Remember the Deficit?

By Richard Lacayo

Congress was just days away from its August vote on his deficit-reduction package and Bill Clinton, still a few votes shy of victory, was working the phones, pleading with wavering members of the House. When he put in his call to Representative Timothy Penny, a Minnesota Democrat who wanted deeper cuts than the White House plan of $496 billion over five years, Clinton got right to the point. Not only would he propose more reductions in the fall, the President promised, but he would welcome proposals from Congress for further cuts. "This is just the first step," Clinton assured him.

When the White House took the second step last week, it barely toddled forward. At a press conference, Clinton outlined what he said was an additional $30 billion in budget trims over the next five years, an estimate that Administration experts quickly admitted might be too large by half. Either way, a good chunk of the savings -- about $10 billion -- would be achieved through Vice President Al Gore's plans for "reinventing government" and reducing its cost. Gingerly picking through programs like the much ridiculed support payments for mohair-goat herders would yield an additional $1 or $2 billion.

Was that the whole thing? Deficit reduction on that order is how the national debt grew from $994 billion when Reagan came into office to $4.4 trillion when Clinton arrived. Though the White House also announced last week that this year's deficit will add just $255 billion -- not the $322 billion the CBO predicted in January -- even that figure amounts to an uncomfortable 4.1% of gross domestic product. So Penny has taken Clinton at his word about welcoming more input from Congress. He and Ohio Republican John Kasich are sponsoring a proposal for $103 billion in further cuts over five years. In the Senate, Bob Kerrey of Nebraska, who gave Clinton his one-vote margin of victory on the budget, is trying to patch together a $100 billion deficit- cutting plan.

Give them all credit for taking on a thankless task. The Penny-Kasich House version includes a politically risky reduction of Medicare payments for recipients who earn $75,000 or more in adjusted gross income. Penny can afford the risk -- he has already announced that this will be his last term in the House. And Kerrey, who has no plans for retirement soon, knows what he's up against. "I could walk into the Senate with a headband in Japanese lettering, salute the Emperor and go to my death offering major deficit reduction," he laments. Should a ceremonial sword be the prize for lawmakers who dare to give voters what voters claim to want?

/ However imprecise his budgetary math, Ross Perot can be credited with getting people to think seriously about deficit cutting. Even more earnest thinking is now coming from the Concord Coalition, a year-old group headed by three men safely out of the Election Day line of fire: Nixon-era Commerce Secretary Pete Peterson and two ex-Senators, Warren Rudman of New Hampshire and Paul Tsongas of Massachusetts, whose presidential campaign peaked on the eat-your-spinach message that everyone must sacrifice to bring the deficit down. Claiming 100,000 followers in 50 states, they aim to make it easier for politicians to make painful budget cuts by educating voters as to why they must grin and bear it. Or as Tsongas puts it: "Congress will do what is courageous when it is no longer courageous ((to do it))."

Their message is short and sharp. The deficit is a powerful drag on the economy, they say, that will require a radical retrenchment on the entitlements -- mostly Social Security, Medicare and farm-support payments -- that make up more than half of all federal spending. In a new book, Facing Up: How to Rescue the Economy from Crushing Debt & Restore the American Dream, Peterson holds out the bitter pill. "We can't do it without the middle class and we can't do it without going at entitlements head-on."

The Concord jeremiad goes this way. Even if Clinton's original budget package had passed unchanged, by 1997 the deficit would be just $140 billion lower than what it otherwise would have been. After that it would rise again rapidly, reaching $465 billion by 2004, about 4.6% of that year's projected GDP. The President's deficit-reduction plan fell short because its main element was a tax increase on a sliver of American households -- the 1.2% earning about $180,000 or more.

The Concord Coalition would aim for a much broader target. To reach a balanced budget by the year 2000, it would impose a strict means test on entitlements. Households would lose about 10% of their federal benefits of whatever kind for every $10,000 of income above $40,000, up to a maximum of 85% for those making $120,000 and up. The 58% of Americans whose incomes, including entitlements, range up to $40,000 would lose nothing. On the revenue side, the Concord plan calls for a 50 cents-per-gal. gas tax and a $12,000 cap ($20,000 for joint filers) on tax deductions for mortgage interest, a move that would affect just 5% of homeowners.

Not all economists agree that budget cutting on that scale is necessary or desirable. "Coming out of recession, there is a tendency to exaggerate future deficits because you don't think you'll ever get out of the recession," says Alan Reynolds, director of economic research at the conservative Hudson Institute. Allen Sinai, chief economist of Boston Co. Economic Advisors, thinks that nearly half the current deficit is due to an underperforming economy, which results in lost tax receipts and extra spending on unemployment. Moving too sharply to balance the budget would "pour salt on the wound," he says. "Modest budget restraint is the best way to go, so that the recovery is not sacrificed."

The economy does give signs of crawling into the light. The Commerce Department reported last week that GDP grew in the third quarter at an annual rate of 2.8% -- up from 1.9% in the second. But that gathering speed is precisely why now is the time to make cuts, says economist Rudy Penner, a former CBO director. "The economy is growing. If we don't do it now, then after a while the only way we'll be able to pay the debt is to print money."

Their critics say that the Concord group's proposed cuts for retirees violate the trust of people who paid into Social Security and Medicare for years. The Concord argument rests strongly on a moral plea of its own: older Americans should not burden their children and grandchildren with the task of paying off the debt. Peterson likes to quote Thomas Jefferson's observation to James Madison that passing on debt to future generations is "swindling futurity." Is it possible to make seniors sit still for such talk? Perhaps it is. The sky didn't fall when Congress approved the Clinton proposal to tax higher-income retirees on 85% of their Social Security benefits. Tsongas claims to have given his deficit-slashing speech 70 times this year to diverse audiences without resistance. "There is no doubt in my mind that the country would rally to a zero-deficit banner," he says.

The rally will have to grow substantially before the gamesmanship in Washington is over. Next month Congress is expected to consider the ultimate feel-good measure, a balanced-budget amendment to the Constitution, which lets lawmakers praise cutting without pointing the knife. Among the sponsors are 65 members of the House who voted in August against both Clinton's deficit- reduction package and the Republican alternative. But why should politicians stop playing deficit games before voters do?

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With reporting by Wendy Cole/New York and Adam Zagorin/Washington