Should we worry about the deficit?

• Author: Gould, Stephanie

SHOULD WE WORRY ABOUT THE DEFICIT?

On February 20 The New York Times startled its readers with the front-page headline, "Economists Now Detect Falling Trend in Deficit.' After years of passing along gloomy projections about $200 billion deficits "as far as the eye can see,' as David Stockman once put it, the Times was now predicting that the deficit would fall by $20 billion a year--even without the benefit of Gramm-Rudman. With inflation down and employment up, cuts that had already been made in federal spending meant that the deficit was not going to be nearly as great as once projected. One particularly good sign was that interest rates were down; lower interest rates meant that payments on the $1.6 trillion national debt might drop by as must as $16 billion through fiscal year 1987.

On the following day, The Washington Post was telling a different story. "Volcker Questions Deficit Projections' read the headline. Appearing before the Senate Banking Committee, Paul Volcker, chairman of the Federal Reserve, had called the optimistic calculations "very fragile.' The deficit was not "last year's problem,' he warned. "It is very much with us.'

Then came a maybe-yes/maybe-no story in The Wall Street Journal under the headline, "Deficit Projections Raise Hope and Doubt.' On the one hand, Gramm-Rudman's "show of deficit-cutting resolve' had provided a boost to the financial markets and triggered a decline in interest rates. On the other hand, President Reagan's pledge to raise defense spending 8 percent after inflation hand't been taken into account by the optimists.

Who's right? In one sense, all three papers are wrong: ephemeral projections based on today's favorable economic conditions aren't nearly as significant as the headlines suggest. But the big news is that the deficit does indeed seem to be coming down--thanks in large part to a factor so obvious that it's been overlooked.

Could'a been worse

Just how out of control was the deficit? Consider: if the federal budget had remained on the trajectory mapped out by the policies adopted in 1981, we would now be facing a deficit approaching $400 billion or 9 percent of Gross National Product--nearly double the current deficit. By fiscal year 1991 the deficit would have been climbing to well over $500 billion--and still growing. Before the 1980s, peacetime deficits had never risen above 3 percent of GNP, except briefly in fiscal years 1975 and 1976, in the aftermath of a recession and a decade of rapid expansion of spending on domestic programs. With the resumption of economic growth after 1976, the deficit declined rapidly, falling to well under 2 percent in FY 1979. (In discussing the deficit over a long period of time, percent of GNP is more revealing than aggregate dollars, since a $200 billion deficit is only half as significant in our current $4 trillion...