Deficits, joblessness, and the econmic 'ifs'

By , Senior economics correspondent of The Christian Science Monitor

The nation's awesome deficits may turn out to be somewhat smaller than President Reagan's latest budget document anticipates. But there's one big ''if.''

The United States economy must grow a bit faster in 1983 than the modest 3.1 percent the White House projects.

A number of economists predict this will happen. They say the Reagan economic team, headed by Martin S. Feldstein, was overly cautious in its estimate of economic growth this year.

Recommended: Could you pass a US citizenship test?

Sharing this belief is Rudolph G. Penner, director of fiscal policy studies for the American Enterprise Institute (AEI), who foresees a 1983 growth rate of 4.5 percent - almost 1.4 percent higher than the administration's forecast.

''This higher growth rate,'' says Dr. Penner, ''translates into a $21 billion deficit reduction in fiscal 1984 and close to a $40 billion reduction in fiscal 1985.''

Why would President Reagan, often the epitome of optimism, endorse a forecast that many experts think is too pessimistic?

Observers cite two possible reasons, one political, the other economic:

* Falling deficits would redound to Mr.uflogo14Trend of the economyReagan's political credit, making it appear that his policies are working more swiftly than he had anticipated.

* Dr. Feldstein, chairman of the Council of Economic Advisers (CEA), refused to put his name to unrealistic economic assumptions such as marked the first two years of the Reagan term.

''It is best,'' he says, ''to avoid the optimistic or pessimistic extremes and to use a forecast that represents a balance of probabilities.''

If recovery begins this quarter, he concedes, growth will be faster than 3.1 percent. But if recovery is delayed until April or May, ''the real growth in 1983 could be less than 2 percent.''

Penner bases his more optimistic assessment on a 2.5 percent first-quarter growth rate this year and 5 percent per quarter thereafter. The White House projection is for 1 percent growth during the first quarter, gradually increasing to a 4 percent pace in the second half of 1983.

But growth alone cannot solve the deficit problem. Recovery can erase only that part of the deficit stemming from recession - the ''cyclical'' component of deficit.

When the economy goes into a tailspin, people are laid off, fewer taxes are paid, and government outlays for unemployment compensation, food stamps, and welfare mount.

''About half of the fiscal 1983 deficit is a result of the recession,'' Feldstein says.

Each percentage point rise in unemployment costs the US Treasury about $25 billion in lost taxes and additional outlays. Unemployment, now 10.8 percent of the work force, stood at 7.4 percent when Mr. Reagan took office.

If the jobless rate had not increased, the '83 deficit might have turned out to be about $80 billion less than the $208 billion anticipated by Feldstein's CEA.

That still would leave a ''structural'' deficit of more than $100 billion - rising, says Feldstein, to an estimated $300 billion a year by fiscal '88.

''There is no way,'' Penner says, ''of growing our way out of this budget problem.''

The structural or built-in part of the deficit stems from the fact that federal spending grows much faster than the tax revenues that pay government bills. The result is a steadily growing deficit, even when times are good.

Unless, that is, Congress and the White House boost taxes and cut the growth rate of federal spending. ''The overwhelming message that emerges from the President's 1984 budget,'' says Penner, ''is that we need tax increases.''

Nor can ''we wait until 1986,'' as the President proposes, says the AEI economist. ''We should start in 1984.''

Spending for three parts of the budget which boost the structural deficit continues to grow. These are defense, social security, and other entitlement benefits, plus interest on the national debt, which now swallows 12 cents of every budget dollar.

Unless interest rates fall and the deficit declines, Congress and the White House are powerless to reduce interest payments. They can, however, put a cap on the growth of entitlement programs - and they appear ready to do so . That leaves defense, with Reagan on the ramparts to shield his 10 percent real growth in military outlays.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...