially since too many preachers have gone on to more exotic issues. And for the most part, Mr. Peterson's analysis of the major problems of the U.S. economy is correct, though incomplete. His story can be summarized as follows: Most of our economic problems are attributable to a very low rate of productivity growth since 1973, in turn reflecting a slow growth of private and public capital. The combination of a decline in the private saving rate and an increase in the federal deficit, primarily in the 1980s, sharply reduced our net saving rate; we were able to maintain a slightly higher domestic investment rate only by an increase in borrowing abroad.

So far, so good. The Peterson story, however, is not only incomplete but somewhat misleading. Incomplete because he does not mention the substantial decline in student test scores since 1963 or the explosion of health, safety, and environment regulations beginning in 1970. Misleading because he repeats several conventional myths about the 1980s. Productivity growth increased in the Reagan years compared to the dismal record of the Ford-Carter years. And the increase in the federal deficit was not due to the increase in federal non-interest outlays or an erosion of the federal revenue base. Examine the data in the chart below for 1979 and 1989, the cyclical-peak years that bracket the Reagan era.

The increase in the deficit was smaller than the increase in net interest payments, a consequence of the temporary increase in the outlay share during the defense buildup and the temporary reduction in the receipts share due to the 1981-82 recession. As of FY1989, the increased deficit was the price of ending the Cold War and reducing inflation, not of a public or private consumption binge.

The deficit in the last Reagan budget, however, was still too high, and the huge increase in the federal debt was one of the major adverse legacies of this period. There then followed the Bush years. Total non-interest outlays increased sharply, despite a substantial reduction of real defense spending. And slow economic growth reduced the growth of federal receipts, despite a substantial increase in tax rates. The difference is that Mr. Bush had nothing to show for the $1 trillion of federal borrowing on his watch.

Pete Peterson, Ross Perot, and others deserve credit for making a major issue of the federal deficit. They are right to define the deficit as a moral issue, a form of "fiscal child abuse," a transfer to our parents and ourselves at the expense, but without the consent, of our children and their children. A valid case can be made for a deficit to finance a war or a temporary surge in public investment, or to offset a temporary loss of revenues during a recession. But there is no justification for the large, sustained deficits of recent years. Mr. Peterson and others also deserve credit for promoting a dramatic but feasible goal--balance the federal budget by the year 2000-- and for developing a specific plan to achieve that goal. However, one can share that goal, as I do, without endorsing all of the provisions of the Peterson plan, because the economic and other effects are not independent of the means by which any specific deficit target is reached.

Mr. Peterson's budget plan is best described as "Clinton plus." The plan, for example, endorses all of the Clinton spending programs in the FY1994 budget plus most of the Clinton health plan, increased public investment, and increased spending for the elderly and disabled poor. The major spending reductions are a "graduated entitlement benefit reduction" above the median income a gradual increase in the Social Security retirement age, an unspecified reduction of real spending for discretionary domestic programs, lower federal pension benefits, and lower spending on farm-support programs. Similarly, the plan endorses the major tax changes in the FY1994 budget plus a 5 per cent national retail sales tax (excluding food, housing, and education), a 50-cent-per-gallon tax on gasoline, higher taxes on alcoholic beverages and tobacco, a limit on the home-mortgage-interest deduction, and increased user fees. Some of the increased revenues would be offset by a permanent R&D tax credit, worker-training incentives, and the indexation of capital gains on new investment. The Peterson plan, like the Clinton plan, involves mostly taxes. In the year 2004, the increased tax revenues would be roughly 1.7 times the net reduction in non-interest spending (including those changes approved in the FY1994 budget and measured relative to the January 1993 CBO baseline).