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Structural budget deficitsin the federal government:Causes, consequences andremedies a symposiumKhi V. Thai aa University of Maine , Orono, Orono, 04469,MainePublished online: 26 Jun 2007.

To cite this article: Khi V. Thai (1986) Structural budget deficits in the federalgovernment: Causes, consequences and remedies a symposium, InternationalJournal of Public Administration, 8:1, 1-6, DOI: 10.1080/01900698608524503

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INT'L. J. OF PUB. ADMIN., 8(1), 1-6 (1986)

STRUCTURAL BUDGET DEFICITS IN THE FEDERAL GOVERNMENT: CAUSES, CONSEQUENCES AND REMEDIES

A SYMPOSIUM

Edited by Khi V. Thai

University of Mai-ne, Orono Orono, Maine 04469

This symposium is concerned with the seriousness

of the current enormous federal deficit which is likely

to hover between $215 billion to $290 billion unless

some change in fiscal policy is made. It is noted that

these projected deficits were based upon the assumption

t-hat the economy continues to grow toward full

employment. Therefore, many economists and budget

experts believe that the nation has been facing a

structural budget deficit - one that will persist ---------- ------ ------- despite the business cycle of the economy. This editor

believes that the current conti-nuing deficit is similar

to a time bomb. The time for its explosion is the

economic recession which is cyclical in the history of

American economy. The success of Reaganomics in

spurring growth has opened a unique opportunity for

balanced budget because the current economic expansion

is so strong that taxes can be increased and government

expenditure can be cut without causing a major economic

slowdown. The time, then, to act is now. If no action

is taken to reduce the gigantic deficits, an

unavoidable economic recession in the American economy

may occur which could push the deficit to a ballooned

1990 deficit of 425 billion(1) and bring serious

economic hardships to the nation.

Copyright O 1986 by Marcel Dekker, Inc

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T H A I

This symposium is not the first to study this

critical issue. The Federal Reserve Rank of Boston and

the Maxwell School of Public Affairs and Citizenship,

Syracuse University, to cite a few, have organized

symposia on this issue.(2) In addition, many articles,

books, research papers, and popular media have been

devoted to it. Despite the many research efforts and

more than one hundred measures received by Congress,(3)

aimed at either statutory or Constitutional changes to

restrain expenditures as well as taxes and balance the

budget, an adequate solution has yet to be found. _'he

budget deficit continues to be a major policy issue in

the public agenda in years to come.

In exploring the causes and consequences of

structural budget deficits, and suggesting some

remedies to cure the deficit, this symposium is an

attempt to keep public policy analysts, policy makers

and particularly the public aware of the potential

danger of the current and future state of budget

deficits. The reasons for early action are numerous.

Firstly, fiscal changes are required now in order to

have even a moderate effect in later years. THe longer

the time period for adjustment to fiscal changes, the

smoother and more efficient the adjustments will be.

This applies particularly to social programs; abrupt

and sharp cuts will intensify the shock for recipients.

Secondly, any spending reduction usually has

cumulative effects. That is, the savings would be

small at first, but later in the projection period,

they would grow rapidly. Conversely, the longer the

delay in change in fiscal policies, the more violent

the quake. The compounding effect of annual

expenditure increases will make expenditure growth

harder to control.

Thirdly, although a slight decline in the budget

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CAUSES, CONSEQUENCES AND REMEDIES 3

deficit occurred in 1984, this decline was less than

normally expected during an economic recovery. Even

worse, the projected deficit rises in years to come,

despite the continuing strong performance of the

economy. The strong economic performance offers us a

unique opportunity to reduce the "red ink".

Finally, enacting measures to reduce the deficit

would be politically difficult in any year, and

especially so in election years. Some argue that

President Reagan is in the best position to act now

because he is no longer under re-election pressure.

This symposium consists of eight articles. The

first paper explores the definition of relatively new

terms "structural budget deficit", traces the trends of

cyclical and structual deficits, analyzes the patterns

of revenues and public expenditures, and considers the

extent, or seriousness, of deficits from the

perspective of federal financial liabilities and

obligations (Khi V. Thai, "Structural Budget Deficits:

Concepts and Facts"). The second paper identifies the

causes of deficits, and highlights fiscal theories

regarding the size of government and the consequences

of budget deficits (Le T. Cao and Khi V. Thai,

"Structural Budget Deficits in the Federal Government:

A Theoretical Perspective"). The role or size of

government in the economy and the impacts of federal

deficits and debt on macroeconomic variables have been

a long-term theoretical interest to economists and

political scientists. Despite the great volume of

theoretical work, however, there has been little

consensus on the impacts of federal deficits and debt.

The third article adds the dimension of empirical

study in an analysis of the theoretical debates over

the impacts of structural budget deficits. Nguyen and

Olson in "U.S. Budget Deficits: Empirical and Policy

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4 T H A I

Issues", review past empirical studies, point out some

serious statistical problems with these studies, and

simulate several scenarios in which the budqet deficit

may be reduced.

As structural budget deficits have arisen

primarily from the changing mood of the public and

fiscal policy of President Reagan, a basic question

must be raised: "Is the government too large?" This

question, discussed in the second paper, i.s a major

theme of Straussman's "Government Overload Revisited:

An Essay on the Budget Deficit". Based on the

proposition that the federal government is too large or

overloaded, this article reviews the overload thesis,

suggests its current status, and assesses the

importance of the budget deficit as a symptom of the

capacity to govern.

Following theoretical and empirical discussions of

the causes and impacts of structural budget deficits,

the remaining four articles are devoted to strategies

for reducing structural deficits, based on the

proposition that structural budget deficits are

undersirable. Ventriss, in "American Federal Deficits

and Its International Economic Effects", devotes a good

part of his article to theoretical discussion of the

impact of U.S. budget deficits on the world economy,

then proposes an international and national strategy to

revitalize America's role in the world economy.

In the sixth article, "Automatic Cost-of-Living

Adjustments and the Structural Federal Budget Deficit",

Carozza and Pena argue that efforts to reduce

structural budget deficits should focus on large

components of federal spending. According to the

authors, entitlements such as social security, federal

retirement and medicare are among them. As required by

current laws, entitlement benefits are to be adjusted

automatically with the cost-of-living index. AS

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CAUSES, CONSEQUENCES AND REMEDIES 5

automatic cost-of-living adjustments (COLAS) aggrevate

structural budget deficits, some measures have been

suggested to restrain COLAS. In this article, the

authors point out the significance of entitlement

programs in federal budget outlays, review and discuss

COLA changes, and suggest a COLA option and its impact

on budget deficit reduction.

Huq, Taylor, and Whritenour are primarily

concerned with the externalities associated with

spending programs for economic growth. Theref ore,

their efforts are devoted to fiscal policy regarding

infrastructure investment in the U.S. economy. The

a u t h o r s e x a m i n e the i m p a c t and m a g n i t u d e o f

underinvestment in the publicinfrastructure of the

economy, pont to its implications for deficit reduction

and economic growth, and recommend a strategy enhancing

economic growth which eventually will reduce the

structural budget deficits.

If the three preceding articles focus on "micro-

strategies" for reducing structural budgets, Lynch and

Guess use a "macro" approach to recommend some deficit

reducing strategies. It is noted that budget deficit

cutting is not an easy task, as value judgments are

heavily involved. Therefore, many deficit reducing

measures, including balanced budget amendment, have been

proposed, but little concensus has been arrived at

among policy makers, economists, political scientists,

and the public alike. Therefore, it will not be

surpising if Lynch and Guess's "Critical Perspectives

in the Federal Budget Deficit Debate" intensifies,

rather than resolves the budget deficit debate.

REFERENCES

1. Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1986-1990 (February, - - - - - - - - - - - - - - - - -- -. -- - - - -- - - - - - -- 1985), p. 48.

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6 THAI

2. What Should be Done About the Federal Deficit? The Donald S. MacNaughton Symposium, Syracuse University, Syracuse (1984); Economics of Large Governments Deficits, Proceedings of a Conference held by Federal Reserve Rank of Boston, Melvin Village, New Hampshire (October, 1983) .

3. Congressional Budget Office, Balancing the Federal Budget and Limiting Federal SEending: ------- ------ --- -------- ------- - ------- Constitutional and Statutory Approaches (Septembner -------------- --- --------- 1982), p. 1.

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