The author has chosen to use a question-answer format in order to make the often complex subject matter, easier and more enjoyable to read. Q and A is not a dialogue bewteen real people -- the author has provided the dialogue for both Q, standing for Quaero, which is Latin means "I search for" and A, Auctor, which in Latin means "person responsible."
Q- I understand you have been following the federal budget process closely for the past ten years. How did you get interested in a subject which most people find extremely boring as well as complicated?
A- My interest can be traced to 1982 and the formation of the Grace Commission.
Q- What is the Grace Commission?
A- The Grace Commission, originally known as the President's Private Sector Survey on Cost Control was established in February 1982 when President Reagan asked prominent businessman, J. Peter Grace to head a commission for the purpose of conducting a comprehensive study of government spending. The Commission was privately funded and consisted of 161 high-level private business executives familiar with cost control and efficiency.
When the Commission began its work I eagerly anticipated the results, naively thinking they would come up with a relatively quick and easy way out of our national debt problems.
Q- It sure looks like they didn't do their job.
A- Oh but they did. The Commission originally came up with 2,478 recommendations, which if implemented, would have saved $424.2 billion over three years.
Q- Then they didn't follow through?
A- More than half (1,426 proposals) had been implemented by the end of fiscal year 1987.
Q- Then why does our debt keep growing?
A- Eliminating waste is only one part of the problem. Our elected officials have continued on an unprecedented spending spree. You've no doubt heard that it took 204 years to accumulate the nation's first one trillion of debt but only 4 years to accumulate the second trillion.
Q- Which four years?
A- 1981 -1985. The debt ceiling was raised in 1985 to 1.823 trillion and then again in 1986 to 2.3 trillion. But, as was so often said during the eighties, "You, ain't seen nothing yet! " With nobody seeming to care, our elected officials kept spending. In 1990 the ceiling had to be raised to $3.5 trillion but the spending continued so that in 1991 the debt ceiling quietly passed the $4 trillion mark.
Q- You're right. I didn't hear anything about it, and if I had I wouldn't know what to make of it. This may sound stupid, but I doubt that I'm the only one confused about how the deficit is measured. It seems there are a lot of very different numbers out there all claiming to be the deficit.
A-You're absolutely right to be confused and your confusion is the result of intentional obfuscation.
There are baseline deficits, policy deficits, on-budget deficits, off-budget deficits, deficits which compare last year's spending with this years, deficits that count any increase less than the rate of inflation as a cut, deficits that count any spending less than last year's as a cut, deficits that count the social security trust fund surplus and deficits that do not, deficits that include the cost of the war in the Gulf and the savings and loan bail out and deficits that don't, deficits that include government liabilities (in the form of guaranties-- loan, deposits, mortgages---and promises which must be kept to pay health and retirement benefits to federal employees or veterans or other entitled beneficiaries) and deficits that don't.
And then there is the debt---the accumulation of annual deficits. If you were to count future liabilities of the federal government as debt, you'd get another and even more astronomical figure.
Q-It's so confusing I'm convinced nobody really understands the deficit and certainly nobody who comes close, like economists and politicians, is really doing anything about it so I wonder-----do deficits really matter?
A- There are as many opinions as there are economists. And I'm convinced that's all they are--opinions--no matter how many charts and figures they come up with. Some economists insist that excessive government spending encourages demand which reduces savings, drives up interest rates and inhibits investment and economic growth.
Q- I've heard that it makes no difference, as long as government is going to spend anyway, whether the spending is financed via borrowing or taxes.
A-Tell that to a taxpayer---he or she can immediately see the difference!
Q- You're just saying taxes hurt. But it's either bite the bullet now or have future generations shoulder the burden later. If you have a preference between taxing or borrowing, it is probably dependent on whether or not you have children.
A-As far as I'm concerned the economists can argue among themselves and try to determine through economic models the effect of deficit spending as long as they like, but I have my own reasons to fear deficits. My objection is philosophical---I don't want to see an expanding role for government and the accompanying expansion of power over the lives of individual citizens. Deficit spending by the government means an expansion of government's role in society which means a crowding out of the more productive and efficient private sector.
Q- I think a lot of us out here don't understand the squabbling that goes on with the budget every year.
A- Maybe it doesn't seem important because so many ordinary citizens don't have their own budgets under control; they are in debt because they fail to match their personal income and outgo. That's what it's all about--- making spending and revenue come out even. The federal budget entails balancing defense and non-defense, protecting low-income programs and putting tax dollars into programs members of congress think are worthwhile.
Q- The problem is all proposed and ongoing programs are considered to be worthwhile.
A- But members of congress are so far unwilling to collect enough to pay for them all. Thank goodness!
Q-Who decides how much revenue to collect?
A- Congress makes that decision. Our forefathers realized every government is tempted to spend money, but thought the congress would be more likely than the executive branch to keep taxes low. Congress was to give the executive a specific amount of money and the executive was to decide how to allocate those funds.
Q-How does congress reach a decision as to the proper amount to collect?
A- In recent years the determing factor has been need. However the definition of need is dependent on the legitimate function of government which has been debated for over two hundred years.
Q-Why can't congress simply collect a set amount of the national income each year? Say ten percent. Several churches tithe.
A- Many people actually believe that giving the government a set sum and making our elected representatives tailor needs to that sum, as private citizens must do with personal budgets, is the correct way to proceed.
Q-I'd buy that idea. Communism failed when it attempted to fill everyone's needs.
A- You're absolutely right: We're bound to run into problems if we allow taxes to be based on infinite needs instead of on finite revenue. Even if we could limit and define needs, the revenue could not be accurately determined in advance because so much depends on guess-timates of future unemployment, economic growth, interest rates, inflation and so forth.
In a collectivist economy, public needs enjoy the same sort of built-in priority that private consumption enjoys in a capitalist economy. In the collectivist economy all resources are available to the public sector and private consumption is restricted. Witness the empty shelves and long lines in many collectivists countries. In a capitalist economy public services are restricted to claims against the private sector.
Q- It seems like there is a lot of guess work in the budget process. Needs may be largely dependent on which groups have the most effective lobbyists.
A- It is scary isn't it?
Q- More like stupid!
A- Every year one side claims the other side's economic assumptions are not realistic. I remember at the beginning of 1989 interest rates were over eight percent and rising and the administration came up with a 5.4 percent interest rate for its projections for FY1990. It's extremely important to predict rates accurately because our interest expense is so mammoth. For FY1990 for every percentage point that interest rose, between $10 and $11 billion was added to the deficit.
Q- You mean if interest rose from seven percent to eight percent the government would have to pay an extra $10 billion in interest cost to carry our debt?
A- You got it! Under Bush's first budget proposal, defense grew at the same rate as inflation but other programs didn't. Of the $14.2 billion in new revenue, $4 billion was slated to come from the sale of government assets, $2 billion was to come from user fees and the rest from tax increases.
Q- Tax increases in George Bush's first budget? No way! He was still the "read my lips" president at that time----"no new taxes! "---remember?
A- But he had Richard Darman, the "stealth director" at the Office of Management and Budget working for him. I'm talking about new revenue from the collection of medicare contributions forced on unwilling state and local employees who had up until then managed to stay out of that once voluntary system!
Q- You're talking about the budget for FY1990 which had to be determined in October, 1989. George Bush hadn't even been president for a full year. Laying out that first budget must have been interesting.
A-There was the usual grandstanding. The Democrat's 1988 nominee for Vice President, Lloyd Bentsen, still had high visibility. I remember him talking about the need to raise revenues.
Q- Why not? The election was over. No one dared suggest raising taxes just before an election after the Democrat's 1984 nominee, Walter Mondale.
A- Revenue rose nine percent in FY1989, to $990.79 billion.
Q- How close to a trillion can you get?
A- But revenue doesn't have to come from taxes. Democrats can always squeeze revenue out of the portion of the budget allocated to defense. In the fall of 1989 I remember Senator Bentsen claiming that since we borrowed $500 billion from foreign investors (half of the entire budget at that time) we had lost control over our destiny and had become totally dependent on foreigners.
Q- I remember that was the year I first found out about the use of our social security trust funds to mask the real deficit. I felt really betrayed when I read somewhere that the real FY 1989 deficit was actually $220-230 billion, instead of the $140-$150 billion publicized.
A- Speaking of social security trust funds, I don't want you to be disillusioned again but I hope you realize the surplus contributions that are paid via the payroll tax are not actually invested as you and I would think of it.
Q- I know. The government is using the money.
A- Borrowing it, which is a type of investment. By current law the government is restricted to investing in treasury bonds which in effect means loaning the trust funds to the government to be used for its current expenses. Pay-back day, when those I.O.Us. become due, will be a huge problem. The government will not renege on its commitment but will have to either raise taxes or borrow more ---issue even more bonds---to fulfill its obligations to future retirees.
Q- What can be done?
A- The first choice would be for the government to trust citizens to keep those payroll taxes in their own hands and invest them for their own future well being.
Q- At the moment it doesn't look like that's going to happen any time soon.
A- Another proposal making the rounds is for the government to invest prudently and become a coupon clipper for its retirees.
Q- What do you mean?
A- The government, instead of spending the payroll taxes of workers to run its day to day operations, could invest the trust funds in productive America----company stocks, R & D facilities, manufacturing plants etc.
Q- That would be socializing the country . The government would soon own what was once private property.
A- I agree. Since privatizing social security would mean socializing the rest of the nation, then perhaps it is time to look for a third alternative.
It has been suggested that Uncle Sam invest in its own capital projects. Of course this would involve separating the government's capital spending from its current spending.
Q- You mean institute a capital budget. A budget that considers outlays for capital assets as long-term investments and labels them accordingly.
A- Yes, but government would still take the money and Washington D.C. bureaucrats would still decide how to spend it.
A fourth choice would be for the federal government to give trustees authority to invest in state and local government bonds, especially those earmarked for capital investment like schools, police stations, libraries, drug treatment centers and shelters for the homeless.
The huge amounts of cash could command large discounts. Investments would be closer to the people and they would sense more control over their retirement savings.
Those savings would actually be saved---invested with real pay-offs realized over an extended period. The trust funds wold be tied to a tangible and independent source of funding where the bonds would be paid off because of the local government's ability to charge tolls and user fees and its ability to appeal to a local tax base independent of the federal government.
Funding would be according to the people's priorities. It would also eliminate the approximately $2.5 billion provided by the federal government as grants to aid local and state programs.
Q- Wow! Politicians should jump at the chance to finance the needs they keep talking about. And baby boomers should see it as the best hope of having something in the kitty when they retire.
A- The opposition would come mainly from those with plans for the trillions that are currently building up in the trust funds. All those grandiose plans----nationalized health programs, subsidized housing, federal welfare and new educational bureaucracies all controlled and funded on a national level---would have to go by the board.
Q-I see what you mean; it's not likely. I seem to recall a study of 115 nations which found that a one percent increase in spending by any government resulted in a .1 percent reduction in economic growth.
A-That study was done by economist Gerald Scully and if you relate its findings to the U.S. economy with a current GNP of over $5 trillion, a one percent increase in spending is equal to a reduction in growth of about $9 billion a year----not a trivial sum.
But it shrinks in importance when compared with the $250 billion we are now paying every year in interest costs. In fact some people have the annual cost of carrying our gigantic national debt at $300 billion. Interest costs are certainly headed in that direction.
Now that foreigners purchase so much of our treasury debt a lot of that interest is no longer being paid back to American citizens and recycled in our economy.
Q- Just what percentage of the national income is the government spending now?
A- Figures on government spending vary depending on what is included. In the 1950s and 1960s spending by the federal government averaged close to 19% of GNP (gross national product). Starting in 1970 federal outlays rose consistently at a rate of about 1.8 percent per year. Then suddenly in 1979 the spending rate skyrocketed 4.6 percent in one year to 23 percent of GNP. The latest projection in mid-1991 shows we're now spending in the 25 percent range.
Q- People voted for Ronald Reagan in 1980 because he promised to curtail government spending.
A- You're right. Ronald Reagan campaigned with a promise to bring spending down to the 19 percent range again but instead spending climbed to 25 percent of GNP and is still higher than federal revenue. We naturally get a deficit when spending is higher than revenue, as it has been at many times in our history.
Q-Has the federal government ever spent a greater percentage of our national income than it is currently spending ?
A-Yes. During WW II the government was forced to spend a far greater percentage of the national income. 1945 spending amounted to 42.7 percent of the nation's GNP. In 1940, just prior to WW II, the federal government was spending only 10 percent of GNP. But we can go back even further to a time when the government spent only 3 percent of GNP.
Q-Perhaps I should have inquired about the amount the government has recently been taxing in relation to spending.
A- That is a different question to be sure. The federal government has been taxing pretty consistently in the 20 percent range and spending in the 21 percent to 23 percent range. Although the federal budget has shown a deficit 30 out of the last 51 years, we thought the widest disparity between revenue and spending had been reached in fiscal year 1986 when that year's deficit weighed in at over $221 billion.
Q- Thought? You mean we've exceeded the 1986 record?
A- By about 55 percent if projections for FY1992 hold steady. I sat in on the Joint (House of Representatives and Senate) Economic Committee's hearing on the Mid-year Economic Outlook on July 23, 1991.
Q- You mean you were in Washington, D.C.?
A- I "sat in" via C-SPAN--the cable satellite public affairs network which allows any American citizen who has access to cable TV to be present on the House floor whenever congress is in session and to be an attendee at conferences and gatherings all around the country where public policy issues are being debated.
This new technology leaves no excuses for citizens to remain uninformed or to claim they don't have easy access to unbiased information.
I think C-SPAN is the best thing that has happened to this country in a long time and I said so in a book dedication I made to the network in 1988. (The American Deficit: Fulfillment of a Prophecy?)
Q- I've got to admit I'm as bored as the next person by budget-talk, but I'm convinced the economy is affected by the budget deficits. So I'd like to know what went on during that hearing.
A- Sometimes you simply have to buckle down and make yourself hone in on a situation--especially one which has such a bearing on all our lives.
Q- Who testified before the Joint Economic committee?
A- Lots of people but I'll give you a blow by blow of the inquisition of Office of Management and Budget director, Richard Darman and then a separate inquisition of two of the President's Chief economic advisers, Michael Boskin and John Taylor, both formerly Professors at Stanford University in northern California.
Q- How about the Boskin-Taylor testimony first as I know more about those two gentlemen. They are from this area and I understand Professor Taylor is on his way back to Stanford for fall of 1991 anyway.
A- Fine. Senator Sarbanes began be ridiculing the administrations contention that the recession is "short and shallow", claiming politicians should have developed compassionate responses to the unemployed much earlier.
To Mr. Boskin's contention that the unemployment rate had not yet reached the numbers that would trigger more of a response from government, the Senator retorted that the unemployment rate is a poor indicator of economic hardship and that the labor force had grown only half as fast as earlier predicted.
He referred to a claim by Commissioner of Labor Statistics, Janet Norwood, that if there had been normal growth, unemployment would actually now be 7.5 percent but payroll had in truth fallen by $1.5 million between July 1990 and July 1991.
Q-I think Senator Sarbanes is right, because I know a lot of hardship doesn't show up in government statistics. Also what about discouraged workers or part time workers? In 1990-91 they accounted for ten percent of the official rate.
A- That was a point made by Senator Sarbanes. He would have liked to see those discouraged and uncounted workers in what he calls a "comprehensive rate".
Q- Did anyone know how many people had exhausted their unemployment compensation over the previous 12 months?
A- Between July 1990 and July 1991 statistics show that 2.3 million unemployed workers exhausted their benefits. When the bill to extend benefits was debated before congress in the summer of 1991 it was asserted that 1.4 million were due to run out of benefits in a few weeks. And even if the economy turned the corner in the summer of 1991, as spokesmen for the Bush administration kept asserting it would in their testimony-Senator Sarbanes point was that the number of long term unemployed would continue to rise.
Q- Why didn't the safety nets kick in?
A- They were set to start at the appropriate time. When the numbers determined by formula are reached, they automatically trigger extended benefits.
Q- I don't know what's so "appropriate" about some impersonal formula. Employers pay money into a trust fund to provide benefits for their employees beyond 26 weeks. Why isn't that money used for the intended purpose?
A- Exactly Senator Sarbane's point. Supposedly the trust fund you're talking about had $7.2 billion in it on October 1990 and continued to build surpluses throughout 1991. Everyone agreed losing money from the trust fund would provide stimulus for the economy.
Q- I don't get it. Then what's the problem? That trust fund should be relieving hardship just as it was set up to do. It's obvious government programs are not doing their job.
A- We have a semantics problem. Funds aren't physically present in the trust fund. In a unified budget they are used to off-set other spending by government and to mask the deficit. It's legitimate.
Congressman Armey of Texas, a former economics professor made what should have been the telling point when he said, "There are no monies in this trust fund nor any other trust funds."
All other things constant, anybody that received increased expenditure benefits under the authorization of that trust fund, could only do so because we borrowed more money. That should be in the record." But Senator Sarbanes paid absolutely no attention to Armey's remarks and continued to berate the build-up in the trust fund as if the dollars were actually real and untouched.
Q- On the other hand, I think everyone realizes when you're discussing government funds, the government can always print the money that is supposed to be there. In this case Senator Sarbanes only wants it borrowed.
A- I'm surprised and a little shocked at how calmly you say that. I would expect any and all taxpayers to be up in arms upon discovering monies have been tampered with----monies that were collected for a specific purpose. To use them to disguise other spending in a unified budget would be unethical and possibly criminal.
Q- But as Mr. Armey said, all government trust funds are in the same boat because the government must invest trust funds in treasuries and a treasury is an I.O.U. allowing the government to use the funds. Semantics! Right?
A- Right! I'm just surprised at your sophistication and calm.
Q- I'm wondering if unemployment benefits were extended beyond the 26 weeks during other recessions?
A- As a matter of fact they were under Ronald Reagan----a point which Senator Sarbanes attempted to hammer home to Dr. Boskin.
Q- What was Michael Boskin's reply?
A- He pointed out that in 1985, when the extended benefits were discontinued because the emergency was considered over, the unemployment rates were higher than in the summer of 1991 when the Senator was calling "emergency"! However the Senator wouldn't listen and kept stressing the hardships and appealing to emotion. He kept pointing out that in pockets around the nation unemployment was much higher than the national average. It was then 9.5 percent in Massachusets and Michigan had rates over 9 percent.
Q- Weren't there a series of tax manipulations recently? That always causes a slow down in growth. It might be more than coincidental that Michigan with a nine percent unemployment rate, produces luxury automobiles whereas luxury boats used to be a thriving business in Massachusetts, the state with a nine and a half unemployment rate. Anyone can see the luxury tax is hurting.
A- According to Texas Congressman Dick Armey, we're losing $5 for every $1 we're taking in because of this luxury tax. And if that weren't enough damage, congress is also discussing a new gasoline tax.
But to get back to Senator Sarbanes---he kept harping on foreign money going to overseas emergencies--"You're prepared to call an emergency to provide funds abroad, but you're not prepared to call an emergency to provide help at home." He kept saying this to Boskin. "Some of us aren't prepared to leave long-term unemployed out there twisting in the wind."
He was alarmed that some workers lost their jobs when the unemployment rate was 5.6 percent and instead of things getting better in the meantime, things have gotten worse. What's to be done, now that the unemployment rate is seven percent?
Q- Why have we started to look at the government as a daddy or mommy? The United States of America has never been anyone's motherland or fatherland. Why has this generation of Americans failed to grow up?
A-Maybe because government starting taking their money, and telling them not to worry. "We'll take care of everything for you and much better than you can do for yourself."
Q- In retrospect that may have been stupid but I guess they were looking for an easy way out. Their parents went through the depression and they were ready to exchange their freedom and independence for security.
A- Not so much stupid as gullible. Senator Sarbannes (see previous file) kept returning to the supposed balances in the trust fund ----he didn't seem to believe Mr. Armey's (a Congressman from Texas and former economics professor) contention that the funds were no longer there. He asked, "Why should these unemployed workers be cut off from extended benefits?"
Q-Maybe he didn't understand the answer?
A- Dr. Michael Boskin (a Stanford professor and economic adviser to the President) explained that the triggering formula anticipated not just the levels of unemployment but the rate at which the unemployment figures change.
Q- Actually I wouldn't accept an answer like that either. Programs kick in at a certain point according to a bureaucratic sacred formula!! I join the employers who are already hopping mad! The system is obviously not working. Americans pay and pay and never get anything back---FORGET IT! This is blatant abuse of employers' contributions. What's wrong with everybody?
A- Well you sure won't be satisfied with Boskin's wimpy answer.
Q- Try me.
A- He said we started from the best labor market since the early 1970s and he wouldn't support extending benefits unless the spending was accompanied by other spending cuts somewhere in the budget.
Q- Did anybody on the panel accept that response?
A- You know each member of congress on the panel gets his own time to ask questions and carry on dialogue. This particular exchange occurred on Senator Sarbanes time. He pointed out that economist Paul Samuelson believes our unemployment system is not providing the stabilizing role that it has in the past.
Q-To which Dr. Boskin replied. . .
A- That states had changed their rules recently and they determine pretty much who qualifies for unemployment benefits and when. Ninety percent of unemployment contributions are distributed by the states and payments are being made, whereas only ten percent goes into the federal extended benefit program. He said the administration was concerned, but thinks there needs to be off-sets. He agreed that unemployment insurance is supposed to be an economic stabilizer and added that many transfer systems act in such a manner.
Q- And for that you have to have a so-called emergency?
A- This emergency thing is another example of the semantics games played in Washington DC. Unless an emergency is declared, by the terms of the 1990 budget compromise, off-sets (spending cuts) have to be made in other programs in order to pay out these extended benefits. If an emergency is called, these off-sets do not have to be made. It's another example of the significance of finding the right label. This is how things get done on capitol hill. It's not statesmanship.
Q- On the other hand, that seems like a legitimate reason for not recommending extending unemployment benefits on an emergency basis---the administration wants to keep to the budget agreement and not increase the national debt any further. It probably looks to Dr. Boskin like an opportunity to get some spending cuts.
A- One thing should be coming clear--- you don't want government with all it's fancy formulas and shenanigans handling your money. I've said this over and over and will continue to do so as long as I have breath, and that is that government can't possibly do things for you and your family as well as you can do for yourself and your family.
Q- Didn't any other Senators question Dr. Boskin?
A- Sure. Senator Ted Kennedy denied the recession was ending. He recited heart rending personal stories and even included a story of a family involved with the manufacture of sail boats, somehow overlooking the fact that the luxury tax he himself supported put the victim in his story out of business.
Q- It would help if politicians would look for the cause more often instead of just rattling off emotional propaganda.
A- You've got to remember Massachusetts lost nine percent of its total jobs in two years and according to some experts, its unemployment rate could reach eleven percent before the year is over . Even Republican Senator Robert Smith of New Hampshire backed Kennedy's observations by claiming the recession is the worst he ever saw in New England.
Q- Isn't Kennedy the same man who berated junk bonds---the main source of financing for small businesses? But back to Senator Smith (Senator Robert Smith of New Hampshire; see previous file for discussion). . .
A- Senator Smith attributed the depth of the recession to the lack of confidence in banks and the Savings & Loan fiasco. He also felt that not enough effort was being made to get rid of the RTC inventory. Then Senator Sarbanes wanted to know what was being done about the credit crunch.
Q- And?
A- Dr. Boskin described some meetings, saying an attempt was being made to urge the examiners to be more reasonable. He claimed the behavior of most regulators was too restrictive and that there was a real need to base policy on reality not unfounded fears that what occurred with the savings and loans would necessarily be repeated with other lending institutions.
Q-What about the economy in general?
A- Dr, Boskin admitted that in February 1991, he had predicted that the recession would be relatively brief and relatively modest; that GNP would decline and level off and improve in the second half of 1991. He said predictions for the second half of 1991 had been revised by the "troika" .
Q- What in the world is the troika?
A- Troika refers to the Treasury, OMB (Office of Management & Budget) and Council of Economic Advisers. All three compiled the economic projections by consulting with private sector analysts.
Dr. Boskin, by way of disclaimer, admitted projections are by nature inaccurate and that economics is not a precise science because there are always unforeseen events. Nevertheless, he said his predictions had proven to be accurate for the first half of 1991.
He agreed with members of the panel that the length of the recession was in part attributable to hard to get credit which he blamed on several things. Capital ratios were recently imposed on banks to bring them more into line internationally and because banks couldn't raise equity to meet the capital ratios they were forced to cut back on lending.
On top of this the reunification of Germany took more of the world's capital than anticipated. Also he noted that state and local deficits have been in surplus during past recoveries but most states are having their own budget problems during this recession.
The economies of New England, Michigan and California declined the most. In the previous recession the mid west was hit the hardest, but this time, with the exception of Michigan, it was spared.
However the severity of all declines was reduced because of our improved trade balance. Dr. Boskin offered the following comparison: 1981-2 exports fell by over $30 billion at an annual rate which accounted for thirty percent of the entire 1981 decline. By contrast in 1990 exports rose by $53 billion. He observed that declines in world wide growth could hurt our exports and that must be recognized as a potential problem.
He noted that inflation has been in a down trend since the beginning of 1990. The unemployment rate rose from 5.3 percent to 7 percent from July 1990 to July 1991 and is expected to average 6.6 percent in 1991 and 6.4 percent in 1992.
Inflation has decreased to 3.5 percent in 1991 and will likely remain under 4 percent in 1992. Long term rates are down but not as far as expected.
The real GNP is now expected to grow (differs from earlier projections) 0.8 percent in 1991--3.6 percent in 1992 with consumer spending to be a driving force. The 1992-1996 outlook remains the same--2.7 percent annual GNP growth.
He expected stability would wring out the uncertainty included in the interest rates and allow them to decline. The larger than anticipated budget outlays were attributed to deposit insurance (S&L fiasco again) and to Desert Storm. The long expansion which had begun during the Reagan administration, was stopped by both the Gulf crisis and the credit crunch according to Boskin.
Q-I'm always surprised that anyone takes the annual estimate of deficits seriously. I always hear that deficits are far greater than the original estimates.
A-Today---in July,1991---the FY1991 deficit for the year ending October 1, 1991 is predicted to be anywhere from $340 billion to $370 billion---far in excess of the previous deficit record of $221 billion set in 1986. When asked why the deficit was so far off last year's early estimates, Mr. Darman said deposit insurance of more than $100 billion was not included in the early estimates and the economic forecast changed dramatically between FY1991 and FY1992. Receipts were short by $88 billion.
Q- Due to the "short and shallow" recession, no doubt.
Q- Didn't Professor Taylor testify?
A- Only briefly although he was at Michael Boskin's side throughout (Dr. Boskin is also a Stanford professor and economic adviser to the President; see previous files for discussions of his views).
One comment I remember had to do with greater accumulation of inventory (which had been excessive and not moving during the first half of 1991). John Taylor said inventory should be watched as a sign signaling faster growth in the economy.
He broke with other experts I have heard on the subject when he insisted we were below our potential before the recession began so he sees room for growth. The gap between where we are now and our potential seemed promising to him . He anticipated three percent growth during the nineties because of this potential for growth.
He told the panel that the Economic Council is about a half a percentage point higher than private forecasters and one-half of one percent can be significant. He related that not so long ago Italy had a GNP amounting to only 40 percent of the GNP of Britain and now it has a growth rate one-half percent higher than that of Britain!
Discussions are the way to get at the heart of technical differences and he seemed content that last year's budget compromise would mandate discussions because of the restraints it put on total spending making it necessary to trade spending for cuts.
He got talking about trade policy and the necessity in that area to constantly balance different interests. Professor Taylor thought trade should be targeted, barriers further reduced and he advocated decreases in the capital gains tax in order to stimulate growth.
He also favored family savings accounts to encourage capital formation. He suggested that the growth rate of income (profits, wages and salaries) had been pretty accurate, and by way of illustration he said profits will rise to 5.3 percent of GNP in 1991 and 5.6 percent of GNP in 1992.
Q- Private forecasters mostly agree.
A- Richard Darman (director at the Office of Management and Budget under Bush; seep revious files for further discussion of Mr. Darman) working for him defended the capital gains reductions, although others seemed to think they would never fly. Mr. Darman said it is not a rich man's tax cut because $4.8 billion of the projected savings would come from those making less than $50,000/yr.
Anyway it is less than half of one percent of the total package and doesn't by itself spell failure.
Congressman Armey praised an article written by Senator Gramm and published as an editorial in the July 23, 1991 edition of the Washington Times .
Q- Was it on the economy?
A- I didn't read it but Senator Gramm, who was also a professor of economics in Texas at one time, maintained in the article that unemployment rates were low during Ronald Reagan's eight years because the Reagan program was a program of growth.
Q- But under the Reagan administration extended unemployment benefits were paid.
A- That was pointed out by members of the panel and Michael Boskin countered that at the time of those payments the unemployment rate was eleven percent! Senator Sarbanes said "that's right" without seemingly getting, or at least acknowledging the point that in July 1991 when he was grandstanding, unemployment rates were only seven percent.
Q- You can forget that "only" business if you or someone you know is unemployed---that's 100% unemployed right there!
A- Everyone's concerned. Senator Kennedy put on an amazing display of concern--"They just don't know how they're going to feed their families." Maybe Senator Kennedy should set up a private fund to help out the families with whom he comes in contact.
Q- Didn't you tell me a story once about Davey Crockett's attitude toward the public trust? He chastised his colleagues when he was in congress over some spending scheme--- or something like that.
A-It's one of my favorite stories. In the 1800s Davey Crockett was Tennessee's representative to Congress. One day a bill was presented calling for an appropriation of money for the widow of a distinguished naval officer. The speaker was about to put the bill to a vote when Davey Crockett stood up and said "I have respect for the deceased and sympathy for the widow, but we must not collect money from the taxpayers, one group of people, to give to others to whom it does not belong. This would be an abuse of our power." He then offered to give a week of his pay to the widow if the other congressmen would do the same.
Q-I'll believe the wealthy Senator's concern and the indignation of Jesse Jackson when I see them give a couple thousand dollars (a small percent of both men's incomes ) to help these people they claim to care so much about. Talk is cheap and as far as I'm concerned, actions speak louder than words.
A- Senators Sarbanes and Kennedy reasoned that since Bush called foreign aid "an emergency " and asked for hundreds of millions of dollars without cutting the same amount from the budget that was reason enough to keep on doing it.
They reasoned, "Why not call it an emergency"---why cut spending---the devil with the budget deficit and the national debt ---let it continue to buildup---let's feel good and look like heroes.
As far as I'm concerned, they show absolutely no sense of responsibility---they behave like children in sand boxes. I gave them credit for reasoning a moment ago but they don't reason---they react. "Bush called foreign aid an emergency so why can't we--nah, nah, nah, nah" I am deeply ashamed for the people who elected them!
Q- That's a little harsh, don't you think?
A- You should have "been there"! Senator Kennedy mimicked Michael Boskin and made fun of the administration's excuses without pulling any punches: "We've got problems from over zealous regulators, so no credit out there, so business failures". Kennedy staged an embarrassing show, chastising the academicians---I guess he's afraid his state's problems might reflect on him.
When Senator Smith reiterated that the eight years of the Reagan economy was good, Senators Sarbanes and Kennedy said it wasn't Reagan's policy that was responsible for the low two and three percent inflation rates but the price of oil should get the credit. As for the twenty percent inflation and interest rates and fourteen percent rates of unemployment; they had nothing to do with the Carter administration.
Q- Didn't anybody express alarm about the national debt which is fast approaching $4 trillion? I can't get it off my mind ever since you mentioned it.
A-Senator Smith considers the national debt to be the number one
crisis facing the country and he is anxious to deal with it. He realizes if
the debt continues to rise, not only will jobs be eliminated but the other
benefits Kennedy and Sarbanes like to tout will disappear as well. Senator
Smith was aware that the interest on that debt is going to surpass what we
spend on national defense. In passing he also pointed out that the luxury tax
cost 9,000 jobs.