Biggest Danger Seen As Slump, Not Deficit

PRESIDENT BUSH came back to Washington this week to push for what economist John Makin regards as ``downright ridiculous'' - an agreement reducing the federal budget deficit. The president termed the lack of a budget deal ``a real threat to the economic well-being of this country.''

In contrast, Mr. Makin, director of fiscal policy studies at the American Enterprise Institute, holds a deficit reduction package could damage the United States economy by slowing it further.

``We are probably in a mild recession now,'' he says. ``It is not the end of the world. But we do not want to exacerbate it.''

The administration and Congress have tentatively agreed to cut the deficit by $50 billion in fiscal year 1991, starting Oct. 1, and $100 billion per year for four years after that. President Bush, in a press conference, slammed the Democrats for not putting a budget plan on the table. The Democrats countered that the administration had not done so either, though a confidential plan had leaked out in news reports last month.

President Bush was launching something of a partisan offensive prior to the resumption of budget talks next month.

Makin was looking at the economics rather than the politics of the budget issue. Using the recent downward revision of national output statistics, he forecasts a deficit for fiscal 1991 of $195 billion. That number excludes the savings and loan crisis costs, which he regards as ``water over the dam.'' He assumes the economy will turn down slightly over the next two or three quarters, partially because the Iraqi invasion of Kuwait pushed up oil prices.

This means, says Makin, that the deficit will be the equivalent of 3.3 or 3.4 percent of the nation's gross national product (GNP), its output of goods and services. That level is just above the average ratio for the past 20 years. It's down from a peak of 6 percent of GNP in 1985. Further, Makin expects the deficit relative to GNP ratio to decline in the years ahead.

More important, he states, the ratio of federal debt to GNP has stabilized at about 42 percent. This should stay steady or decline in the next five years, even if the deficit doesn't shrink. Economists see a stable debt-to-GNP ratio as a necessary condition for ``a sustainable deficit.''

In other words, Makin ranks the danger of a recession higher than the risks of not trimming the budget deficit immediately.

Surprisingly, the military excursion in the Middle East may have little impact on the budget balance. Indeed, it could even be profitable. Thomas Stauffer, a Washington economic consultant, calculates that the jump in oil prices brings $50 million a day in extra revenues to the federal government.

Saudi Arabia is picking up some of the costs by providing free fuel to the American cargo-transport planes and ships in the region. The US military personnel in the region are getting their regular pay, not combat pay. No expensive ammunition has been fired. So the outlays, barring any changes, could be modest.

Indeed, President Bush hinted at his press conference that some allies (he mentioned Japan) will show ``a very cooperative spirit'' in the matter of sharing costs.

Since the length and other aspects of the intervention are unknown, no one can accurately calculate its costs. However, Makin notes that Washington could quickly cover its costs by selling some oil from the nation's Strategic Petroleum Reserve. The average acquisition cost for the 590 million barrels in that reserve is $27 per barrel. That includes transportation, custom taxes, terminal and some administrative costs as well as the price of the crude. So any sales at a price above that would make a profit if interest costs are not assumed.

Makin sees another factor lessening the importance of the deficit: The increase in the personal savings rate from a low of 3.7 percent in 1987 to 6.2 percent in the latest figures. That swing constitutes a $120 billion net reduction in US needs to borrow capital from abroad. Moreover, if a recession does occur, consumers, concerned about their economic prospects as unemployment rises, tend to save even more. In past recessions, the personal savings rate averaged 7.5 percent.

So Makin says don't tackle the deficit right now. That isn't the popular view.

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