IF THE AMERICAN economy keeps growing only slowly -- and that seems likely -- Congress may have to reconsider its rigid budget strategy. Low growth means that the tax laws won't raise as much money as Congress expected because incomes and profits won't be as high as it had assumed. And that means larger deficits. One response is to keep cutting the other side of the budget, spending, until the deficit is back within the legal limits set by the Gramm-Rudman-Hollings Act. But that would raise its own dangers.
If the economy is growing slowly to begin with, and the deficit is cut sharply, that would tend to make growth slower than ever. That risks another shortfall of revenues, requiring another round of spending cuts and so forth in a vicious spiral leading to a recession -- in which the G-R-H limits would be suspended and deficits would soar.
A better solution might be to suspend the deficit limits and instead target spending alone, holding it flat at its present levels. There would be no further spending cuts for next year, regardless of revenue shortfalls. But there would be no spending increases, now or later, until the deficit was safely back on the G-R-H track.
Things haven't yet come to that point. The economy still invites budget-tightening, preferably through a tax increase. It is essential to get the deficit down, even at the cost of a taste of the austerity that this country has been preaching to its Latin American friends. In this decade, Keynsian economics won't work in its accustomed way. For example: if a budget deficit stimulates economic growth, why is the country's growth rate declining while its gigantic budget deficit grows even larger? The answer is that, utterly unexpectedly to most Americans, the budget deficit has created its own counterforce in the form of an almost equally gigantic trade deficit. One presses toward higher growth, the other presses against it, and at present they nearly offset each other.
That's why the United States can't speed up growth simply by spending more and widening the budget deficit. To increase demand does not necessarily increase production -- in this country. The difference between the two is the trade deficit. Similarly, to restrict demand does not necessarily restrict American production -- not if the trade deficit is falling. But the way to get the trade deficit down is to get the budget deficit down first.
The United States has got itself into a bad position, and cannot extricate itself easily -- or entirely painlessly. It is crucial to avoid a recession and yet the familiar Keynsian preventive, an increase in government spending, is now worse than useless. If the G-R-H budget deficit limits should turn out at some point to be impossible to hit, the alternative is to hold spending flat and let revenues swing with the tides of the economy. The deficit would not come down as swiftly as Congress had hoped, but it would come down more surely.