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THE STRUGGLE IN CONGRESS

THE STRUGGLE IN CONGRESS; U.S. Deficit for 1990 Surged to Near-Record $220.4 Billion, but How Bad Is That?

THE STRUGGLE IN CONGRESS; U.S. Deficit for 1990 Surged to Near-Record $220.4 Billion, but How Bad Is That?
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October 27, 1990, Section 1, Page 8Buy Reprints
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Closing the books on 1990, the Treasury Department made it official yesterday: the budget deficit, after dwindling to manageable proportions in the late 1980's, surged to a near-record $220.4 billion in the last fiscal year.

But while the prospect of $200-billion-plus deficits is scaring Congress and the White House into working out a record deficit-reduction package, economists say the huge number suggests more damage to the economy and to the well-being of Americans than has actually occurred.

They argue, for example, that the deficit is temporarily overstated because of the savings and loan bailout. What's more, they say, the deficit is still manageable; in fact, not much more of a burden than a $3,000 a month mortgage is to a family earning $85,000 a month. The problem is that the deficit, the mortgage, is rising, and the national income isn't.

Or, as David A. Stockman, former President Ronald Reagan's first budget chief, put it, "The deficit does not cause short-run domestic catastrophy, but over a long enough time it is poison." Trend of Rising Deficits

The announcement yesterday underscored the trend of a rising deficit in a period of stagnant income. While the $220.4 billion in 1990 barely missed the record of $221.2 billion in 1986, that high-water mark almost certainly will not survive another year.

Even if the budget proposals now before Congress are approved, the deficit for 1991, the current fiscal year, will be at least $250 billion, the Congressional Budget Office estimates. And this at a time when the national income, the Gross National Product, is barely growing because of the weak economy. The G.N.P. is running at about $5.4 trillion this year.

That makes the deficit equal to 4 percent of the G.N.P., roughly the annual average for the 1980's, but well below the 2 percent or less that prevailed from 1950 until 1975, when the deficit suddenly shot up to 3.5 percent of G.N.P. and became a national issue.

Many economists applaud the efforts of Congress and the White House to work out a budget accord that would reduce the deficit by $500 billion, with the goal of once again making it a shrinking percentage of G.N.P. But some economists, like Robert Heilbroner, the economics historian, or Edward Yardeni, chief economist at Prudential-Bache, question whether the day of reckoning will ever arrive. A Skeptical Economist

"We really don't know how to measure the deficit," Mr. Heilbroner said. "The numbers by themselves don't tell the story and in a world economy, to separate the American balance sheet no longer really works."

The numbers released by the Treasury Department yesterday underscore some of the difficulties. After the deficit fell to $152 billion in 1989, several factors reversed the trend, making the deficit rise by a whopping 45 percent in a single year.

At the head of this list of factors that continue to swell the deficit in 1991, are the weak economy and the savings and loan bailout.

The weak economy held down corporate profits and household incomes, reducing total tax receipts to $1.032 trillion. That was $30 billion less than the Bush Administration had expected to collect, according to Sidney Jones, an Assistant Secretary for Economic Policy at the Treasury Department.

Tax revenues, however, always fall and the deficit rises in periods of economic weakness. In the 1981-1982 recession, the deficit nearly doubled, to 4.1 percent of G.N.P. The problem is that after the 1981-82 recession, four years of robust economic growth passed before the deficit finally again subsided to less than 4 percent of G.N.P. Advent of Huge Expenses

In the 1950's and 1960's, the Government balance sheet shook off the effects of a recession in only months. But that changed with the 1974-1975 recession. The advent of Medicare and huge increases in Social Security and other entitlement programs more than tripled the deficit as a percentage of G.N.P. in 1975 and it did not subside to a more standard level for nearly four years.

The savings and loan bailout is also becoming a major long-term Federal expense, costing the Government in 1990 $58.1 billion, or 4.6 percent of total outlays of $1.252 trillion, to reimburse people whose bank deposits had disappeared in thrift institutions that failed. Economists argue that rather than being a true expense swelling the deficit, the $58.1 billion is a bookkeeping item -- temporarily borrowing or transferring money from the savings accounts of some Americans to replenish the accounts of others.

Mr. Stockman and others argue that there will be a loss from the bailout some day. The deposits the Government had to replenish were used to finance the construction of white elephant hotels and other ventures that today fail to earn an adequate return on the investment, if they earn anything at all.

The real loss in 1990, then, will not be the $58.1 billion announced yesterday, but only the $4 billion to $6 billion a year that might have been generated if the $58.1 billion had been invested in successful ventures. "There are all sorts of estimates," Mr. Stockman said, "but we don't know yet what the true loss will be from the ill-conceived ventures of the thrifts."

For this reason, some economists would reduce the deficit by the amount of the thrift bailout, in calculating the impact on the economy. In 1990, that would leave a net deficit of $162 billion, which represents a less alarming 3 percent of G.N.P., although in the view of Mr. Jones at Treasury, it is still too much.

"That is why some of us, zealots, believe we have to do something about the deficit," he said.

A version of this article appears in print on  , Section 1, Page 8 of the National edition with the headline: THE STRUGGLE IN CONGRESS; U.S. Deficit for 1990 Surged to Near-Record $220.4 Billion, but How Bad Is That?. Order Reprints | Today’s Paper | Subscribe

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