America's Fiscal Constitution by White Bill

Author:White, Bill [White, Bill]
Language: eng
Format: epub
ISBN: 9781610393447
Publisher: PublicAffairs
Published: 2014-04-01T00:00:00+00:00

PART V

THE EROSION, REVIVAL, AND COLLAPSE OF THE TRADITION: 1977–2013

14

STRUCTURAL DEFICIT: PRESSURES FOR TAX CUTS AND A REVIVED COLD WAR

1977–1981: Years when deficits exceeded debt service = 5 (1977–1981, soaring interest rates and military costs)

RISING INTEREST EXPENSE

Jimmy Carter’s status as a Washington outsider was a campaign asset that became a liability when he had to prepare a budget within weeks of taking office. His staff’s lack of experience with budgets and Congress made his task difficult.

Carter searched for wasteful spending and decided to cut nineteen hydroelectric power projects. Members of Congress in both parties objected to the potential loss of those infrastructure investments, which had been planned for years. Some members also objected to the president’s deferral of investments in several new weapons systems. Carter’s tax proposal—a one-time tax rebate of $50 per taxpayer—was slow to gain traction, and the administration dropped its initiative after only a few months in office.1 From then on, Carter later reflected, his “major economic battle would be against inflation,” a fight in which he tried to “stay on the side of fiscal prudence, restricted budgets.”2

The emphasis on fiscal discipline limited the Carter administration’s ability to undertake new domestic initiatives. Carter’s annual budgets—like those of his predecessor, Gerald Ford—contained few new programs apart from those intended to enhance energy security.

Rising interest expense made it even harder to balance the budget. When Carter took office in January 1977, the Treasury sold long-term bonds at an effective interest rate of 7.63 percent. By 1979 Treasury bonds were sold at a yield of 10.44 percent, a level reached previously only during the War of 1812 and the Civil War.3 Higher interest rates soaked up revenues that otherwise could have been used to fund expanded medical services, tax reduction, or more robust Cold War military budgets.

Consumer prices increased 13 percent in 1979.4 Monetarist economists marshaled persuasive evidence showing price levels rose principally to the extent that the supply of money grew faster than did the output of the economy. Carter’s appointee as chairman of the Federal Reserve, Paul Volcker, began throttling back growth in the money supply in October 1979. The combination of restricted credit and inflationary expectations propelled the prime lending rate offered by banks to an unprecedented level of 21 percent.5

For all that, however, by the end of fiscal year 1979, the deficit in the federal funds budget had fallen to 2.3 percent of national income, almost half the level of the deficit in the last full fiscal year in the Ford administration.6 The budget probably would have satisfied the criterion of balance at “reasonably full employment.” Nonetheless, the public grew impatient with the seeming inability of elected officials to restore traditional fiscal discipline.

By 1979 a majority of state legislatures had passed resolutions calling for a constitutional amendment that required a balanced federal budget. According to polls, more than 70 percent of Americans supported such an amendment.7

BUDGET CHAOS IN 1980

Carter sought to balance the budget by the end of his term. There was more at stake than fulfilling a campaign promise or securing his legacy.

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