Deficit pressures

CONGRESS and the Reagan administration are edging closer to a deficit reduction package. But there are still many roadblocks to an accord this presidential election year. Interest groups are pressuring Congress to protect spending for costly defense and entitlement programs. Congress is reluctant to vote for necessary tax increases.

Thus, it is imperative that both sides continue to make every good-faith effort to work out a mutually satisfactory agreement as quickly as possible.

It also is essential that lawmakers produce more than just a token accord - such as the $150 billion budget-reduction/tax-hike plan now expected to be enacted for the period running through fiscal year 1987. During that same period , federal budget deficits are expected to total $600 billion or more. A $150 billion package - while better than no package - will not be enough. Washington should face up to the responsibility of producing a much larger agreement to reduce the deficits - deficits that, as Federal Reserve Board chairman Paul Volcker points out, raise the danger that massive federal borrowing down the road could push up interest rates, crowd out private borrowing, and abort the recovery.

The increasing likelihood there will now be a modest deficit-reduction agreement stems as much from an intuitive sense on the part of the Wall Street financial community as from any substantive results reached in the various day-to-day and week-to-week meetings taking place in Washington. Some analysts say that the stock market rally on Monday came from mounting expectations that a budget accord is now possible. That is ironic. If one took his cue just from the various budget meetings themselves, one could conclude that all is over on the compromise front. President Reagan has said that he has lost faith in bipartisan congressional negotiations and will now concentrate on intraparty discussions with GOP lawmakers in the Senate. At the same time, the various Senate and House committees involved are all marching to their separate drummers on the deficit issue.

But that's precisely the reason why there is now at least a glimmer of light. In other words, evidence of a new sense of accountability is now under way. In seeking to work out some compromise with Republican senators on cuts in the defense budget, the White House is indirectly acknowledging that it has a responsibility to come up with an agreement. Republicans, after all, control the White House and the Senate. They have to take the lead on the deficit issue. The Republican Senate is expected to reduce Mr. Reagan's defense budget. It would thus seem logical that the White House help shape the nature of the reductions to salvage what it can of the planned military buildup.

Meanwhile, all the action by the various House committees is to the good. Like their Senate counterparts, they are trying to produce an accord.

Wall Street, which is closely watching the recent upward rise in both short- and long-term rates - strongly wants Washington to cut a deal. It is that pressure from the business and financial community that is surely prodding the Washington political establishment toward some agreement.

Another factor underscoring a need for quick action on the deficits should be noted: The still-rapid growth of the economy. Martin Feldstein, Mr. Reagan's chief economic adviser, believes that the growth rate for the current (first) quarter of 1984 will be 6 percent rather than the 4 or 5 percent originally expected by the administration. Such rapid growth could be construed as setting up the conditions for more inflation and thus lead to efforts by the Federal Reserve to slow the economy. But that would intensify upward pressure on interest rates.

The recovery, for now at least, continues to be robust. New housing starts are up. Civilian unemployment during February dropped to 7.8 percent, down from 8 percent in January. The Commerce Department says that US industry is planning to spend $344 billion on modernization and equipment this year, up 13.6 percent from last year.

In other words, despite such worrisome problems as a large trade deficit and the recent downward slide in the stock market (as measured over the past several months), the recovery remains on track. The objective for federal policymakers must be to ensure that it stays on course.

That means reducing those deficits.

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