
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, March 7, 1995                   TAG: 9503070064
SECTION: EDITORIAL                    PAGE: A6   EDITION: METRO 
SOURCE: FRANK MUNLEY
DATELINE:                                 LENGTH: Medium

NOW, FOR THE GOOD WORD ABOUT GOVERNMENT DEFICITS

SEVENTY-SIX years ago, the United States adopted a ruinous constitutional amendment prohibiting alcohol. The House of Representatives, in its infinite wisdom, has passed a new prohibition - this time against federal budget deficits. The proposed amendment, if someday also passed by the Senate and ratified by the states, would hogtie government's fiscal ability to meet real social needs and act as a flywheel against the vicissitudes of the business cycle. We should evaluate the charges against deficit spending, and be on the lookout for the political agenda of those proposing to eliminate it.

In 1941, after eight years of the New Deal and on the eve of World War II, the net federal debt - the total amount of money the federal government owed the public - was about $48 billion, or 43 percent of the nation's gross domestic product. Four years later, after the great effort to defeat fascism in Europe and Asia, the debt stood at $235 billion - almost five times as much as at the start of the war, and a whopping 111 percent of 1945's GDP. But hardly anybody worried about the debt. On the contrary, it was seen as an eminently worthy investment to defeat aggression and develop the nation's tremendous human resources.

The annual deficit, which is the shortfall of federal revenues compared to expenditures, has been totaling billions of dollars in recent years. The shortfall can be financed only by adding to the federal debt. Although today's ratio of public federal debt to GDP is nowhere near 1945's level, there's much weeping and gnashing of teeth because the ratio has increased in recent years.

While the debt/GDP ratio isn't historically high, and is moderate compared to some other industrialized countries, we all agree that government spending should be scrutinized and fat should be cut wherever possible. But anti-deficit hawks, primarily ``Newtonian'' Republicans, want to abolish the deficit because it supposedly will lead to a large principal-and-interest burden and consequently to low growth.

The anti-deficit hawks' warning of a skyrocketing debt burden on future generations is dubious, because they ignore the possibility of keeping interest rates and interest payments on future debt at a low level. Low rates have the added benefit of promoting economic growth, which increases tax revenues and keeps the deficit in check (as the past several years demonstrate). Therefore, the task is to oppose the Federal Reserve Board's knee-jerk tendency to jack up interest rates at the slightest sign of good economic times, especially when ``good time'' is taken to be a 6 percent unemployment rate!

Hawks counter that interest rates can't be kept low because government borrowing drags them up. But in the real world, other more important factors overshadow the effect of the deficit. For example, from 1989 to 1992, the annual deficit as a percentage of GDP went from 2.9 percent to 4.9 percent - a significant rise - but the prime rate charged by commercial banks to their best customers fell from 10.87 percent to 6.25 percent, with similar declines in other interest rates. And all this with historically low inflation!

Another problem with deficit scare stories about interest and principal repayment is that they're applicable to private debt also. The private-debt burden, which is about 3 1/2 times the federal, might be the greater danger! But in fact economic health is, for better or worse, vitally dependent on credit. Prudence demands that private and public deficit spending be carefully scrutinized without abolishing credit altogether. If it's unreasonable to require the private sector to pay as it goes, why insist the government should do so?

The weakness of the deficit scare stories suggests a more likely motive for deficit prohibition: a quintessentially Republican pro-business ideology that seeks to freeze government out of the credit markets for the purpose of restricting spending that doesn't directly benefit business. Remember how Reagan & Co. ignored signs of the developing savings-and-loan mess, caused to no small degree by its own banking-deregulation actions? How ironic, because the savings-and-loan bailout now adds billions to the deficit.

Remember also how quickly the so-called free marketeers lavished corporate welfare on the ailing Chrysler Corp.? No concern with the deficit there! How about tobacco subsidies? ``What's good for Phillip Morris is good for the country.'' And don't forget the perennial Republican concern for the welfare of defense industries, as shown by the recent effort to resuscitate the discredited and fiscally irresponsible Star Wars program.

All deficits aren't equal. Spending incurred due to inefficiency, bureaucratic self-interest and corporate cupidity should be cut. Spending on health, education, economic infrastructure and the arts, all of which are investments in future economic well-being and quality of life, is to be welcomed. If that requires deficit spending, so be it.

Frank Munley, of Salem, is an associate professor of physics at Roanoke College.

by CNB