Congressional leaders speak urgently of a budget compromise this spring. President Reagan amiably replies that he is perfectly willing to discuss anything except the two things that count-- defense spending and, above all, a tax increase.
The real question is no longer the size and shape of the compromise, but whether it can happen at all. The probability is fading fast. To comprehend the magnitude of the trials ahead, it helps to see a few numbers.
The budget deficit has now flown well and truly out of control. Last year it was $58 billion, this year it will be around $110 billion, and next year--the year for which the budget is now being written--it seems to be moving toward $165 billion.
Where did that staggering number come from? It's a long story. But you will have the beginning of an answer if you remember that Reagan inherited a $60 billion deficit from President Carter, then persuaded Congress to pass a huge tax cut. That cut, in 1983, will amount to about $90 billion.
The tax cut is central to the whole budget debate. Reagan is extremely proud of it. He regards it as a great triumph, and shows no inclination to retreat from it.
But the deficit is dangerous, for it is the cause of the present extremely high interest rates. Many American businesses are not viable at these interest rates, and the politicians know it.
Do not let anybody tell you that the high rates are a mystery. Do not listen to elaborate explanations that there's no theoretical relation between deficit financing and the rates. To lenders, those deficits mean high inflation ahead, and they are not going to be caught again--as they were most expensively caught in the late 1970s--with a lot of low-interest loans out in a time of rising inflation. The rates won't come down until the deficit does.
To affect interest rates quickly and substantially, the 1983 budget would have to promise a deficit lower than this year's. The 1983 deficit would have to be under $100 billion. That means a reduction of at least $65 billion. Where is it coming from?
From defense, it's possible to take about $10 billion next year without doing damage to anything important. But because of defense spending's long lead times, it's difficult to get more than that.
Freezing all of the cost-of-living on all of the entitlement programs, including Social Security, might save about $25 billion a year. But a year's total freeze is utterly unlikely. A half- freeze would be worth about $13 billion.
It's getting very hard to find further cuts in that small part of the budget that is neither defense nor entitlements. A figure of $10 billion stretches the limits of plausibility.
If you add those three figures together--the outside possibilities of cuts in defense, entitlements and other spending--you get just about half of the crucial $65 billion by which Congress needs to reduce the budget. What about the other half?
There's only one possibility--a tax increase. It would have to be a very large one. The necessary amount, something well over $30 billion, is in the same range as the reduction that will result from cutting the tax rates 10 percent--as President Reagan's cherished tax bill will do next July.
Thirty billion dollars a year is not an amount that you can raise by higher barge fees, or a tax on beer. You could raise it with a tax of 40 cents a gallon on gasoline. Or a tax of perhaps $6 a barrel on all oil, foreign and domestic. Beyond that, there aren't many possibilities except, of course, the income tax.
That's where all the talks with Reagan have collapsed. He won't hear of a major tax increase, reversing last summer's victory. As a result, congressional leaders seem to be losing hope of getting the deficit under $100 billion. Without a major tax increase it becomes impossible, as a matter of congressional realities, to put together any serious combination of spending cuts. No committee chairman is inclined to sacrifice programs about which he feels deeply, if it isn't part of an agreed package that everyone can confidently expect to make a decisive difference in the deficit and interest rates. Who will vote for a gingerly three-month delay in Social Security cost- of-living increases, if the sole effect is to reduce the deficit from $165 billion to $161 billion--affecting interest levels not at all?
Next question: What if there is no budget compromise, and perhaps no budget passed by Congress? Under those circumstances, Paul Volcker and the Federal Reserve Board would have very little control over interest rates--just as they have very little control now. If the Federal Reserve moved to loosen the money supply --the traditional method of lowering interest rates--Wall Street, with one voice, would shriek that Washington was once again trying to pump up the economy for an election year, with the usual inflationary aftermath. With that, rates would go up rather than down.
As high rates continued, the pressures on Congress to bail out companies and whole industries would become irresistible. Then the spending side of the budget would begin to swell again.
It's a prospect that ought to terrify, above all, the closest supporters of the president. They won an election with the charge that big government was suffocating American private enterprise. Now, through the impact of big government's borrowing and the fear of big inflation to follow, the interest rates do in fact threaten to suffocate many American business enterprises. If Congress struggles to rescue some of the victims, it will make government bigger than ever.
This emergency began with the unintentional effects of an excessively large tax cut. All the talk of budget compromise comes down to dealing with those effects, as they have developed in the eight months since Reagan proudly signed the tax bill into law.