There is little dispute that huge government deficits, which send the Treasury scurrying to borrow money, increase the demand for funds in capital markets. The result of this competition is higher interest rates which force out individual and corporate borrowers. Vital industries such as housing, automobiles, and real estate are directly affected, while scores of related service industries suffer needlessly.
The solution to these large deficits lies in a reduction in defense spending, additional cuts in social programs, and -- most important -- adjustments in the course of the recently enacted tax cuts.
Tremendous federal spending, instituted by Lyndon Johnson and continued under successive administrations, necessitated extensive tax increases and planted the seed of double-digit inflation.
As a result of the deepening recession, the Reagan tax cuts are not being funneled back into investment as the administration had predicted. This is corroborated by a Commerce Department report that US businesses will spend less on new plants and equipment this year than in 1981.
Instead, the tax cuts are simply creating a further drain on the US Treasury, thus increasing deficit spending and putting additional upward pressure on interest rates. These high rates already are stifling investment by both individuals and corporations, thereby eliminating any significant chance of economic recovery in the near future.
In an effort to promote investment, specifically in areas hardest hit by rising unemployment, the administration has proposed what are known as ''enterprise zones.'' This innovative concept envisions government designation of economically depressed areas throughout the country as qualified enterprise zones. Businesses and individuals alike would be encouraged to pour investment capital into these areas via tax and other financial incentives, including larger investment credits, greater and faster depreciation schedules on buildings and equipment, tax abatement, low-interest loans, regulatory relief, and other fiscally attractive proposals. The local economy, thus invigorated with an influx of capital, would reap rewards in the form of increased jobs and the production of goods, and in an extension of the local tax base.
It makes good sense to reallocate the scheduled 1983 tax cuts, if in fact intended to stimulate economic recovery, into these enterprise zones instead. The administration could do so by eliminating the across-the-board tax cuts in 1983, while granting enterprise zone investors even greater financial and tax incentives than now proposed. Those seeking tax benefits in 1983 would thus be forced to direct their investment capital now into those areas already suffering the most severe economic crises.
In addition, repeal of the sweeping 1983 tax reduction would permit the extension of the enterprise zone program to a greater number of depressed areas. The result would be a nationwide grass-roots movement to spur investment, stimulate employment, and help generate new state and local taxes in zones, cities and even industries now reeling under the impact of the present recession. At the federal government level, we could expect a far smaller deficit than now projected, through the elimination of the 1983 tax cut and the resulting enhanced revenues. The Treasury's need to borrow funds would thereby be reduced, interest rates lowered, and a greater opportunity created to place America firmly on the road to economic recovery.