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The Spending Monster Still Has Too Long A Leash


Economic Viewpoint

THE SPENDING MONSTER STILL HAS TOO LONG A LEASH

BEATING THE STREET

By Peter Lynch with John Rothchild

Simon & Schuster -- 318pp -- $23

Peter Lynch is a single-minded crusader: He wants to persuade people to buy stocks. Surely there's no one better qualified to take up this worthy cause. As manager of the Fidelity Magellan mutual fund, he was a legendary stockpicker. In a very worthwhile 1989 book, One Up On Wall Street, Lynch preached the gospel of investing, and here he is, back at it again.

The virtues of stock investing are numerous; they can hardly be repeated too often. Unfortunately, repetition is a failing in a book--and one that is all too common in sequels. Beating the Street offers mighty little of substance that wasn't covered in One Up.

But Beating does offer numerous anecdotes. They illustrate how Lynch picked this stock and why he didn't pick that stock--and why he shouldn't have picked another stock, with examples taken from his days at Magellan as well as from his more recent semiretirement. There is, for example, a lengthy love song to Lynch's longtime favorite, Fannie Mae. In One Up, the anecdotes illuminated the principles that were so cogently presented in the book. In Beating the Street, they essentially provide padding.

One interesting and original topic that Lynch might have taken on is an inside view of the mutual-fund business, Fidelity in particular. But we get no sense of what it's like to work for this giant. Fidelity CEO Ned Johnson is mentioned a few times, but we get no feeling for the man. Of course, with Lynch still employed as a Fidelity consultant, a probing examination of that company is probably too much to ask.

If nothing else, Beating is a good read. Lynch's co-author is again John Rothchild, a financial writer of clarity and wit. It's just unfortunate that there isn't much else.

Despite misgivings about higher taxes, Americans generally support President Clinton's proposals for tax increases because he has convinced them that they will significantly reduce the budget deficit. But if the past 12 years are any guide, federal spending is likely to expand as tax revenues grow.

Federal expenditures at the end of Jimmy Carter's Presidency in 1980 were $591 billion, and taxes brought in $517 billion, so the deficit was $74 billion. By the end of Ronald Reagan's second term in 1988, tax revenues had risen to $909 billion despite--or because of--the Tax Reform Act of 1986. That would have created a large budget surplus if federal spending hadn't risen even more, increasing the gap to more than $150 billion.

The trend during the past four years is even more revealing, since the defense buildup--started under Carter and accelerated by Reagan--tapered off. But notwithstanding the 1990 budget accord between Congress and President Bush in which he was persuaded to break his vow not to raise taxes, the deficit grew sharply, to $300 billion, because spending grew faster than taxes did.

And it did so despite the fact that the government shunted large expenditures onto the business sector. It mandated business outlays for environmental cleanup, aid to handicapped employees, old-age support, health care, and other programs.

HEAVY PRESSURE. President Clinton says he will both raise taxes and reduce spending, but his proposals put much more emphasis on tax increases than on spending cuts. But the net reduction in expenditures amounts only to a little over $100 billion, even after including the $55 billion in spending cuts Clinton says he will accept if Congress agrees to higher spending on jobs, roads, and other "investments." According to the Administration's estimates, the proposed hike in energy and income taxes will bring in about $250 billion of additional revenue during the next five years. And during the next two years, the Administration is not even asking for any reduction because the President wants an additional $30 billion to be spent on stimulating the economy--despite the strong 4.8% growth in gross domestic product during the last quarter of 1992 and 2%-plus growth during the whole of last year.

The heavy weighting of the President's proposals toward higher taxes and the deficits experienced during the past dozen years are not accidents, nor do they only reflect partisan conflicts. There are enormous pressures on Congress and Clinton to spend on thousands of programs favored by groups with political clout. In addition to the two biggest components, health and retirement benefits, the full list would take up many BUSINESS WEEK pages: It would include education and training programs to help children; a delicatessen of pork, featuring roads, public-transportation systems, and airports; the environment; assistance to the handicapped, minorities, and the poor; improving life in the cities; fighting drugs and crime; supporting Big Science and university research; and helping industry develop commercially viable technologies.

LONG ODDS. The President sought to weaken the opposition to new taxes and to make the proposed tax increases more popular by concentrating the hike in income

Howard Gleckman; Gary Weiss


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