Pay now, fly later: a scenario for avoiding economic downdrafts

Herbert Hoover and Jimmy Carter, intelligent and industrious men, chose bad moments to be president. So did Lincoln; but he turned adversity to national and philosophical triumph.

Franklin Roosevelt and, to a lesser degree, Ronald Reagan arrived at gloomy economic moments for the nation, when there seemed nowhere to go but up. Each made the most of bad times, although they chose diametrically different routes upward.

All this leads to a question: Is the next term - the 50th in the long-running serial called ''the glorious burden'' - likely to be worth the intense struggle needed to retain or win the Oval Office?

Based on public and behind-the-scenes evidence, the candidates think so. Intensely. The Mondale-Hart struggle has resembled one of those Western movie fights in which two stunt men leap from balconies, crash through swinging saloon doors, and lend their heads to help fragment chairs. Walter Mondale has gotten up off the floor one more time than Gary Hart. But that only means he has to carry on the battle with the fresh, incumbent sheriff, who has been off in Asia and Europe, showing everyone he isn't a gunslinger.

Given the size of the Damoclean deficits hanging over the next four years, the 1.5 trillion-and-rising national debt, the huge trade deficits, the weight of third-world debt, Kremlin intransigence, and American labor's intent to take back its give-backs beginning next fall, why does anyone aspire to the job?

There are obviously many intangible reasons. Most of them boil down to a political variation on Mallory's reason for climbing Everest - because it's there. But there are also some concrete reasons for believing that the course of the next four years may lead up, not down. And that makes for a good report card in the history books - and a job worth having.

One of these reasons is that the Soviet boycott of the White House is likely to abate some time during the next term. A second reason is that a host of interlocking economic problems is likely to be tackled next year.

Last week I examined numbers, lots of numbers, at the Fort Knox of computerized economic statistics - Data Resources Inc. (DRI) in Lexington, Mass. DRI's computers are ravenous. For their midnight snacks alone they suck in huge quantities of trade, demographic, economic, and monetary figures to be 'read' for meaning while Paul Volcker and the rest of us sleep.

I was trying to get the background on a little-noticed scenario that DRI had put forward in its latest monthly review of the US economy. Stripped to its barest essentials, that scenario showed what would happen if Congress and President could agree next year to double the deficit-reduction ''down payment'' Congress is about to produce. DRI analysts say realistically that the congressional down payment amounts to slightly more than $41 billion. In their scenario for 1985 they propose three steps to add another $45.9 billion. That would bring the total to about $87 billion a year for fiscal 1985-87.

The projected results of this doubling of the down payment are striking: The economy would be weaker at first than if deficits were allowed to grow or only attacked in half-hearted fashion. But then the economy would come back stronger, overtaking the growth rate of the do-nothing or half-hearted approach by 1989.

''Interest rates drop very sharply in 1985,'' say the DRI analysts, ''reinforcing gains in investment at the expense of consumption. Lower interest rates and a weaker economy also lower the (dollar) exchange rate . . . more than doubling export gains and (cutting) import losses. Lower demand, reduced capital costs, and higher productivity result in lower inflation.''

Savings on the projected deficit amount to $200.8 billion by 1990. The deficit thus drops to only 1.5 percent of gross national product - the nation's output of goods and sevices - instead of the 5 percent it threatens to run.

In other words, a president and Congress who take advantage of the window that opens next year (and probably slams shut as midterm elections approach) can gulp and impose austerity quickly and then reap benefits later. First would come lower interest rates. They would be greeted with enthusiasm at home and abroad, in the West and the third world. Then would come less consumption, more investment, and, as a result, increased productivity. A lowered dollar, combined with that investment and productivity, would stimulate exports.

Historically, that's exactly what presidents have wanted: Austerity moves early in a term, resulting in prosperity later.

All right. What's the catch?

First, there is the matter of how the DRI scenario makes that extra $45.9 billion cut. It would gain $20 billion by easing back on the indexing of income tax brackets. Instead of guaranteeing that inflation would not artificially boost you into a higher tax bracket, the DRI scenario would guarantee that your bracket would creep at a rate 2.5 percent less than that of the consumer price index. House Budget Committee chairman James R. Jones (D) of Oklahoma and Senate Finance Committee chairman Robert Dole (R) of Kansas have urged this type of index-shaving.

Next, the scenario would cut defense spending from the 4 percent annual real growth allowed by the ''down payment'' approach to 3.5 percent growth from 1985 through 1990. How realistic that is may depend on perceptions of Soviet attitudes and actions. DRI estimates savings of about $47 billion a year.

The final (and most controversial) step would be to ''de-index'' entitlement payments such as social security, medicaid, and medicare by the same amount that tax brackets would be de-indexed. A social security recipient would see his or her monthly check rise 2.5 percent less than the official inflation rate. That step would save the Treasury about $23.4 billion a year in 1985-87.

The main argument for such a triple package is that it shares the sacrifice to some degree.

Beyond this lies the most compelling argument of all. If nothing is done, or only half-measures are taken, the most unfair distribution of sacrifice imaginable will result. Today's Americans will be running up a massive charge-account bill, and leaving it to be paid by their children and grandchildren. This unfair debt on the young and the unborn is just one of the pressures that is likely to force Congress to go beyond the deficit down-payment plan next year. Continuing application of the screws by Federal Reserve Board chairman Volcker is another. Massive trade imbalances are another. High interest rates and estimates of higher inflation are another.

Taken together these goads provide a sober reason to expect some kind of package like the DRI scenario to pass next year. If so, the next presidential term will be a brass ring worth grasping, as far as economics are concerned. It would start tough but end sweet.

You've read  of  free articles. Subscribe to continue.
QR Code to Pay now, fly later: a scenario for avoiding economic downdrafts
Read this article in
QR Code to Subscription page
Start your subscription today