Former Reagan adviser spots economic troubles

By , Staff writer of The Christian Science Monitor

William A. Niskanen Jr., until last week the sole remaining member of President Reagan's Council of Economic Advisers (CEA), says there may be trouble ahead for the United States economy on inflation, interest rates, and the health of the savings-and-loan industry. In an hour-long interview Friday, his last day in office, Mr. Niskanen also defended Japan's overall performance in the trade area. President Reagan sent negotiators to Japan Friday to seek additional concessions in telecommunications trade talks. Yesterday Japanese Prime Minister Yasuhiro Nakasone discussed a full range of trade issues with one of the American envoys, National Security Council staff member Gaston Sigur.

``Japan for the most part has been an innocent victim of this whole trade issue,'' Niskanen said. Despite some formal and informal trade restraints that are ``terribly frustrating'' and should be addressed, Japan still has ``the freest market of any of the summit countries, including the US,'' in terms of tarriffs and formal quotas, he added.

On the domestic economy, some of Niskanen's remarks depart a bit from official administration positions:

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Due to weakness in the overall trade sector, Niskanen says, US economic growth in the first quarter of 1985 ``could be'' even slower than the sluggish 2.1 percent pace forecast in the government's initial estimate. Most private forecasters are saying the government's ``flash'' gross national product estimate will be revised up, not down. Niskanen adds that the growth slowdown will be a ``one-quarter wonder,'' with no change needed in the administration's GNP forecast for the year.

On a more optimistic note, Niskanen said the US manufacturing sector ``is a good bit stronger'' than current data would suggest, with a strong dollar hiding major improvements in competitiveness.

On taxes, Niskanen said that unless Congress this year enacts total budget savings close to the $51 billion level the administration proposed, ``I don't think there is any way to hold off a tax increase and a great temptation to reinflate.'' Presidential spokesman Larry Speakes said Friday that Mr. Reagan stands ``in concrete which will not crack'' against a tax increase.

The administration's inflation forecast for 1985 will likely be revised down slightly in April from the current 4.3 percent, to 4.1 percent. But ``there is some risk'' in that forecast, he admitted. If the recent drop in the dollar is a permanent rather than a temporary phenomenon, consumer prices could be rising at a 5 to 6 percent rate by the year's end, he said.

A sharp decline in the dollar that could trigger inflationary pressures ``is not likely'' unless US fiscal policy changes greatly, he says. A sharp drop could be triggered ``if it becomes clear that the sort of things that affected Ohio [savings and loans] are likely to affect other elements of the financial community.'' He warned that the S&L industry ``is still very weak,'' with net worth ``very close to zero,'' if accounting standards that apply to nonfinancial corporations are used.

S&Ls are ``terribly vulnerable'' to a rise in short-term rates since they do short-term borrowing and long-term lending, he said. And the futures market currently is predicting a 2 percentage point rise in short rates over the next 18 months, he noted.

Interest rates in 1987 and beyond probably won't be as well-behaved as the administration's 1986 budget projected, Niskanen says. If interest rates do not fall as the administration projected, the budget deficit will be higher than it has estimated. ``I am not comfortable with'' the administration's interest-rate forecast, which shows rates on 91-day Treasury bills declining steadily to 5.0 percent by 1990, he said. He is ``much more comfortable'' with Congressional Budget Office estimates that show short-term rates stuck at the 8.2 percent level through 1990.

Niskanen spoke in an office cluttered with packing boxes. While he has functioned as head of the CEA since Martin Feldstein resigned last July, Mr. Niskanen never was appointed acting chairman. President Reagan announced Feb. 21 he would name Treasury undersecretary Beryl Sprinkel as his CEA chairman. In the interview Niskanen spoke warmly of President Reagan and did not sound bitter, although he acknowledged being ``disappointed but not surprised,'' not to be named CEA chairman.

During the interview, Niskanen tried to clear up what he felt to be American misconceptions about US-Japanese trade. Japan's share of the US trade deficit has declined in recent years, he noted. The country has drawn fierce criticism largely because Japanese companies ``are such formidible competitors,'' he asserted. Some recent criticism of Japan also has reflected ``implicit racism,'' he charged.

Trying to force Japan to engage in reciprocal treatment -- to treat US firms operating in Japan roughly the way Japanese companies in the US are treated -- ``is unrealistic as well as undesirable,'' he said, since in essence it seeks to force another nation to adhere to US laws and social customs. Reciprocal treatment is sought by the Reagan administration in negotiations over opening Japan's telecommunications market.

The officials Reagan dispatched to Japan -- National Security Council staff member Gaston Sigur and Commerce undersecretary Lionel H. Olmer -- were sent to warn Prime Minister Yasuhiro Nakasone that unless the overall Japanese market is opened further, Congress may enact protectionist legislation.

Mr. Nakasone said Saturday that he will issue a special statement April 9 discussing friction between Japan and its trading partners and outlining remedial steps Japan is prepared to take.

Press reports in Japan said Nakasone's communiqu'e would be based on an advisory council report urging that Japan adopt a policy of upholding ``a totally open market.''

Even that would not make a major dent on the US trade deficit, Niskanen said. ``The trade deficit is made in the United States. A good bit of it is made here in Washington.''

Columnist Richard A. Nenneman is on vacation.

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