Deficits, joblessness, and the economic 'ifs'

The economic report of the President released Wednesday projects six years of sustained, noninflationary economic growth ahead - if deficits are reduced, monetary policy is sound, and protectionism is controlled.

But the report, which outlines the economic assumptions behind the President's budget, does more than offer a relatively rosy view of the economic future. It also underscores how sharp the debate on reducing joblessness is likely to become.

''Unemployment is the most serious economic problem now facing the United States,'' the report admits.

Although his advisers predict unemployment will average 10.7 percent in 1983, 9.9 percent in 1984, and 8.9 percent in 1985, President Reagan continues to argue against the massive job-creating programs that are now gaining momentum in Congress.

Jobs bills ''only shift unemployment from one industry to another at the cost of increasing the federal budget deficit,'' the President says. And the administration contends that massive budget deficits pose a key threat to the real economic growth - averaging 4 percent a year - which it predicts.

A major job-creating effort might signal financial markets ''that Congress is not willing'' to hold the line on budget deficits and ''will have the effect of raising (interest) rates and hurting the recovery,'' contends Martin Feldstein, chairman of the President's Council of Economic Advisers.

Instead the administration favors more limited efforts aimed at groups that will face high unemployment rates even after the recovery takes hold. For example, it is proposing tax credits for companies that hire the long-term unemployed and a seasonal subminimum wage for youths. Overall, it wants to spend from the current year.

Mr. Reagan's basic position is that ''only a balanced and lasting recovery can achieve a substantial reduction in unemployment.''

The President's stance is in sharp contrast to an agreement Democratic congressional leaders reached Tuesday to push for a multifaceted jobs and economic assistance package costing between $5 billion and $7 billion. The program would create public-service jobs and provide food and shelter for the poor.

According to House Speaker Thomas P. O'Neill Jr., the plan also includes ''public investment to lay the foundation for long-term economic prosperity,'' as well as ''economic cooperation to create better opportunities for labor, business, and government to work together to plan a strategy for long-term economic growth.''

Trade is one segment of the economy not expected to contribute significantly to economic growth in 1983, Mr. Feldstein says. The administration is predicting a 1983 trade deficit of $60 billion to $75 billion because of the strength of the dollar relative to other currencies.

With foreign trade down, the nation should resist protectionist moves, Mr. Reagan argues in the report. ''While the United States may be forced to respond to the trade-distorting practices of foreign governments through strategic measures, such practices do not warrant indiscriminate protectionist actions, such as domestic content rules for automobiles sold in the US.''

''Budget deficits beget trade deficits,'' Feldstein told reporters at a White House briefing. If budget deficits are cut, he argues, interest rates are likely to fall. And that would make the dollar a less attractive investment, lowering its value relative to other currencies.

''As . . . domestic macroeconomic problems are resolved, the problem of the dollar and the trade deficit should also be resolved,'' Feldstein told the congressional Joint Economic Committee.

The administration is also making a fairly upbeat forecast on inflation, predicting consumer prices will rise 4.9 percent in 1983, 4.6 percent in 1984, and 4.6 percent in 1985.

''Our forecast assumes that the Federal Reserve will continue to pursue a policy that is consistent with a gradual decline in inflation and we make no attempt to allow for transitory price shocks after 1983,'' Feldstein says.

If budget deficits do not reignite inflation, interest rates are likely to fall, Feldstein adds. ''Rates are abnormally high now for the current level of inflation,'' he says. For example, the traditional real interest rate on long-term government bonds (the rate after adjusting for inflation) has traditionally been 2 percent. It currently is 6 percent.

''There is a lot of room to come down if deficits are perceived to be under control,'' he says. The administration predicts the average interest rate on long-term bonds will drop from 13 percent in '82 to 10.2 in '83 and 9.8 in '84.

You've read  of  free articles. Subscribe to continue.
QR Code to Deficits, joblessness, and the economic 'ifs'
Read this article in
QR Code to Subscription page
Start your subscription today