Federal deficit puts heavy burden on Midwest recovery

Gradually, the impact of the federal budget deficit is becoming apparent in the American Midwest. One Nebraska farmer says the debate over the federal budget may be more important than the debate on the 1985 farm bill.

The key to prosperity for Midwest agriculture, industry, and labor, now seems to lie with Washington budget-cutters who are aiming to trim the deficit. If their scissors are not long or sharp enough, economists warn, the biggest loser will be the Midwest.

''I'm much more concerned than I was last summer,'' says Richard Carlson, an economist and partner at Q.E.D. Research.

''The Midwest is already suffering. And if something isn't done quickly and effectively about the budget, it will get even worse,'' Mr. Carlson says.

''There's no way you can get around it,'' says John Del Roccili, director of contracts research at Wharton Economic Forecasting Associates. ''The region will not grow as quickly with a large budget deficit.''

There is, thus far, evidence of the beginnings of economic growth - of a deep and pervasive restructuring throughout the Midwest.

On the prairie stretching to Kansas and beyond, farmers are being pressed to make their operations as efficient and fiscally strong as possible. Heavy industry is moving to scrape away the rust of outmoded plants and equipment.

In the cities along the industrial swath strectching from Buffalo, N.Y., to Milwaukee, labor-management relations are showing signs of compromise and conciliation.

Still, if the region sees any growth at all next year, Kent Werst of Data Resources Inc. predicts, it will be limited to 1 or 2 percent.

Carlson is even gloomier. He says he believes that many econometric forecasts , based on past trends, are not taking into account an important change in the region's economy.

Midwest industry now relies much more on export sales, he says. As such, it is more sensitive to changes in capital flows and international trade.

It is here that the impact of continued high budget deficits hurt so much, economists say:

* Deficits cause high interest rates, hurting the region's makers of consumer goods and industrial equipment, who rely on sales financed by loans.

* High interest rates boost the value of the dollar, making foreign goods cheaper to buy in the United States. At the same time, Midwestern wheat, machinery, and durable goods are more expensive abroad.

The fallout from this hits the Midwest broadside, Carlson says.

Except for automobiles, the region's major industries face unprecedented foreign competition. Imports of steel and machine tools are near all-time highs. US agricultural exports were buoyed only because of unprecedented Soviet purchases.

''(I'm) cautious about the outlook, but not depressed about it,'' says Nina Klarich, chief regional economist of First National Bank of Chicago. ''The pervasiveness and depth of the recession have produced a mind-set that's focused on decline. And I think the mind-set is inaccurate.''

''(In the) long run, I'm very optimistic,'' says Jerry V. Jarrett, chairman of AmeriTrust Corporation in Cleveland. ''We've been involved in too many buyouts, restructurings of managements . . . to be pessimistic.''

The region's restructuring is slow, but it has started, Mr. Jarrett says. Historians of the area add that the region's overall failure to react quickly is not surprising.

''I don't think there has been anything quite like this,'' says Fred Luebke, director of the Center for Great Plains Studies at the University of Nebraska. The successes of the 1960s made the region unprepared for the sweeping economic changes and competition that began in the 1970s.

The effects of that blow have been quickly felt. Last year, nearly 100,000 fewer people were working in the Midwest - the five Great Lakes states and the Buffalo and Pittsburgh areas - compared with 1974, according to the SRI study.

Meanwhile, the nation was adding more than 18 million jobs.

If the Midwest fails to keep pace, one of the SRI study's scenarios shows the region by 1990 permanently losing 1 million manufacturing jobs and its share of overall US employment - dropping from 19 percent to 16 percent.

The Midwest has begun to react, Carlson says. But the most important questions will be answered outside the Midwest.

''Tell me what happens to the budget,'' he says. ''It comes to the stage where (Midwest success) is almost entirely based on that issue.'' Chart: Reconstructing Midwestern industry.

The industrial Midwest is going through a dramatic and painful restructuring, but some of the trends are encouraging.

Hints of cooperation. These observers point to new kinds of labor contracts, such as the one negotiated between General Motors and the United Automobile Workers, increased contact between colleges and business, and local development initiatives.

Growing share of heavy industries. It is actually a bigger slice of a smaller pie, economists say. Plants in non-Midwestern locations are closing. Meanwhile, many companies here are making a commitment to stay by modernizing their existing plants. A recent survey by Plant Engineering magazine showed that 42 percent of large durable and nondurable goods manufacturers plan to boost spending next year for new construction, capital items, and maintenance and repair.

Significant growth possibilities. One of the big problems has not been lack of innovation, but a sluggishness to implement it, according to a study by SRI International (formerly Stanford Research Institute), commissioned by AmeriTrust.

Significant opportunities exist in steel and other industries, if these new processes are speedily implemented, the study says. The domestic auto industry wins high marks from various observers for its use of robotics.

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