Pie in The Sky

By Barbara Rudolph

As the 100th Congress begins a new year of work, it immediately faces an economic dilemma that is agonizingly old: what to do about the monstrous and dangerous U.S. deficit. Despite all efforts in years past to control it, the gap between federal spending and revenues grew to a record $221 billion in fiscal 1986. This week, as President Reagan sends Congress his 1988 budget, the annual battle over the deficit gets under way. Behind the barrage of statistics and beyond the parade of partisan interest groups fighting for bigger shares of the federal pie, the issue at stake is, quite simply, the well-being of the U.S. economy. The outcome of the budgetary wrangles could have a profound effect on taxes and take-home pay, interest rates and the cost of a house, the health of the stock market and the value of the dollar.

In many ways Reagan's 1988 budget seems like a wishful blueprint for a miracle. The President proposes to slash the deficit to $108 billion, the 1988 target prescribed by the Gramm-Rudman law, without a tax increase and while still boosting defense spending by 3%, after adjustment for inflation. The deficit reduction would come entirely through further cuts in social and other nondefense spending, along with short-term expedients like sales of Government assets. But private economists are almost universally doubtful that the formula can work. Charles Schultze, a Brookings Institution scholar who was President Carter's chief economic adviser, sees "no way" that the 1988 Gramm-Rudman goal can be met without a tax increase.

As in the past few years, Congress is likely to reduce the President's defense request and insist on fewer cuts in social programs. Since the Democrats have taken control of the Senate and already command the House, Reagan will find it more difficult than ever to get a budget that even remotely resembles his original plan. Though James Miller, Director of the Office of Management and Budget, maintains that the President's budget is "eminently doable," critics are labeling it "dead on departure."

Congress is still weary from its struggle with the 1987 budget. In the end the lawmakers decided to let federal spending pass the once inconceivable $1 trillion mark this year. Their final spending bill anticipated a deficit of $154 billion, as permitted by Gramm-Rudman. But the Congressional Budget Office now projects a 1987 deficit of $174.5 billion, and some private economists say it may go as high as $190 billion.

For 1988 Reagan has proposed spending $1.02 trillion against expected revenues of only $916 billion. He thus becomes the first President to send a trillion dollar budget to Capitol Hill. His proposals call for the deficit to be cut to the $108 billion Gramm-Rudman target through a combination of $42 billion in spending reductions and revenue increases. Some $20 billion of that would be trimmed from domestic programs, including mass-transit aid, housing assistance and farm subsidies. Social Security, as usual, remains untouchable.

The other $22 billion would come in part from gimmicks that the White House used to call revenue enhancements. One proposed strategy is the sale of Government-owned assets to private investors. Among items that could make it to the auction block are the Amtrak rail system and several regional power- marketing administrations, which sell electricity to local utilities. Reagan is putting forward a plan in which the Government would sell $8 billion worth of the loans it has made to students, small businesses and other debtors. Private investment companies would buy the loans and then collect the interest and principal payments.

Many of these ideas have been floated before -- and sunk -- on Capitol Hill. So opposed has Congress been to the sale of regional power-marketing administrations that the lawmakers last year passed a bill forbidding the White House even to study the subject. Critics contend that the Government is not really bolstering its revenues through sales of assets, since the transactions result in the loss of future income like interest payments on loans. Says Rudolph Penner, head of the Congressional Budget Office: "It's a one-shot deal that doesn't mean a long-run cut in the deficit."

One of the touchiest budget issues may be military spending. Most Democrats do not want to appear soft on defense, which could be politically damaging. Still, many Democrats, along with a number of Republicans, remain convinced that the U.S. cannot afford as much of an arms buildup as Reagan has proposed. Says a Capitol Hill staffer: "If there were a way to provide 3% real growth for defense, you can bet that the Democrats would do it. But the cupboard is bare. There's nothing there."

An even more politically explosive topic is farm aid. U.S. farmers, who are still mired in a deep depression, enjoy perennial clout on Capitol Hill, but Reagan wants to cut the farm budget by several billion during the next five years. The Administration seeks to cut target farm prices, which determine the size of subsidies, by 10% a year. It would also like to toughen up the rules on maximum payments to ensure that the bulk of the aid goes to farmers who need it most. Says OMB Chief Miller, alluding to the movie Country: "A lot of money goes to people who are not Jessica Lange on the farm."

Leading the congressional efforts to deal with the deficit will be the chairmen of the two budget committees. On the Senate side, the budget panel will have a new chief, Democrat Lawton Chiles of Florida. Chiles is no stranger to the budget wars. In years past he worked so closely with the former Republican budget chairman, Pete Domenici of New Mexico, that the two men became known as the Bobbsey Twins. In the process, Chiles earned a reputation as a sincere and often effective budget cutter.

The House Budget Committee will be led for the third year by William Gray of Pennsylvania. Gray has been willing to stand up to the White House in the budget debate, and this year he seems more determined than ever to challenge Reagan's priorities. Says Gray: "What Congress is saying, Mr. President, is if you want to spend more money for the Pentagon and foreign aid, you've got to pay for it out of new revenues and not out of decimating education, health care for the elderly and nutrition for children."

In an interview with TIME, Gray suggested that one way of raising revenue might be to impose a "temporary" surcharge on foreign imports that would last no more than three years. Gray estimated that higher fees on imports could raise anywhere from $10 billion to $30 billion annually, depending on the type of surcharges imposed. The duties would have the beneficial side effect of reducing the trade deficit and helping American industries, but would surely invite retaliation by other countries and might worsen the U.S. trading position in the long run. Many economists advocate a more focused tax on imported oil, which would not only boost revenues but also encourage conservation and reduce dependence on foreign supplies.

The least likely step is an income-tax increase. Last month Texas Representative Jim Wright, the incoming Speaker of the House, suggested that the tax-rate cut in the new reform legislation be delayed for the wealthiest Americans. Wright's notion was promptly criticized by members of both parties, and he has not broached the subject since.

More and more economists and Congressmen believe the current Gramm-Rudman target for fiscal 1988 is unrealistic and needs to be revised. If Congress made too drastic a cut in the deficit, they argue, it could throw the sluggish economy into a recession. Says C. Fred Bergsten, director of the Washington- based Institute for International Economics: "I don't think anybody believes that it is either possible or desirable to meet the Gramm-Rudman target." Admits Chiles: "There is nothing magic about $108 billion. But I think you have a problem if you abandon it without something better in its place." House Budget Chief Gray and incoming Senate Majority Leader Robert Byrd have also suggested that Gramm-Rudman may have to be revamped. But the White House would probably object. Says Miller: "If we go back on Gramm- Rudman, the deficit will shoot right up again."

While economists oppose cutting the deficit by too much, too fast, they agree that doing nothing to diminish the level of federal red ink could be equally dangerous. Massive Government borrowing soaks private savings out of the economy, leaving fewer funds available for business investment. Most ^ ominous, the national debt may exceed $2.2 trillion this year. The interest payments on that gargantuan sum already threaten to put an intolerable burden on future generations. Says Roger Noll, a professor of economics at Stanford: "What we will see happen as a result of continuing deficits is the slow, persistent erosion of the health of the U.S. economy."

Like clean air and water, a reduced budget deficit is a public good: everyone benefits from it. At the same time, though, it is in each person's private interest to fight to defend his particular piece of the Government spending pie. Ultimately, America's prosperity will depend on whether its leaders have the courage to put the public good above private interests.

With reporting by Bernard Baumohl/New York and Jay Branegan /Washington