'Solid' recovery still upstaging Washington's big deficit

By , Staff correspondent of The Christian Science Monitor

''The argument used to be that we can't have a recovery if we don't cut the deficit. We didn't cut the deficit, and we have a recovery,'' says economist Barry P. Bosworth.

''For the time being,'' says Dr. Bosworth of the Brookings Institution, ''that ends substantive discussion on reducing spending and raising taxes'' - at least until after next year's elections.

In fact, in Bosworth's view, the deficit is likely to be ''worse than had been expected,'' because defense spending may grow and certainly will not be trimmed.

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That being so, says the former director of the Council on Wage and Price Stability, health and welfare outlays are unlikely to be cut.

So next year's deficit, analysts agree, is likely to be in the $200 billion range, about the same as the shortfall in fiscal 1983, which ends Sept. 30.

Yet politicians of both parties who face voters in 1984 appear to be banking on two things:

* That voters will be beguiled by good news of the recovery - including low inflation and unemployment coming down - and will ignore what Bosworth calls the ''very serious problem down the road,'' namely the deficit.

* That somehow the Federal Reserve will manage the money supply in the interim to avoid either inflation or higher interest rates before the election.

If this sounds like fiddling while Rome burns, many experts would agree. Meanwhile, President Reagan and his aides stress the good news on the economic front.

All recent figures point to a continuing solid recovery, but not so torrid that inflation would appear to be a threat in coming months.

''Inflation will come primarily this time from classical excess demand (too much money chasing too few goods). This is not likely to occur, since interest rates at their current level will dampen growth somewhat,'' a high Fed official says.

That is just what is happening. After growing at a breakneck 9.2 percent annual rate in the second quarter, the economy is slowing down.

''Information is still sketchy,'' said a senior analyst at the Federal Reserve Board, ''but from the fragments we do have, it appears the economy may be slowing down to a 4 to 5 percent growth rate in the fourth quarter of 1983. That could continue through next year.''

Retail sales, accounting for two-thirds of economic activity, throttled back in the June-August period, after a nationwide surge of pent-up spending during the spring.

August retail sales dropped 1.4 percent, paced by a sharp 9.2 percent decline in automobile sales. Excluding autos, total retail sales climbed a meager 0.5 percent, Commerce Secretary Malcolm Baldrige said Tuesday.

The money supply, which like retail sales had galloped ahead, has dropped back within the Federal Reserve's target range. This in turn eased interest rates slightly and prompted a modest stock and bond market boom.

Economists in and out of government hail the slower pace of the economy. Continued growth at the second-quarter rate, they say, would have kindled inflation.

Interest rates played a key role in events of the past few months. Concerned about the future impact of huge budget deficits, banks and other financial institutions over the summer pushed interest rates up by 1.5 percentage points.

Housing, which had led the early stages of recovery, began to falter in the face of mortgage rates averaging nearly 14 ercent. Pressure began to be felt in other interest-sensitive industries, especially durable goods.

Few analysts expect an upward explosion of interest rates this fall or winter. But almost all expect rates to ''stay very high,'' as Bosworth puts it.

''We can perhaps live with interest rates at this level,'' said a high Federal Reserve Board official. ''But the present situation, centering on the budget deficit, badly needs to be rectified.''

He cites the effect on debtor lands - especially the major Latin American nations - of high US interest rates, which make it expensive for debtors to reschedule existing loans or borrow fresh funds.

Brazil is a prime example of a debt-strapped nation struggling with social and political pressures that make it hard for the government to conform to austerity measures demanded by lenders, including the International Monetary Fund.

High interest rates boosted the international value of the dollar. This in turn made American exports so expensive that overseas markets for many US goods are shrinking, contributing to a 1983 trade deficit expected to be the largest ever.

None of these things, however, prods the White House or Congress to tackle the root cause of high interest rates - the budget deficit - until voters have gone to the polls.

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