Whatever budget cuts Congress may agree on are in for some erosion
CONGRESSMEN return to face the 1986 federal budget again this week. With President Reagan putting the White House behind the effort to break the deadlock that developed before the July 4 recess, there may be more chance for some resolution. The difficulty that Congress faces is that, even while it tries to agree on something approaching a $50 billion deficit reduction, events are moving in a way that will probably cancel out much of what it does.
This is for two reasons. First, the actual savings from various changes in the law (just as changes from tax increases) usually turn out to be less than estimated. Second, the assumptions being used about economic growth, interest rates, and inflation will likely prove to be too optimistic.
The White House is still talking about 4 percent growth rates for the next three years. This year is looking closer to 3 percent, with the first half of the year probably averaging less than 2 percent. Shortfalls in important estimates such as this one are reflected in major revenue shortfalls later on. The White House also does not expect any pickup in inflation; it employed a gradually declining T-bill rate.
If the economic environment proves to be this weak, overall growth is also likely to be quite weak.
Jacques de Larosi`ere, director of the International Monetary Fund, referred to the destabilizing effect of the US deficit in a speech in Geneva last Friday. He noted that the United States is using about one-sixth of the rest of the world's annual savings to finance its deficit. Most would agree that this is not the best use of savings that are needed for investment all over a growing world. Moreover, he noted, it is this inflow of funds from abroad that has made the US dollar artificially high and in turn created the pressure for import controls in the US.
The most recent economic statistics confirm the quiet, slow-growth state of the economy. During June the unemployment rate was unchanged, at 7.3 percent. This was the fifth month of stability in the index. Some 45,000 more jobs were lost in manufacturing, giving that sector a 220,000 decline for the year so far.
American car sales were off 12 percent in the last 10 days of June, a drop that auto analysts attribute to an increase in volume of Japanese imports. This number confirms the weakness in manufacturing noted above, as well as one result of the overvalued dollar.
Other statistics released last week showed that the economy has been moving along well enough to keep on a growth path. Factory orders, which had been down for three months, rose 2.1 percent in May. Even disregarding strong defense orders, the statistic was nevertheless up 0.8 percent. Sales of new single-family homes also rose during May by 9.7 percent after declining by a slightly larger percentage the previous month. The rise was undoubtedly stimulated by the decline in mortgage interest rates. Whether or not rates fall any more this summer, the decline so far should still make itself felt in the economy in coming months.
The OPEC meeting in Vienna was not over as this was written. Whatever the formal outcome, a further decline in oil prices seems a sure thing. This, in turn, will help keep the inflation rate from rising.
If more substantive progress could be made in reducing the deficit than now seems likely, all the elements would be in place for further declines in interest rates. And that, in turn, would prolong the economic expansion.