Warning bells

The current stock market plunge - with the Dow Jones industrial average skidding 24 points Wednesday, and falling slightly over 10 percent since Jan. 6 - is clear proof of investor concern over the prospect of rising interest rates and high budget deficits. What is happening on Wall Street is also an ample warning to Washington that action must be taken to curb the deficits.

At the same time, it also needs to be said that Wall Street may be overreacting somewhat to the current impasse between Congress and the White House. As several longtime market analysts are noting, there has now been an element of panic on the part of some large institutional investors, which are selling marginal stock holdings to shore up their portfolios. And some market analysts are also criticizing the various players in the budget-impasse drama for unduly escalating the level of dialogue in the discussion about the deficits.

Federal Reserve chairman Paul Volcker and Treasury Secretary Donald Regan, for example, have both publicly raised the possibility of a new recession in the months ahead without a proper mix of fiscal and monetary policy. Ironically, although both have used the word ''recession'' - a word that cannot help but have a visceral effect on the investment community - they come at the deficit issue from different vantage points. Mr. Volcker wants budget cuts and tax increases to reduce the deficits, which he argues puts upward pressure on interest rates. Mr. Regan, who plays down the link between deficits and interest rates, wants budget cuts, but is opposed to any immediate tax hike.

Mr. Volcker and Mr. Regan are not alone in their use of strong words to describe their feelings about the deficit problem. A number of lawmakers are also speaking out in no-nonsense terms. Perhaps a deescalation in the war of words now under way in Washington might be in order for the moment. Such a deescalation of words need not preclude a healthy debate over the deficits. But scare tactics to prod action on the budget, whether intended as such or not, do not seem to be helpful at this juncture. One is reminded of Alfred Kahn, the former ''anti-inflation czar'' in the Carter administration, who forswore use of the word ''depression'' following public reaction after Mr. Kahn suggested that accelerating inflation might produce a depression. Chastised, but with evident good humor, Mr. Kahn said that from henceforth he would only use the word ''banana'' for ''depression.''

Obviously, no one is now talking of anything so drastic. But even more modest ''recession'' talk cannot help but trigger deep public concern.

How then should the public react to the current decline in the stock market? Does the downturn mean that the economy is heading for trouble?

The answer, of course, is unknown at this point. In past years, sharp market declines have not always anticipated a deline in the economy. The stock market is only one indicator of general economic performance. The market may now be sliding, but other measurements still look good. Unemployment continues to drop. Productivity is up. Inflation remains low, compared with the double-digit rates of the late 1970s.

Still, Congress and the White House would be remiss in overlooking the market decline. As pointed out by Geoffrey H. Moore, director of the Center for International Business Cycle Research, market declines very often tend to forecast what technicians refer to as a ''growth slowdown'' or ''growth recession.'' In other words, even if the economy were not to tailspin into a recession where output falls in real terms, the economy could still cool to such a point that growth was relatively slow.

At the least, a continuing stock market decline could have an unfortunate effect on the general public's perception of personal wealth and the future direction of the economy. Investors have lost more than $158 billion in paper values since the market decline began in early January. Yet, the economic recovery has been primarily a consumer-led recovery. Thus, a drop in investor and consumer confidence could worsen the normal economic slowdown that usually takes place in the second year of a business recovery.

The bottom line, therefore, seems unmistakable: For the good of the nation, it is time for Congress and the White House to reach a consensus on reducing the deficits.

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