Of Flexible Freezes and Gored Oxen

This article is the last in a three-part series examining the transition to the Bush presidency.

The six U.S. senators and representatives attending Tuesday's Joint Committee hearing on the 1989 economic outlook hardly looked surprised when Federal Reserve head Alan Greenspan told them he thought President Bush's economic forecast was too optimistic.

After all, Greenspan--who controls the nation's money supply--is one of many Washington insiders who support Bush's economic goals, but express doubt about the president's ability to deliver on his campaign promises.

With the election and its rhetoric fading into history, conservatives and liberals on both the Charles and the Potomac say Bush will be hard pressed to sustain current economic growth while staying off inflation and recession.

Specifically, insiders doubt the president's ability to bring down the $155 billion deficit--a hand-me-down from the Reagan era--without raising taxes or making massive social spending cuts, as he has promised. Even many staunch Republicans say Bush's spending plan will not be enough to keep the federal government out of the red.

While many experts say the deficit spending of the Reagan era has helped fuel a six-year recovery, those experts believe it will lead to future economic instability. Experts also say that the budget deficit has contributed to a deepening trade deficit, which threatens American industrial competitiveness abroad.

Largely because of these concerns, the Bush team has pegged deficit reduction as its numberone economic priority from the first days of the presidential campaign. New administration appointees like Associate Professor of Economics Lawrence B. Lindsey say a so-called "flexible freeze" can balance the budget in five to six years.

With proponents from the not-so-liberal boutique of the Harvard Economics Department, the flexible freeze would allow total federal spending to increase at the same rate as inflation. Revenue increases from expected economic growth over the next five years, Lindsey and other Bush economists say, will meet expenditures by 1992, thus balancing the budget.

But while Bush has promised a balanced budget, he also told voters last year he wanted to be the "education" president, and has hinted at more spending for child care programs and other new federal policies. Under a flexible freeze, Bush would have to cut equal amounts of spending in other areas to keep total spending frozen at inflationary levels.

"You set a goal that overall spending not surpass the inflationary rate," explains Rep. Willis D. Gradison Jr. (R-Ohio). "Then you go back and say some programs are going to be above the line and some are going to be below the line."

The problem for Bush, observers say, is that the promises he made in the campaign mean tough cuts for other programs. Already, he has pledged not to touch Social Security, and has suggested he would not cut Medicare. Moreover, while Bush has said he would trim the defense budget, he has said he would limit it only to the level of inflation.

These constraints, say experts like Susan Irving, a Kennedy School of Government lecturer, mean Bush must cut other programs drastically if he wants to meet the balanced budget goals required by the 1985 Gramm-Rudman-Hollings Act.

"You can get through this year and meet Gramm-Rudman-Hollings without a tax increase, but you can't get through the next four years," says Irving, who served in the Carter Administration. "What the numbers hide are some tough policy choices."

Bush supporters, including Rep. Fred Grandy '70 (R-Iowa), say they also foresee difficult choices, adding that they do not know where the axe is going to fall.

"A flexible freeze program means somebody's ox is going to get gored," says Grandy. "People are saying we can't freeze entitlements and we can't touch Medicare, and we certainly can't touch Social Security. That's probably true. But the bottom line is the lion's share of our government spending goes to those benefits, and unless they address them some way, it's going to be damn difficult to balance a budget on remaining expenditures, including defense."

Not knowing whose ox is going to be gored is making Congress uneasy, say House and Senate budget leaders. Until Bush announces his budget on February 9, members of Congress say they do not know from where the cuts will come.

In Cambridge, some experts have already pinpointed prime candidates for trimming. Former Nixon adviser and Lee Professor of Economics Hendrik S. Houthakker, for one, says high spending for agricultural programs and grants to state and local government could be reduced, creating a windfall to finance the deficit.

"Both of these are grossly inflated," says Houtthaker.

What troubles other experts, however, is a belief that the Bush campaign promises are irreconciliable with a balanced budget.

According to Irving, Bush's pledges to keep defense spending at the inflation rate and not to cut Social Security leaves only $28 billion in spending increases for all other programs in the 1992 budget. Moreover, Irving says, Medicare--left untouched--will cost an additional $65 billion in that year. Unless Medicare or other programs are drastically cut, she says, the budget will continue to operate in the red.

Says Sen. Timothy E. Wirth '61 (D-Colo.), "they're not going to change defense. They're not going to change Social Security. They're not going to change federal retirees' [pensions]. So what are they going to do?"

Irving says "most of those guys just refuse to answer the question head on."

Bush supporters like Lindsey have said growth in the economy and cuts in other programs will make up the difference.

Tax increases--which have officially been ruled out by the president and several of his advisers--are on the minds of several congressional leaders.

Rep. William Lehman (D-Fal.) says Bush will probably resort to some kind of "user fees"--such as licensing fees--to bring in revenue without instituting an actual tax. "They won't be called a tax increase," says Lehman, a Business School grad.

Wirth, who will speak this month at Harvard on environmental concerns, says a tax geared towards conserving energy might be a viable policy option for the president. He says a gasoline tax would be "smart economic policy and smart energy policy."

And according to Irving, Bush might be better off politically by eating the words of his campaign rather than keeping his promises of no new taxes, considering the economic consequences of continued deficit spending.

"He would, I think, be better off biting the bullet of a tax increase," she says.

Despite the presidential-congressional sparring of the Reagan years, insiders say that Bush and the Democratically-controlled Congress will be able to reach a compromise measure for deficit reduction, even if it is a politically unpopular tax increase. Congressional leaders like Gradison, the ranking Republican on the House Appropriations Committee, note that Congress is as committed to a balanced budget as the president.

"We have institutionalized our concern about the deficit with the Gramm-Rudman-Hollings bill and saying basically if certain cuts aren't made other certain dire cuts will take place," says Gradison. "I do think there is a growing consensus that cuts across party lines that the deficit has to be brought down and that compromises have to be made."

And if members of Congress are cyncial about Bush's expected proposal, they say they are optimistic about Bush's advisers. Director of the Office of Management and Budget Richard G. Darman '64, for one, is well-respected on Capitol Hill, according to Wirth.

"Darman is very smart," says Wirth. "He understands the problems and he's very pragmatic. I'm sure he'll have a significant influence on the administration."

So far, the only economic proposal coming out of the White House was met with widespread protest. Bush's suggested fee on savings accounts to help bail out the troubled Savings and Loan industry, drew fire from congressional leaders like Wirth, who serves on the Banking and Budget Committee.

And in Washington this week, some observers were already grumbling about how long Bush was waiting to put his government in place and set his agenda. Testifying on Tuesday, Greenspan was criticized by Senate and House members for alleged policy conflicts with the president.

But most observers are waiting for February 9, when Bush will unveil his budget plan, before passing final judgement. In the end, experts say Bush, like Reagan before him, will be measured by his ability to reduce the deficit and avoid a recession. Lacking a clear mandate for other policies, the Bush legacy may hinge solely on the balance sheet for 1989 through 1992.

Says Gradison, a senior House Republican, "Bush in 1992 is going to have to face the question of what progress has been made in moving towards the elimination of the budget deficit."