Economy watch

IF the White House and Congress are keeping their eyes glued to the business pages these days, they have more than ample justification for doing so. The economy continues to send mixed signals: Holiday retail sales are up, but the nation's money supply is down. Consumer confidence is high, but Americans are selling fewer and fewer manufactured goods abroad, the result of the high-priced dollar.

What all this adds up to, according to most economists, is a US economy that has slowed considerably since its pell-mell growth rates earlier this year. That reduced pace in itself is not disturbing. The nation could not have long sustained the rapid 8.6 percent growth of the first half of 1984. A slower, more sustained recovery is not only normal to the second or third year of a typical recovery, but healthier all around. And indeed, economists still believe that the nation will manage to avoid a recession during 1985 - with growth holding steady in the 2.5 percent to 4 percent range. But that slower pace - coming after such a rapid expansion - also presents special problems. Such a modest growth would not produce enough momentum to lower unemployment much more. Moreover, with a sluggish growth rate, any unexpected blip of adverse news - such as, for example, the threat of a major default on the international debt front, or failure of Washington to put together a comprehensive deficit-reduction package - could work against consumer and financial community confidence and directly threaten the very durability of the recovery itself.

The upshot could not be clearer: It is absolutely imperative that Washington move flat out in the early months of 1985 to take the strongest possible action on the deficit. Inertia, or worse, squabbling, would be intolerable. That means there must be a genuine bipartisan effort, starting with a program to reduce expenditures across the board for the fiscal year 1986 budget. Such an effort might also require some tax increases, although, most likely, not involving any increase in individual income taxes, thus allowing President Reagan to fulfill his campaign promise not to raise taxes.

Two other points warrant consideration:

* If the White House is unwilling to reduce the rate of increase in defense spending, then Congress must forthrightly do so. The tough budget-reduction plan put forward by David Stockman's shop at the office of Management and Budget calls for reducing the deficit to around $100 billion by 1988. That would be half the currently projected deficit. But such a halving will require far deeper cuts in defense spending than the Pentagon has indicated it will accept.

President Reagan should take a leaf from President Eisenhower back in the 1950s. Ike, based on his long experience with the military, was astutely aware of the appetite of his defense chiefs for larger and larger appropriations. But he also knew that a nation's security rested as much on the well-being of its economy as its armaments.

* The independent Federal Reserve Board needs to ease up somewhat and allow greater money-supply growth, which has been at the very low side of its annual target range of late. The Fed is, of course, correct in wanting to maintain the success that it has made in lowering inflation from the double-digit rates of the late 1970s and early 1980s. But for the moment, there is nothing on the horizon that suggests a major jump in inflation. Factory-use rates are in the 82 percent range, not suggesting any strain in plant capacity. Wage demands and contract gains have been modest. Commodity prices, especially for petroleum products, have been soft or are dropping. In short, there seems no reason why the Fed should not ease up somewhat on the money supply to provide the wherewithal for enlivened economic growth during the remainder of the 1980s.

About these ads
Sponsored Content by LockerDome

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...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK