Meet Ralph, the average American taxpayer, who each year sends the government some of his paycheck to finance defense, national parks, Amtrak, education, welfare, subways, sewers, environmental protection and more.
Ralph probably doesn't know it, but this year the government will take $699.23 of his $3,537 in federal income taxes to fund something that delivers no services at all: the payment of interest on the government's unpaid debts.
These payments comprise the third-largest item in the budget that President Reagan unveiled last week, after Social Security and defense. A little-understood process that is as old as the republic, this debt service costs more today than at any time in history.
The reason is that Congress and Reagan cut taxes in 1981, while embarking on an unprecedented increase in defense spending and heading into a recession -- all factors that acted as drains on the federal Treasury. Without enough taxes to finance the government, the Treasury had to borrow money, selling notes and bonds at unprecedented levels.
At the end of 1980 the government's cumulative debt -- for two centuries -- was $715 billion. Today it is $1.7 trillion, an increase of 137.7 percent.
The choice was not to pay now or pay later, but, as Ralph is discovering, to pay now and pay later. The growth in debt begat a growth in the interest payments required to carry it. These payments put new strains on existing revenues, begetting more borrowing, more interest payments, and so on.
In 1980, the annual interest payment on the federal debt was$52.5 billion. In 1987, according to Reagan's budget proposal, it will be $147.99 billion.
How does this affect Ralph? In 1980 the government needed only $337.16 of his taxes to pay the interest on its debt. By 1981 it needed $463.02; by 1982, $563.61. In 1983, a recession year that drove interest rates down, it dropped to $529.17. But by 1984 it rose to $544.19; by 1985 to $660.14, and this year to $699.23.
That is, if Ralph earns $33,600, the median U.S. income for 1985, he has to work for 1 1/2 weeks this year just to pay the interest on the government's debt. As Ralph's situation illustrates, the American government may not be paying its bills, but the American people are.
It wasn't supposed to be this way. Reagan campaigned in 1980 vowing to balance the federal budget by 1983, to do what Jimmy Carter said couldn't be done.
"I refuse to accept his Carter's defeatist and pessimistic view of America," Reagan declared in September 1980. "I know we can do these things, and I know we will."
Had Reagan kept that promise, the debt today would stand at no more than $1.14 trillion, its total at the end of 1982. And interest payments would be about $85 billion, or $63 billion less than this year's total.
Based on figures compiled by the Office of Management and Budget, and the Treasury, roughly $442 of Ralph's $699.23 contribution to this year's debt payments will be used to finance government debts accumulated during Reagan's presidency. This is almost a week of Ralph's earnings, a drag on the family prosperity Reagan toasted in his recent State of the Union address.
Even if the goals of the Gramm-Rudman-Hollings law are met and the budget is balanced by fiscal 1991, deficits in the intervening years will have added another $334 billion to the debt, pushing the amount of money owed outside creditors beyond $2 trillion.
Who are these outside creditors? Many are individual taxpayers like Ralph. Others are American corporations and banks. The Treasury Department says that $213 billion is held by foreigners -- governments, banks, businesses and individuals -- who have increased their holdings fourfold since 1981 to take advantage of the strong dollar. The largest chunk of debt abroad, $42.8 billion, is held in Japan. Next come oil-exporting countries, with $28.8 billion, West Germany, $27.3 billion, and Switzerland, at $17.8 billion.
Interest payments on the debt amount to transfers of money from Ralph, in the form of taxes, to bondholders, in the form of interest. Since 11 percent of the debt is held abroad, roughly $76.91 of Ralph's contribution -- or just under a day of his wages -- goes out of the United States.
Ralph also pays in several indirect ways, ranging from lost government services to a more precarious, if recovering, economy.
Although Congress and Reagan appear determined to pare the budget, they are legally barred from cutting funds earmarked for interest payments; otherwise, the government would go into default, triggering a financial crisis. The result is that interest payments crowd out other federal spending. In 1987, with interest payments estimated at $148 billion, debt service will claim almost 15 percent of the budget. In other words, Ralph gets 85 cents of government for every $1 worth he thinks he buys with his taxes.
What is he losing? The answer lies in Reagan's 1987 budget proposals. In meeting the targets set by Gramm-Rudman-Hollings, the president has sought to reduce food stamps, welfare and other poverty programs by $760 million. That amounts to 0.5 percent of the annual interest payment.
Reagan proposed to eliminate the $617 million subsidy to Amtrak -- a move that the OMB forecasts will bankrupt the passenger rail line, which carries 21 million passengers such as Ralph every year. The president also proposed to cancel $11 million in grants for the Washington Metro, phase out $25 million in sewage treatment grants to localities, and abolish $120 million of maritime industry subsidies, along with $21 million in air carrier subsidies and$58 million in miscellaneous aid.
These cuts, from Amtrak to miscellany, total $852 million, or just over 0.5 percent of the payments on the debt.
The entire package of savings proposed by Reagan to meet the Gramm-Rudman-Hollings target amounts to $38 billion: savings ranging from higher fees in national parks and forests to eliminating the Legal Services Corp. This is only 25.7 percent of the current debt payment, and is only60 percent of the increase in the payment since 1982.
In other words, had Reagan managed to balance the budget in 1982 as promised, the government would now have roughly$63 billion more than it does.
Of course, had the budget been balanced in 1982, Gramm-Rudman-Hollings would never have been invented. But for the purposes of argument, interest savings of $63 billion would not only meet next year's $38 billion target cut without cutting a nickle from programs, it also would leave $25 billion for other national priorities, or it could be used to lower tax rates.
Scholars debate whether the government's soaring debt has hurt the economy, but a number of them cite harmful effects.
Because of its enormous credit needs, the federal government consumed 22 percent of all funds raised in U.S. financial markets by people, businesses and governments in 1985, according to Bob Schwartz, an economist for Merrill Lynch, Pierce, Fenner and Smith. This heightened demand for credit, driving up interest rates, according to Schwartz and many other economists.
Administration officials insist interest rates were not affected by the deficit. But even though rates have fallen, the economists said, loans would be cheaper if the government were not putting such heavy demands on credit markets.
The reason the government's huge credit needs did not dry up loan money for people such as Ralph was that foreigners flocked to deposit money in American banks over the last several years, largely to take advantage of high interest rates, and thus supplied the extra money to satisfy the nation's credit needs. By contributing to an increase in the exchange rate for the dollar, the influx of foreign currency made imports cheaper, resulting in job losses in American auto, steel, electronics and other industries that compete internationally.
The budget-cutting momentum and the recent slide in interest rates promise some relief for the debt burden of the future. The OMB says that every one-point change in interest rates in 1986 would add or subtract $5.1 billion in debt payments.
Despite the debt's significant effects on Ralph, the greatest burden of the debt crisis will fall on younger generations.
Take the debt for 1991, predicted to be $2 trillion even if all Gramm-Rudman targets are met. At 10 percent interest, this would cost the government $200 billion a year. Of that, the average taxpayer would pay $980 a year.
Ralph has a daughter who will enter the work force in 1991. Suppose she stays there for 40 years: Unless the government runs surplusses, her total bill for the federal debt would be $39,200 -- all for a function that produces no services.
Scenarios such as these prompted Reagan to say in January 1983: "We must . . . bring those deficits down. If we don't . . . we will leave an unconscionable burden of national debt for our children. That, we must not do."