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Tug of war

October 11, 1983



Along the banks of the Potomac it is being called the Regan-Feldstein dispute. Out in the rest of the United States and abroad it is looked upon as an interesting political tug of war between two top Reagan administration economic experts, Treasury Secretary Donald Regan, and chief White House economic adviser Martin Feldstein. But whether it is perceived as a political squabble or as a more fundamental economic disagreement, the way the controversy is resolved could have long-range consequences for the giant US economy.

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At issue: Could the huge budget deficits now projected for the next four or five years - deficits in the range of $200 billion and up - keep real interest rates high, or even force them higher, and thus abort recovery?

Mr. Feldstein argues that the enormous deficits could do just that. Secretary Regan insists that there is no link between deficits and interest rates. He says that Feldstein's thesis is the ''soured wisdom of some defunct or obsolescent economist.'' He also says the deficit could narrow to around $100 billion in fiscal year 1985. That is far below the $170 billion deficit reckoned by the Office of Management and Budget.

The White House, not surprisingly, has asked the two men to scrub their disagreement, at least publicly. But hiding the argument is hardly in the best interest of the American public. Nor would the White House effort to quiet the outspoken Mr. Feldstein seem prudent. As chairman of the Council of Economic Advisers, the former Harvard professor's role is not just to be an administration spokesman, a role that was often thrust (often to his obvious displeasure) on former CEA-head Murray Weidenbaum. Mr. Feldstein's function also legitimately includes being an impartial analyst of how well administration economic policies are working - or should work - in other words, an economic early-warning system for the White House. Clearly, what seems in order now is a firm White House policy to deal with the situation discussed by Mr. Feldstein.

Interest rates, it should be noted, began to jump sharply this past May. In recent weeks there has been a decline. In fact, many economists now believe that rates will inch downward as recovery slows somewhat from the pell-mell growth recorded earlier this year. Current rates, of course, remain far too high by historial measurements. Still, there is no collision between private and government borrowing in capital markets. Loan money is readily available. Many businesses have been able to finance capital requirements from rising profits.

The problem is down the road, around spring of 1984. If Congress takes no steps to reduce the deficit, either by raising taxes or cutting expenditures, the likelihood is considerable that the Federal Reserve Board will tighten credit to thwart a resurgence of inflation. The Fed did just that during the 1980 election.

The underlying problem, as many economists have repeatedly pointed out, is the size of the ''structural deficit.'' This is the amount of the deficit that is unrelated to the costs of fighting recession. The structural deficit will remain in the range of $100 billion or more for the next few years no matter how well the economy rebounds.

Why? Future tax revenues - as called for by current law - will fall to about 18 percent of gross national product by 1987. But federal expenditures will remain constant at about 24 percent. Thus, the government will spend more than it takes in.

What should be done to avoid a collision between private and government borrowing next year - thus pushing up interest rates?

The Reagan White House is going to have to face up to the need to raise taxes and slash expenditures. It can hardly be unnoticed by the President that proposals for such actions, either in part or in whole, are coming from responsible persons within his own party.

Going after the deficit will mean much more than merely getting the 1984 budget in place. President Reagan cited a need to be in Washington to help shepherd the budget as part of his justification for canceling his trip to the Philippines. But sharp new reductions in this year's budget seem unlikely. What will be necessary will be reducing the rate of increase in a number of programs in the fiscal year 1985 budget. New taxes, such as an energy tax, could be imposed on consumption.

The recovery is at last on track. It is essential that the administration take whatever steps are necessary to ensure that the recovery is not threatened down the road.