Business: Reining in a Runaway Budget

The White House tries for fiscal belt tightening without much pinch

Of all the ways that inflation can and must be fought, none is more important than beating the bloat out of the federal budget. The fiscal 1980 spending program that Jimmy Carter unveiled this week is a modest, but only modest, success in the struggle. Carter has always described his budgets as lean and tight, and this one, the third of his Administration, is certainly leaner and tighter than the puffed-up document for fiscal 1979 that he sent to Congress a year ago.

That said, next year’s proposed spending of $531.6 billion, a 7.7% increase over this year’s, is not about to put the economy on the stringent rations that conservatives have been demanding and liberals fearing.

Though the first sentence of the budget describes the package as “lean and austere,” a more accurate description is found inside: “Overall, this budget, adjusted for inflation, provides for about the same level of real federal activity in 1980 as in 1978 and 1979.” In fact, the document calls for little more than a moderate slowing in the rate of growth of Government expenditures, as well as for a judicious pruning of the deficit, which is projected to decline from its current level of $37.4 billion to $29 billion next year. As sketched out by the budget, the theme for fiscal 1980 looks to be belt tightening without the pinch.

Most economists welcomed the thrust of the budget as signaling a new and important appreciation in Washington that Government has to begin at least trying to live within its means. Quipped Alan Greenspan, former economic adviser to President Ford: “It’s a good Republican budget.” Rather than launching new programs, the budget underscores the national return to the old-time economic values of prudence and restraint. Says Carter in his covering letter to Congress: “I believe that we must firmly limit what the Government taxes and spends. We must balance public and private needs. We must set priorities more carefully. We must change some old priorities and establish new ones. We must defer some of our demands if we are to meet adequately today’s most critical needs.”

From the White House point of view, the budget’s key accomplishment was lowering the projected deficit to $29 billion. With the economy now in the fourth year of recovery and expansion, there really should be no deficit at all; but attempting to slow the flow of red ink is a move in the right direction. For that, Budget Director James Mclntyre deserves much credit. Unlike years past, when Carter involved himself deeply in the budget-drafting process and reviewed the document virtually line by line, this year he left the task largely to Mclntyre. The budget boss mainly succeeded in keeping new spending proposals by agency and department heads out of the package. With the President stressing the need for austerity, and Mclntyre and his staffers at the-Office of Management and Budget having what amounted to carte blanche to cut, Cabinet officers quickly realized that appeals to the White House over OMB reductions were pointless. At the Department of Health, Education and Welfare, for instance, one of the few new programs to survive OMB scrutiny was a $38 million plan for improving mental health services by the states, and, said one HEW official, “that was only because Rosalynn Carter chairs the President’s Commission on Mental Health.”

On the other hand, existing programs were not cut much at all. Total spending for HEW rises a bit more than 10%, to $199.4 billion next year, and the department’s share of the budget grows fractionally to 37.5%. Similarly, at Housing and Urban Development, spending is up slightly more than 18%, to $ 10.6 billion. Boasted one HUD staffer: “We didn’t lose one program that we didn’t want to lose.”

Some of the biggest and most controversial components of the budget are projected to climb most steeply of all. In keeping with a pledge that Carter made to the U.S.’s NATO allies last spring, defense spending will rise 3% in real terms, to $125.8 billion in fiscal 1980. Much of the increase will go for strengthening U.S. forces in Europe as well as for upgrading the nation’s strategic arsenal of nuclear-equipped missiles, planes and submarines in order to improve the Administration’s bargaining stance in the current SALT talks with the Soviet Union. Carter proposes, for example, to order the eighth submarine in the $21 billion-plus Trident program, in which costs have been shooting out of sight. He also calls for spending $237.5 million to continue development of the cruise missile system, which the Pentagon wants as a counterweight to the Soviet nuclear strike force.

Spending on the panoply of social programs also grows. The cost of funding for Social Security, welfare, food stamps, civil service pensions and other income-security programs leaps 13%, to $179.1 billion. The trend continues upward largely because expenditures for many programs rise automatically with the rate of inflation. Social Security, at $115.2 billion, is by far the largest single item hi the budget, and the reforms proposed by Carter would save only $600 million.

There is also a considerable riddling with programs that ultimately saves very little. For example, the budget calls for an overall decrease of $446 million in funding for education, training, jobs and other social service programs next year, even though money for educating the handicapped rises sharply, to $814 million. Funds for public service employment under the CETA program (for Comprehensive Employment and Training Act) are cut by 7%, to $9.6 billion. CETA is supposed to provide jobs and skills for the hard-core unemployed, but numerous cases of waste and corruption have been uncovered in the system. The program was enacted in 1973 and has never achieved its original goals.

Spending on health, mostly to cover the rocketing costs of Medicare and Medicaid, is projected to rise by about 9%, to $53.4 billion. It will probably go up much more than that because Congress is not expected to pass Carter’s hospital cost containment bill, which would put ceilings on increases in hospital charges.

In spite of the White House preachments about the urgency of the energy crisis, the 16-month-old Department of Energy suffers about the closest to draconian cuts in the entire budget. Spending declines almost 9%, to $7.9 billion, and solar energy research is the only area with significant increases. One of the biggest losers is the strategic petroleum reserve program, which is designed to stockpile oil in underground caverns in case of another embargo. Its money is being cut by 22%, to $319 million. That is probably just as well, because problems have lately developed in, of all things, finding ways of pumping the oil back out of the underground storage sites.

All those reductions and raises are what Carter wants, but what he winds up getting in the fiscal year beginning Oct. 1 could be wildly different. The President proposes, for example, to cut the agriculture budget by nearly 31%, yet success depends in no small part on the weather. A bumper crop could depress market prices and force up subsidy price support payments, while bad weather could wreck a harvest and force farmers to draw down more government loans than expected.

The whole federal budget is riddled with unknowns and guesses about the future. No one can be sure, for instance, just how much the Treasury will have to spend next year to keep rolling over the national debt of some $780 billion. Next year’s budget foresees net interest charges of $57 billion on that debt, but the cost will be considerably higher unless interest rates decline. At present, 90-day Treasury bills cost the Government more than 9% in interest payments, and the budget projects the rate to fall to about 7.6% next year.

In addition, Congress will not go along with all of Carter’s proposed slowdowns in spending. Opposition is strong not only to the hospital cost containment bill but also to the President’s plan to eliminate the $255 burial payment to the family of any Social Security beneficiary who dies. There is powerful sentiment on Capitol Hill to slow the growth of spending, but budget-slashing fever could subside when legislators face up to hard choices about where to cut.

Even if Congress cooperates fully, the deficit could grow much beyond $29 billion unless the economy behaves the way that the budget predicts. Deficits are the shakiest figures in any President’s budget, and next year’s look shakier than most. Warns liberal Economist Arthur Okun: “If I were President Carter, I would not put that $29 billion figure in lights on the Washington Monument.”

To keep the deficit from swelling above $29 billion, the economy will have to grow by at least 2.2% this year and 3.2% during 1980. At the same time, inflation will have to subside from more than 9% at present to about 6% by the end of 1980, while unemployment must not climb above 6.2%. It is almost impossible to say whether those goals will be met. Most economists believe that high interest rates are bound to bring at least a mild recession later this year or early in 1980. That would not only cause tax receipts to fall and unemployment payments to rise but might even panic Congress into quickly enacting a stimulative program that would simply increase the deficit.

On the other hand, waiting for the recession could be like waiting for Godot. Figures released last week showed that even at this late stage of one of the longest peacetime expansions, the economy is surprisingly robust. During the final quarter, last year’s production of goods and services grew at a high annual rate of 6.1 %. One reason was that the three-year-old surge in home construction still has plenty of life left. Starts of new houses and apartments hit a near record annual rate of 2.1 million. Meanwhile, personal income last month once again rose faster than inflation, meaning that family paychecks, as well as receipts from interest payments, dividends and rents, are growing faster than inflation is eroding their value.

Carter’s economic advisers point to the statistics as further support for their forecast that there will not be a recession in 1979. Says one ranking Cabinet member: “The weakness of all these forecasters is that they’re using the past to predict the future. No one is yet taking into account the new psychology and behavior that is affecting the economy.” The new psychology supposedly is that despite warnings of recession, Americans are continuing to borrow and spend because it is hard for them to stay ahead of inflation by saving and investing. Also, people are saving less than in earlier years because they figure that generous private pensions, Social Security, Medicare, unemployment compensation and other Government programs will take care of them if and when they become aged, ill or jobless. This buy-now psychology is a major reason why the economy continues to grow in spite of rising interest rates and out-of-sight prices for everything from hamburger to houses.

Yet it would be foolish to hope that consumer spending will buoy the economy for another several years.

Capital spending to build, buy or expand factories and machines is vital for healthy long-term growth and the creation of jobs and wealth. Even though much of America’s productive machine is old, and some of it is not competitive against Europe’s and Asia’s, U.S. businessmen have been reluctant to invest. With inflation raging, they have not been able to calculate that a dollar committed to capital spending today will pay for itself several years in the future.

There is a tremendous backlog of demand for capital goods building up, but businessmen will be willing to buy and build only when they see that inflation has been curbed. They believe, with much justification, that Government spending is one of the root sources of the inflationary spiral that hurts all Americans. For both psychological and substantive reasons, narrowing the deficit and bringing the budget into balance are vital steps in slowing the rise in prices. During the ’60s and early ’70s, the budget exploded with a mass of social programs that were perhaps innovative and needed at that time, but the mood and economy of the country have changed. Top OMB officials admit that during nearly a decade, billion-dollar programs were not “rigorously examined.” It is time for Carter and Congress to take a more serious look at those decade-old ideas. The budget for next year is a good beginning, but more—much more—needs to be done.