The Peace Dividend

FOR FISCAL 1997 (ENDING LAST SEPTEMBER), THE federal budget deficit was $22 billion, down from $290 billion in fiscal 1992. President Clinton plans to submit a balanced budget for 1999. The Congressional Budget Office (CBO) says the budget is already almost balanced. In coming weeks, Clinton and congressional Republicans will compete for who should get the most credit for erasing budget deficits. At present, the contest is a virtual draw. In a recent CNN/USA Today poll, 42 percent of Americans selected Clinton and 39 percent chose the Republicans. Who really deserves credit? Well, the answer is: Mikhail Gorbachev.

We are now enjoying a ""peace dividend'' from the end of the cold war, which--more than Clinton or Gingrich--subdued budget deficits. In fiscal 1998, defense spending will total about $266 billion, or roughly 3 percent of national income (gross domestic product). A decade ago, it was 6 percent of GDP. The difference amounts to an additional $260 billion. You can quibble. Perhaps defense budgets would have dropped even if the cold war hadn't ended. Maybe true ""savings'' are only $150 billion. Still, the conclusion remains: without these savings, massive deficits would endure.

It helps to understand how the budget surpluses arrived (assuming the forecasts come true) before deciding what to do with them. But defense hardly enters this essential discussion. In part, the omission is understandable. A booming economy provided the last shove toward budget balance in the form of an unexpected surge in tax revenues. For fiscal 1997, they were $72 billion higher than forecast by the CBO only a year ago. Without that windfall, the budget deficit would have been nearly $100 billion.

The main reason, though, that defense cuts are ignored is that they're politically inconvenient. They suggest (a) that much of the heroic rhetoric from Clinton and the Republicans about balancing the budget is overblown, (b) that the common notion that ""big government'' is on the wane is false (just the opposite: aside from defense, government is expanding) and (c) that defense cuts may have gone too far.

Those cuts are clear. Since 1990, the number of army divisions has dropped from 18 to 10; the navy's combat fleet has shrunk from 546 to 357 ships; the number of active air-force tactical fighter wings (72 planes each, without spares) has gone from 24 to 13. Outside of defense, big cuts are harder to find. Political scientist Allen Schick of the Brookings Institution has noted that only two major programs were killed in the 1980s: general revenue sharing (block grants to states and localities) and Urban Development Action Grants (urban renewal). In the 1990s, Schick knows of no major eliminations. Asked about big programs Clinton has ended, the Office of Management and Budget (OMB) provides two: farm subsidies for wool, honey and mohair; and water-conservation grants in the Interior Department.

Federal spending comprises four major categories: defense, domestic discretionary (a catchall stretching from FBI to NASA to health research to education and housing), entitlements (programs for which people automatically qualify, from Social Security to Medicare to food stamps) and interest on the federal debt. Aside from defense, none has declined in the past decade as a share of GDP or in inflation-adjusted dollars. Between 1988 and 1998, entitlement spending went from 10.2 percent of GDP to an estimated 11.3 percent. In the same period, domestic discretionary spending has risen from 3.2 to 3.4 percent of GDP.

Because the economy grows faster than prices, these changes signify increases in inflation-adjusted (""real'') dollars. Since 1988, ""real'' spending on domestic discretionary programs has risen about 25 percent. In the 1980s, the Reagan administration did trim some agencies. James C. Miller III, director of the OMB between 1985 and 1988, recalls killing the Energy Department's synthetic-fuels program (making oil from coal). But since then, most agencies have survived and even flourished in an era of alleged austerity.

Consider the Small Business Administration. Once considered a prime candidate for elimination, it has prospered. It switched its emphasis from direct loans to government-guaranteed loans (a bank typically makes the loan, but government covers most of the cost of any default). Between 1983 and 1996, these ballooned from $8.5 billion to $24.6 billion. Susan Tanaka of the Committee for a Responsible Federal Budget rightly worries that in a recession both defaults and federal outlays would soar.

All this underlines that the balanced budget stems mainly from the peace dividend--and good economic luck. Hard decisions were avoided. Efforts to anticipate the retirement of the baby boomers by trimming entitlement spending were ignored. It's true that the budget agreements of 1990 and 1993 did raise taxes on high-income taxpayers; but as noted, the strong economy resulted in revenue gains that vastly exceeded forecasts. The 1990, 1993 and 1997 budget agreements also imposed some procedural limits on spending. But these mainly created a framework to cut defense.

Just because this is the path of least resistance does not mean it's wise. No one thinks the United States now needs the force levels of the cold war. But what do we need? Writing in The New Republic, strategist Eliot Cohen of Johns Hopkins University says ""there is no substitute for a bigger budget.'' He doesn't argue for higher force levels but for more investment in new technologies and tactics ""to maintain a comfortable lead over China 20 years hence'' and to combat new forms of terrorism, ""including the possible use of weapons of mass destruction.''

What are our collective needs and responsibilities? A sensible debate would expand important programs and end outdated ones. (In a $1.7 trillion budget, a few big programs must be clunkers.) With any remaining surplus, we'd then decide how much to cut taxes or reduce debt. Such a refined debate seems unlikely. Programs endure; beneficiaries enjoy unstated property rights in their payments; favored constituencies get selective tax breaks. Congress and the president tinker and wait to be moved by big events, for good or ill.