To the President and the Congres

The federal budget is now out of control. It is primed to generate immense deficits, year after year, for decades ahead--deficits far larger than any in our history. This fiscal course is senseless. It threatens to lock the economy in stagnation for the remainder of this century. Massive deficits would absorb savings urgently needed for investment in plant and equipment, infrastructure and R&D. Productivity would sag and inflation resurface. Interest-sensitive industries would be smothered and exports would dwindle. The result would be a period of gradual decline, punctuated by high unemployment and social conflict and culminating in an America that is permanently poorer and weaker.

The Nation cannot afford to leave the budget to politics as usual. It is time to set aside differences of party, region and ideology. We appeal to you, our leaders, to display true leadership in the spirit of national unity, to resolve the current crisis. Only if you do so can the balance of this century yet be a time of prosperity and growth, of new jobs and higher standards of living. And only if it is, can we leave future generations with a richer and stronger America.

Despite the budget actions of 1981 and 1982, the deficit has just topped 100 billion dollars for the first time in history and will rise beyond 200 billion dollars--5% to 6% or more of GNP--by the mid-1980s. After 1985, the deficit outlook actually worsens.

We are rapidly moving into uncharted fiscal territory. Deficits now in prospect have no precedent in our peacetime history, either in periods of sturdy growth or recession.

Furthermore, it is now widely realized that the solvency of the Social Security system is clearly threatened. It is now acknowledged that from 1983 to 1990, the Social Security system alone will run cumulative deficits approaching 200 billion dollars. By the year 2000, the system's annual deficit, including Medicare, could reach over 350 billion dollars, in spite of significant in-creases in Social Security taxes between now and 1990.

Today's deficit is partly caused by the recession, reflecting a shortfall in tax revenue caused by today's weak economy. The present recession has clearly been aggravated by a collision between tight money and loose budget. Recovery requires a better balance between the two policies. Making the budgets even looser will make such a balance and thus a healthy recovery virtually impossible.

The crux of the budget problem resides not in 1983 but in the ensuing years. The startling growth in the deficits projected for the mid-1980s and beyond is not recession-related. These immense, structural deficits will take place even on the happy assumption that economic recovery commences immediately and proceeds at a sustained, healthy pace. We cannot "grow out of" this deficit shadow. Even if real GNP grows at a buoyant annual rate of 5% over the next 3 years, the 1985 deficit still will be about 200 billion dollars. On the other hand, if economic recovery is partial or halting (a more likely case, because massive federal borrowing will itself retard the recovery) the 1985 deficit could reach 250 to 300 billion dollars.

The growth in tomorrow's deficits arises not from today's economic recession but from yesterday's government policies. Recent tax legislation will keep relatively constant the share of national income going to federal taxes over the next several years. But federal spending, already authorized or announced, will be rising as a share of national income.

Federal spending no longer fluctuates in parallel with national needs. It no longer rises and falls much due to emergency defense programs to meet temporary crises, or due to cyclical outlays designed to counter recession, such as unemployment compensation, such as unemployment compensation or jobs programs. Rather, 75% of the budget now flows into open-ended social entitlement programs, contractual interest expenses, and long-term defense modernization, and by 1985 this proportion would grow to over 80%. These long-term commitments have enormous momentum. They are scheduled to grow rapidly--in absolute terms, as a share of the budget, and as a share of GNP--for as far as we can project. That is why, as now structured, the federal budget would never achieve balance, but would sink deeper into the red with each passing year.

Recent tax cuts will keep total federal revenues fixed at 18% to 20% of GNP over the 1980s.

By contrast, the growth in total spending has not been reduced. Quite the contrary. Without further budget cutting, spending in 1985 is projected to equal 25% or more of GNP, up from 22.4% in 1980--an increase of about 380 billion dollars.

This spending growth comes from three sources: social entitlement programs unrelated to means tests, such as Social Security, Medicare, and federal pensions; the defense buildup; and interest on the debt.

Under current laws, these non-means-tested social "entitlement" programs would grow by over 150 billion dollars--from 227 billion dollars in 1980 to 380 billion dollars in 1985--rising from 8.8% to about 9.9% of GNP. (By contrast, social programs targeted to the poor will decline relative to the economy, from 2.2% to about 2% of GNP. Budget actions to date have reduced the growth in these means-tested programs by more than twice as much on a percentage basis as non-means-tested programs.)

Defense spending, under the currently planned buildup, will increase by 150 billion dollars, a real (after inflation) increase of about 9% a year--over 15% per year in hardware items--lifting defense (not including military retirement) from 4.8% in 1980 to about 7.1% of GNP in 1985. (By contrast, public investment, grants to state and local governments, and federal operating expenses will actually decline from about 4.6% to about 2.9% of GNP.)

Huge deficits--and high teal interest rates, with few precedents in modern history--risk denying too many Americans any chance at sustained jobs and prosperity in the new decade, after a decade in which real median income per worker showed little or no increase and unemployment rose to higher levels.

Recovery from today's recession could be feeble and temporary as a result. Depression conditions now prevail in most industries which sell their product on long-term credit:'housing, automobile, construction, durable goods and the like.

High long-term real interest rates, largely attributable to concern over future government policy, would remain abnormally high, holding back new investment, which in recent years has been the lowest of any industrial country and is now declining still further. High short-term real interest rates would threaten to push thousands of small businesses and farms into bankruptcy--to say nothing of the adverse effects on the fragile economies of the developing world as well as on the global financial system.

Dollar exchange rates--now at lofty levels that have already crushed our export industries, overwhelmed our manufacturers in practically every international market, and have cost us an estimated one to two million job opportunities in the current period--would remain artificially high; they would continue to choke off American exports, suck in imports, destroy U.S. jobs, and could make the temptation of full-scale protectionism irresistible.

As a result, capital formation and job creation would continue to stagnate, making unacceptably high unemployment a fixed feature of the industrial landscape.

Thus, tomorrow's big deficits, and the high long-term real interest rates that will accompany them, are already doing serious damage now and will wreak even more havoc in the coming decade and beyond. Without savings available to fuel productive investments, the economy will face nearly perpetual stagnation.

In short, by losing control of the budget, we are sacrificing the jobs and prosperity of our children and grandchildren, and shrinking America's stature and influence in the world.

Budget crisis transcends conventional politics. No solution is possible through partisan maneuver. We, the undersigned, believe Americans must now rally around three basic principles of budget reform:

1. Focus on the Long-Term. Financial markets, and the American people, are worried by today's deficits, but much more by the huge deficits now in prospect for the mid-1980s and beyond. Today's government action must commit to a substantial, progressive scaling down of those outyear deficits. The reforms must be large, structural, and permanent--equal to the size and duration of the problem itself. Temporary, one-shot actions won't do any good.

2. Fairness. Balancing the budget on the back of just one group or one set of programs is not feasible, and trying to do so would not be fair. So far in 1981 and 1982, the budget cuts have focused on the means-tested programs, through reductions in Medicaid, AFDC, food stamps, legal services and the like. The much larger programs which have been barely touched are those social programs that confer a large part of their benefits on middle and upper income groups (such as Social Security and federal pensions) and the military defense programs. Together, such programs in 1985 would amount to over 650 billion dollars in spending or 68% of the budget (interest on the national debt would be another 12%). It is now time for a wider sharing of the burden.

3. Focus on Investment. The chief vice of uncontrolled spending and big deficits is that they rob the future, by absorbing investment capital needed to build up productive jobs and real income for tomorrow. (Beginning in 1983, budget deficits will amount to a stunning and unprecedented 100% of the net savings generated by individuals and families in the U.S.) The 1980s should be a decade of investment, not a decade of red ink. Cutting deficits by measures that would simultaneously reduce savings and productive investment would make no sense. Budget reform should protect the future. As we squeeze the share of GNP taken up by federal spending--which we must--we should concentrate on programs that subsidize consumption (e.g., the social entitlement programs) and spare programs of public investment (e.g., R&D and economically sound public works). When increasing revenues, we must focus our new taxes on private consumption and not on private savings and investment.

To achieve credibility in long-term financial markets, a project of fiscal reform must aim, at a minimum, to cut the projected 1985 deficit by about 175 billion dollars. This would bring the 1985 deficit to the 75 billion dollar range. Also, specific actions taken in 1983 should assure budget balance within a few years thereafter. If we do less than this, future deficits will likely remain well above 2% of GNP for years to come, which would make the nation's financial and investment situation in the 1980s even worse than in the 1970s. The last decade was bad enough for the nation's economic performance. To invite a further drop in our economic performance would be totally irresponsible.

We recognize that this budget reform is not the only action necessary to achieve long-term economic recovery. Many who signed this statement also favor other changes, such as in monetary policy, in the structure of the Social Security and federal pension systems to assure their long-term affordability and financial integrity, in support for research and development, in tax incentives for savings and capital investment, in manpower retraining, in rebuilding public infrastructure, in reformed exchange rate systems, in export policies, etc. But we are firmly united in our conviction that such measures will not prove effective without basic and major changes in budget policies.

We can remake the budget without gutting our military security, without starving private savings and investment, and without putting harsh burdens on the poor. But we will have to address head-on each of the three major sources of runaway deficit: the growth of large social entitlement pro-grams, the growth of defense spending, and the inadequacy of tax revenues. If any of these areas is placed "out-of-bounds, no fair or effective solution to the problem is possible.

We, the undersigned, rarely stand together on political and economic issues. But we believe Americans must rally to the common cause of fiscal responsibility. We support this plan as a fair, realistic, and bi-partisan approach toward regaining mastery over our economic destiny, and we commend it to you for early action:

1. Entitlements and Other Non-Defense Programs. We should now slow down the growth in non-defense spending so as to reduce the deficit by about 60 billion dollars in 1985. The best way to begin is with a one-year freeze in the growth of benefit levels of cash payments flowing from the large, non-means-tested entitlement programs: Social Security, veteran's benefits, civil service and military retirement, and other non-defense subsidies and payments that are not means-tested. Thereafter, there should be limits on the automatic inflation indexing of benefits (e.g., by capping inflation adjustments at 60% of the CPI, or at 4% per year, or by providing adjustments only for the amount of inflation in excess of 3% per year). However difficult politically, controlling the budget requires controls on the large entitlement programs and on the inflation indexing process that drives the cost of those programs upward. If those programs are instead placed off-limits, it will be impossible to make budget savings now necessary for financial stability. Similar restraint is required on all transfers, subsidies, and programs other than those essential to the needy.

These measures can be carried out in ways to protect those citizens truly in need.

2. Defense. The defense budget increases now planned should be moderated so as to save aout 25 billion dollars in FY 1985. This would still provide for a major and sustained defense buildup, an overall increase in real terms between 1981 and 1985 of about 7% and an increase in hardware purchases of about 11% per annum. It would encourage more explicit planning for that buildup and lead to wider, sustained public support for a strong defense posture.

3. Taxes. Revenues should be increased by about 60 billion dollars in FY 1985. The principal source of these increases in revenue should be from consumption-based taxes, and by imposing user fees for the government's commercially valuable services. Modifying, delaying, or stretching out the income tax cut for 1983 has the unanimous approval of the undersigned members only in the context of a prior agreement on the kind and magnitude of spending cuts referred to in parts 1 and 2 of this program.

These steps, if undertaken now, would cut the FY 1985 deficit by about 145 billion dollars. This in turn could lead, through less federal borrowing, to a further deficit reduction of about 30 billion dollars in lower interest payments. We would then meet the overall target of about 175 billion dollars in FY 1985 deficit reductions.

The program we suggest would require tangible sacrifices from many middle and upper income citizens. But the sacrifices would not be severe, and they are simply necessary to avoid economic chaos and stagnation. Inaction would exact enormous and unnecessary sacrifices from every American.

The budget crisis is a national crisis. Only a united leadership in Washington, extending across both parties and embracing liberals and conservatives alike, can avert a fiscal disaster. Let us work together, as Americans, to rescue the future of our economy . . . and our country.

THE BI-PARTISAN BUDGET APPEAL NEEDS TILE SUPPORT OF EVERY AMERICAN. Please send this message to your Senators and Congressmen. Contributions may be sent to: The Bi-Partisan Appeal, P.O. Box 9, Bowling Green Station, NY, NY 10004. Reprints of this message are available at modest cost from the above address.

W. Michael Blumenthal John B. Connally C. Douglas Dillon Henry H. Fowler Peter G. Peterson William E. Simon

Secretary of the Treasury Secretary of the Treasury Secretary of the Treasury Secretary of the Treasury Secretary of Commerce Secretary of the Treasury