Whatever happened to the recovery?

In eight years as the first and only director of the Congressional Budget Office (CBO), Alice M. Rivlin developed and led an organization that gained wide respect for the accuracy and objectivity of its economic analyses.

Shortly Dr. Rivlin will retire as CBO chief to become director of Economic Policy Studies at the Brookings Institution in Washington.

Here, in a Monitor interview, Dr. Rivlin discusses economic and budgetary trends.

To what extent has President Reagan succeeded in redirecting the flow of government spending?

The direction of government spending has been changed. But I think it was a national consensus, not just something that President Reagan dreamed up. Clearly it was the consensus of Congress and the administration that there should be additional growth in defense and that many other programs should be cut back.

There has been a strong shift toward defense spending and away from domestic programs, particularly those domestic programs that are not entitlements, and especially those that are not pensions.

Does this mean that social programs have borne the brunt of the cuts?

Social programs is a vague term, sometimes including entitlement programs such as AFDC (Aid to Families with Dependent Children), food stamps, and medicaid. Those programs have been cut somewhat. But other programs - grants to state and local governments, education, health programs - also have taken cuts.

As all this has been going on, budget deficits have risen to record levels. Is this due to built-in flaws in the economic program of the President and Congress?

The deficits have been a product of two things. One was the simple fact that taxes were cut by more than spending. That created large deficits, particularly deficits that escalate in future years, because the tax cuts were extended over several years. Also, the tax cut included indexing of the tax system to inflation from 1985 on.

On the spending side, the increases in defense were offset to some extent by cuts in other programs. But the gap widened between spending and revenues.

The other part of the picture, of course, is that the economy has not performed as well as either the administration or other forecasters believed it would. We have had two recessions in the last two years and the recessions have cut into revenues. That has increased the deficit very substantially.

On the economy itself, how do you interpret the latest batch of statistics?

I find them very worrisome. Earlier the economy had been expected by most forecasters - including our own - to pick up in July. That apparently has not happened. August was a little more negative than July. The recovery, which we still all expect, is not yet under way. All of the statistics point to a slowing down, or bottoming out, of the recession. But none of them shows that recovery clearly is under way.

What have the budgets of the last two years done to tax revenues and to government spending as a percentage of the total US economy?

In fiscal 1981 revenues were about 21 percent of the gross national product and spending was about 23 percent. The tax cuts enacted last year would have cut revenues to about 18 percent of GNP by 1985 - that is, before the recent ($98.3 billion) tax increase. Spending stays at about 23 percent of GNP, with the real increases in defense partly offset by cuts in social programs. This means that without additional action by Congress, the deficit would have widened to about 5 percent of the gross national product by 1985. Recent congressional acts - increasing taxes and cutting spending more - will make that deficit perhaps 4 percent of GNP in 1985.

Still, unless something else is done, don't we have a tendency toward built-in deficits, because spending will continue to outpace revenues?

That's right. What Congress now has done is to arrest the growth of the deficits, but has not succeeded in bringing them down. Congress took very strong actions this year to increase taxes and to cut spending further, but was hampered by the fact that the economy was deteriorating.

What has to be done to begin to narrow the budget deficits?

The arithmetic really forces some very difficult choices. If the budget deficits are to be brought down over the next several years by a substantial amount, then the defense increase probably has to be slowed somewhat. The major pension programs, especially social security and medicare, are large growth items in the budget and have to be considered, and probably taxes as well.

Politically speaking what can we realistically expect of that agenda?

I think it is very hard to say. The Congress has shown itself this year very serious about bringing down the deficit, willing to do politically difficult things, such as raising taxes in an election year and making substantial additional cuts in very popular programs. I think Congress will continue to regard deficits as a very serious problem.

Has the Federal Reserve Board been following a correct course?

I'm not sure there is such a thing as a correct policy. It was certainly necessary to bring down inflation. The Federal Reserve, by slowing monetary growth, has contributed to that. But the cost, of course, is that it also slows down the economy. The real question is the question that the Federal Reserve Board must be asking itself all the time - have we slowed down the economy too much?

The budget process by which Congress now works is eight years old. As the only director of the CBO, what have been the strengths and achievements of the new process?

The main achievement is that it has given the Congress a way of making decisions on the budget as a whole. Under the old system, (Congress) dealt with the budget only in fragments - spending bills one at a time, tax bills separately - and never voted on the budget as a whole.

The new process has put the whole thing together and forced the Congress to come to grips with the budget problem. I don't think that the major budget changes that have been made in the last couple of years are really conceivable without this budget process.

Under the old system any President who had a major strategic change that he wanted Congress to adopt - as Mr. Reagan did - really had no way of articulating it, of putting it into a budget resolution for consideration by the Congress. So it's hard to imagine what would have happened to the Reagan plan without the new budget process.

Can we begin to glimpse a way to achieve noninflationary growth - that is, bring down unemployment without reigniting inflation?

I think no one knows what the magic combination is. A relatively slow recovery is less likely to rekindle inflation. On the other hand, that makes it a much longer time before the unemployment rate comes down to acceptable levels.

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