GRAMM-RUDMAN: REMEDY OR RUSE?

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Economic Outlook

by Mark Rapp

After Congress and President Reagan spent several months haggling over deficit reductions, the stalling in Washington finally gave way to positive action in the form of the Gramm-Rudman-Hollings bill (better known to most of us as the balanced-budget amendment). In mid-December of 1985, Congress passed this historic piece of legislation in order to force the deficit reductions necessary to keep the recovery going. Hastily constructed and rushed through Congress in order to avoid a debt crisis here and a confidence crisis abroad, the Gramm-Rudman plan promises to bring the federal budget deficit to zero by 1991 — for the first time in more than 20 years. But promises were made to be broken, and Gramm-Rudman is no exception.

Even more significant than the landmark balanced-budget amendment was the debt-ceiling bill to which the Gramm-Rudman measure was attached. The passage of this bill raised the federal debt ceiling to $2.079 trillion, which is, in effect, an admission that Congress and the traditional budget process have failed. Could it be that nobody wants responsibility for reducing the deficit that has financed our recovery, when cutting the deficit could bring on another recession?

All the stalling can hardly be blamed on those in Congress, either. Many of these deficits were born of President Reagan's incompatible priorities of increasing defense spending while slashing taxes. It was the president's belief, based on supply-side theories, that the tax cuts would stimulate enough economic growth to pay for themselves. But the stubborn deficits have refused to come down, providing mounting evidence that supplyside theories may have been more fantasy than fact.

Because of President Reagan's long-held view that we would eventually grow out of the deficit, it has been Congress — and not the White House — that has taken the lead in the battle against red ink. In fact, deficit-reduction attempts by members of the president's own party during the spring and summer of 1985 were thwarted by Mr. Reagan himself.

Record-high trade deficits were undoubtedly among the primary forces that finally motivated Congress to take action to reduce the budget deficit. The trade deficit is directly related to the huge federal deficit. The federal budget deficit has forced the government to do a lot of borrowing, and the competition for cash between the government and the private sector has caused real interest rates to remain rather high. Our high interest rates and apparent economic health have drawn a lot of foreign capital to the U.S., and much of this foreign investment has gone for the purchase of U.S. debt securities. This has helped us finance the deficit, but foreign demand for dollars to invest in the U.S. has driven the value of the dollar way up. Our overvalued currency has caused our exports to be more expensive overseas and also has reduced the prices of imports here. These factors have resulted in record U.S. trade deficits, which have led many American manufacturers to seek protection from foreign competition. Concern over rising protectionist sentiment and a slowing economy, also believed to have been caused primarily by the trade deficit, prompted Congress to take action.

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