There is good reason to predict that by the year 2010 the United States and the European Economic Community will be the two dominant forces in the world community. Each will generate an annual GNP of approximately $8 trillion-double or more that of Japan, China or Russia. But that upbeat result is not written in the stars. To a large extent, it will depend on the kind of world trading system that develops in the coming decade.
One important influence will be the way in which Western Europe responds to its new hegemony. If 1992 merely symbolizes the replacement of internal trade walls with external restraints on international commerce, then the opportunity for economic growth throughout the world will be lost. But if the EEC-and the U.S. and Japan-each respond positively to the prospects for enhanced international trade and investment, then we may be at the threshold of a more competitive and stronger world economy.
As for the U.S., the task ahead seems clear: It is as easy to formulate as it is difficult to carry out. The U.S., as a society, needs to tighten its national belt, or, as an economist would say, it needs to slow down the pace of consumption. We need to produce more and consume less, to save more and to borrow less. That is the fundamental way to reduce, simultaneously, the still historically high trade deficit and the continued dependence on foreign borrowing. Exchange rates also have an important role to play. A cheaper dollar helps to make U.S. goods and services more competitive in world markets. And a very substantial realignment already has occurred.
The much higher cost of capital in the U.S. forces our firms to adopt much shorter planning and payment periods. The solution, clearly, is to reduce the cost of capital in this country. This brings us back to the need to save more and to borrow less.
The most direct action to take now is to reduce the massive federal budget deficits, especially by cutting the rapidly rising outlays for consumption. After all, the budget deficits have become a powerful engine
for converting private saving into public consumption.
Here, of course, is where theory runs afoul of practice. Everyone wants to cut all the waste out of the budget, but the specific items that benefit any group or individual are seen differently. They are always vital contributions to economic growth or fairness, or some other virtuous goal. It is always the “other fellow’s” programs that should be cut. Unfortunately, there are not enough “other fellows” to go around.
In my new book, Rendezvous With Reality, I have identified a “dirty dozen” federal spending programs that deserve to be cut substantially or eliminated from the federal budget entirely. This will save $100 billion a year. They are among the following.
· Eliminate farm subsidies. That would save $25 billion a year. It would also respond to the farmer who blithely says, “I make $400,000 a year and I live off the government.”
· Deregulate the cumbersome military procurement process. Stripping away the bureaucratic paperwork requirements could save 10 percent of the annual procurement bill or $15 billion annually.
· Adopt a “diet COLA” for social security, limiting the annual cost-of-living increase to the rate of inflation above 2 percent, saving another $15 billion a year. Do the same for the other entitlements and save $12 billion a year. These harsh-sounding recommendations reflect the fact that, on average, senior citizens now have more wealth than working or “junior” citizens.
· Postpone paying military retirement benefits until veterans reach age 55, a $10 billion a year economy. At present, able-bodied 38-year-olds collect retirement pay.
· Cash out food stamps and save $5 billion a year. The proponents of food stamps say they shouldn’t be included in the incomes of poor people when the government measures poverty. Why? Because the recipients do not get a $1 of value for every dollar the federal government spends.
· Stop giving low interest rate loans to a lucky few. Charge those who borrow from the government the same interest rates as the rest of us pay. That should reduce the now-insatiable demand for federal credit and reduce the deficit by $2 billion.
· Another $2 billion could be saved by closing down obsolete military bases. My favorite example is Ft. Monroe, Virginia, a 167-year-old relic with no known military mission.
· Limit VA hospital use to veterans with service-connected illnesses. My estimate of $2 billion of saving is on the low side because, as World War II veterans reach their 60’s and 70’s, they are coming down with the normal ailments of older people and will overwhelm VA hospitals.
· Reduce foreign aid to the Middle East by at least $2 billion a year. I mean the disproportionate amounts now going to two countries, Egypt and Israel.
· Stop the $1 billion a year of pork
barrel projects of the Corps of Engineers and the Bureau of Reclamation. Pork is not a subjective term; I am referring to projects whose costs exceed their benefits computed at any reasonable estimate of the cost of capital.
Sound reasonable? Only until you try these suggestions out on anyone who benefits from any of the dirty dozen. There are all sorts of good reasons to avoid reducing social security benefits, for not terminating farm and business subsidies, and for not keeping a tight lid on the military budget.
But we can’t avoid all of those unpopular actions and still bring down the budget deficit sufficiently. The time for hard choices is now. President Bush and the American people have, to use the title of my new book, a rendezvous with reality.
Murray Weidenbaum is Distinguished Scholar at the Center for Strategic and International Studies in Washington, D.C. He authored the recently published book, Rendezvous with Reality: The American Economy After Reagan.