Q: Will anybody try to fix what ails the budget this year? The president now has the latest bad news on the numbers, with deficit estimates of more than $200 billion. The election is over, but the president ruled out any number of possible deficit-cutting steps during the campaign. Does anything happen in 1985?
A: I guess I still doubt it. Let's run through the traps. I think that, if you assume that the president is not going to deliver a very different budget than what we've seen in the last two years, then you can be sure that the Congress, and certainly Democrats, are not going to step in and deliver a very different budget.
We had an election, and the election rhetoric from the president was that we can grow out of this, we don't need increased taxes, we don't need to cut entitlement programs and we don't need to cut defense.
I think it now depends really on what he does. If he is willing to take some political negatives for changing his mind and delivers up a budget that does a number of those things, I think the Congress would respond to it. But I expect he will deliver a status-quo kind of budget: marginal changes, but basically the same trend. Congress is not going to change it. . . .
Q: It seems clear that the budget President Reagan sends to Congress is not going to have any tax increase in it other than limiting the tax-free value of employer-paid health insurance, which is already on the table, and perhaps some other small items. . . .
This year, the tax issue was very prominent in a lot of congressional races. Are the Democrats going to touch a tax increase of any kind, unless he gets out in front first?
A: I think some bridges were really burned on that. I don't think that you are going to see Democrats being willing to go through the same drill that we went through, with Republican senators beating on him and us following -- in one instance with him taking a kind of meek lead and in the other instance kind of disappearing. . . . No, I don't think we will be willing to participate in that.
It's kind of hard to convince somebody here that we ought to take some dramatic, almost politically sacrificial, action to overcome a problem that his rhetoric created in the election.
Q: Short of some kind of perceived economic crisis?
A: That can change the chemistry. That might get the president very interested in dramatic changes. If he's interested, then, ipso facto, everybody's going to be interested. People are going to know that that is the best thing to do, and the political fallout of not doing it would be worse than anything.
Q: What about the thing the president says he will spend a lot of time on: tax simplification? You have a direct personal involvement in that. What are the prospects for Bradley-Gephardt and tax simplification in general this year?
A: While I'm pleased that there's a lot of interest in it . . . my concern is that, if it is not propelled to some extent by the budget context, the budget imperatives, then it has a very hard time being passed.
The old saw is that you can't do tax reform unless you have a tax decrease, which is this sweet coating on the outside of the bitter pill. In this case, I think it is very hard to have tax reform unless you have the sweet coating of deficit reduction. That would mean a tax increase along with spending reduction in order to achieve deficit reduction. . . .
If the president sends a tax simplification proposal here and a budget that really doesn't have deficit reduction, then it's a troubled proposal. The whole focus will be on what's wrong with that way of reforming taxes. You'll have all the lobbies and all the interests that basically aren't interested in tax reform being able to key on what's "wrong," and you'll have nothing "right." The "right" is deficit reduction. It'll have no engine, no impetus. . . .
But if it's in the context of deficit reduction, and it's an integral part of achieving that, then it's got a real engine. Then people can say, "Well, golly, I didn't want to vote to knock out the storm window credit. I never would have done that, but it was part of this whole thing that we just had to do for the good of the country. . . . "
I think that we are likely to see a proposal from the president that doesn't contain real deficit reduction or an integrated package to do that. Therefore, it's going to be seen just as an isolated tax reform effort, and I think it's going to be a troubled proposal.
Q: Martin Feldstein, the former chairman of the Council of Economic Advisers, this week made a comprehensive proposal for deficit reduction. It included domestic and defense spending cuts, indexing Social Security and other non-means-tested entitlement programs and the personal income tax system only to the extent that inflation exceeds 3 percent, and after a tax simplification effort, raising the resulting rates enough to raise $50 billion in 1989.
A: Well, it's the usual cast of characters. You know, when you look at this thing, it's really pretty simple. . . . If your budget is 45 percent entitlements, 27 percent defense, 13 percent all other and 11 percent interest, you know where you are going. There is no magic about it. There is no secret. Everybody knows who's looked at it for 10 minutes that you're going to deal in all those areas, including taxes.
But the problem has never been the specifics. . . . It's a political problem. It's not an economic problem. It's not a numbers problem. It's how you get the votes, 218, 51 and the president. That's the key thing to look at. Obviously the mix of this thing, and the way it's put together, has an effect on that. But you can't get to the outcome you want by going through the specifics. You have to get at it through the politics, I think.
To go back to where I started, the president is the one leader of the country. He's elected to be the legislator; he is the leader. His job is to propose solutions to problems, to compose budgets. If he is not willing politically to take the heat, to take the fallout, whatever the trade-offs, of proposing that kind of a budget to the Congress, then I don't think politically it is going to happen.
You can use Feldstein's approach or 80 other approaches -- we're drowning in scenarios to do this -- that's not the problem. The problem is the political will to get the votes to do it.
In my humble opinion, until you have a president who thinks the problem is bad enough, urgent enough that he is willing to propose a scenario that touches all those bases, you aren't going to get action.