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1 Paul W. McCracken, Gobbling up the Economic Pie [i] (1984)

handle is hein.tera/gobbecpie0001 and id is 1 raw text is: TAX FOUNDATION, INCORPORATED WASHINGTON, DC 20005 ONE THOMAS CIRCLE, N.W., SUITE 500 S E IL REPORT TELEPHONE (202) 822-9050 Gobbling Up the Economic Pie By Paul W. McCracken While deficits dominate fiscal discussions, they are not the fundamental fiscal problem confronting the U.S. and, for that matter, the Western world. The fundamen- tal problem is the relentless tendency for government to pre-empt a growing proportion of the national income and output. The deficit projections leave one with the feeling of stanr~ing on the edge looking into an almost limitless abyss. In his Budget Message, the president does project a deficit declining from this year's estimated $184 billion to $123 billion by 1989, with outlays in that year of $1.183 trillion, and receipts of $1.06 trillion. (These iigures are about the size of the total gross national product in the early 1970s.) But this substantial shrinkage assumes some legislative actions proposed by the president, as the Budget Message is a pricing out of his proposed program, not a mere prediction of statistical things to come. On the basis of current tax and spending programs, however, the deficit for fiscal 1989 is projected to be $65 billion to $70 billion larger. And with so-called off-budget items includ- ed, the projected deficit for that year could be in the $200 billion zone. Isn't the Proper Path Other estimates are still higher. The Congressional Budget Office puts the deficit by 1989 at $326 billion if national defense budget authority rises 5% in real terms a year (which is roughly current policy), and $249 billion if there is no such real growth for defense. Those who insist that this is not the proper path for the budget are, of course, correct. And there is a wide measure of zgreement on this matter. For example: ... we cannot delay until 1985 to start reducing the deficits that are threatening to prevent a sustained and healthy recovery. This is not a pronunciamento by Messrs. Feldstein or Stockman or some mogul from the financial community. These words are Ronald Reagan's, in that part of the Economic Report that the president himself signs. He is, of course, on target. The pool of funds available to all potential borrowers in any year will be 14 % to 15 % of GNP. If in 1989 our GNP is about $5.5 trillion, as pro- jected in the Budget Message, about $800 billion of funds would then be available in credit markets for all bor- rowers. Experience suggests that the vigorous consumer and business capital formation required to make 1989 a reasonably prosperous year would involve about $700 billion of private borrowing. If the 1989 deficit is $300 billion, then the Treasury must pre-empt that much of the funds in credit markets, and the private economy would be about $200 billion short. These figures can, of course, lay no claim to precision, but they are broadly in- dicative of our problem. As best the fiscal situation can be modeled, we shou':1 guide the budget on a path that will assure a federal deficit five years hence of not more than $100 billion. If a more ambitious target could be achieved, so much the better-meaning, as it would, an even higher investment economy. And a good 1984 downpayment (to use the current buzzword) would do a lot for interest- rate levels and the readjustment of exchange rates so essential for redressing our severe trade imbalance. Yet it is also true that simply plunging ahead toward a downpayment on the deficit might accomplish surpris- ingly little, even if a 1984 downpayment package can be fashioned, unless we see the larger war of which this deficit is one battle. We must deal with the relentless ap- petite of government for an ever-increasing share of the national income and output. In the U.S., outlays of government at all levels (federal, state and local) were equal to about 20 % of the GNP as the 1950s opened, and this ratio is about 34% today. Moreover, the problem is more troublesome than this figure might imply. For one thing, the economic pie that can be divided up on an ongoing basis is not gross national product, but net national product. This is not mere pedantry. It is net na- tional product that attempts to measure the output of goods and services beyond what has to be produced to offset worn-out machinery, equipment and capital goods. Of our total gross output, 11% to 12% represents such replacement capital. Thus the share of the true economic pie being taken by government is not really 34% now, but about 38% to 40%. That share started accelerating as we moved into the current decade. From 1979 to 1981, the rise in govern- ment spending was equal to 43 % of the rise in GNP and to almost 50% of the rise in net national product (with cyclical influences stripped out). And if the uses of economic resources mandated by government through its credit programs and direct regulatory decrees are added, the public sector was pre-empting well over half the in- This article, by Tax Foundation Trustee Paul W. Mc- Cracken, appeared in The Wall Street Journal, on February 28, 1984. Because of its cogency, we have reproduced this article in its entirety for our readership, with permission.

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