WORLD/COVER

A cutting agreement

IAN AUSTEN November 30 1987
WORLD/COVER

A cutting agreement

IAN AUSTEN November 30 1987

A cutting agreement

Less than two months after the stock market crash of 1929, which propelled the world into the Great Depression of the 1930s, President Herbert Hoover crossed Lafayette Park from the White House to speak to businessmen at the headquarters of the U.S. Chamber of Commerce. Last Thursdayone month to the day after the Dow Jones Industrial Index took its most severe dive in history—President Ronald Reagan made the same short trip for the same purpose. The world’s financial markets were waiting for a sign that Reagan was ready to take decisive action to reduce the $219-billion U.S. budget deficit, which many analysts said was a major cause of last month’s stock crash.

The President disappointed them. But the very next day—the deadline for Congress and the White House to reach an agreement on budget cuts before an automatic deficit-reduction law would come into effect—he announced a face-saving compromise that will result in a cut in the deficit. Said a clearly unhappy Reagan when he announced the deal: “It is probably not the best deal that could be reached, but it is a good solid beginning.”

Reagan managed to avoid the tax increases that the Democrats had demanded as part of a deficit-reduc'tion plan. Still, without touching income tax rates, the agreement will reduce the deficit by a total of $99.5 billion over the next two years— $39.5 billion this fiscal year and $60 billion in 1989. The two-year savings will result from a combination of still-unspecified tax increases, higher user fees for government services and $47 billion in actual spending cuts. The agreement was struck only 11V2 hours before the controversial Gramm-Rudman deficit-reduction law was scheduled to take effect; the Gramm-Rudman measure would have imposed draconian across-theboard spending cuts totalling $23 billion this year.

The agreement was the result of 20 days of meetings between congressional leaders and three top administration officials—Treasury Secretary James Baker, Budget Director James Miller and White House Chief of Staff Howard Baker. And although House Speaker and Democrat James Wright later called it “a truly bipartisan agreement,” the immediate reaction on Capitol Hill was decidedly lukewarm. Indeed, before the formal announcement of the accord, Oregon Republican Senator Robert Packwood, a key negotiator, denounced the plan as “a miserable little pittance.” And he predicted that the reaction from world financial markets would be negative. “I find it hard to believe they will be happy about it,” he said.

American stock markets managed a brief rally in the few minutes of trading time that remained after the announcement of the accord; a clearer indication of how the markets will react to the budget news was expected early this week.

After the recent stock market crash, economists, politicians and financial experts at home and abroad had called for swift, decisive action. But although progress was painfully slow and the compromise agreement is likely to disappoint economists and stock market investors, for most Americans it was preferable to an imposed solution under the GrammRudman law. Under that law, about half of the mandated $30-billion deficit reduction was to come from the military budget and the balance from painful and indiscriminate across-the-board cuts in every other department. But in the compromise plan, spending cuts will be targeted at more specific budget categories, giving lawmakers more flexibility.

In effect, the agreement is a classic compromise: the White House will have to cut more from the defence budget than it had wanted but avoids the politically unpopular income tax hikes. Still, some observers predicted that several cuts may prove to be illusory. Among them: a measure that the House of Representatives recently passed, requiring frozen-pizza manufacturers to tell customers when they use imitation cheese. The lawmakers say that the bill will increase demand for real cheese and, as a result, reduce government outlays on dairy subsidies. The predicted savings from

pizza lovers: $19 million a year.

Even though an agreement has been reached, the work of the deficit negotiators will continue. Because of Gramm-Rudman deadlines, they will have 10 working days following this week’s American Thanksgiving break to decide on what specifically to cut. But lobbyists have already begun efforts to protect programs of interest to their clients. And with congressmen susceptible to pressure from special interests, many observers argue that the process will bog down without strong leadership from the White House. Said Alice Rivlin, a former director of the Congressional Budget Office: “The reason so little has been accomplished is because there has been a real absence of leadership from the White House.” Although Reagan pledged last week to help negotiate the second round of spending cuts—his clear lack of enthusiasm for raising taxes in the past has only raised skepticism on Capitol Hill.

IAN AUSTEN

in Washington