Taming the twin deficits

LIKE an old family car in need of a tuneup, and maybe some body work, too - a car that's lasted much longer than the neighbors ever expected - the American economy keeps chugging along. In fact, it's chugging along fast enough that some are concerned about overheating with inflation again. But just as the kids in the front seat know that if the old clunker makes it over one last hill, it can coast the rest of the way home, so many of the nation's economists are expecting that since the expansion has lasted this long, it should continue through the election. Whoever wins, however, will have to face the challenge of finally tackling the twin deficits, in the federal budget and in trade.

The world financial community may realize it's too much to expect the United States to reorder its economy during an election year. But investors are surely going to expect to see decisive action soon after the new administration and the new Congress are installed.

Seldom has the ``danger/opportunity'' chestnut been so apt. If the foreign investors and central bankers who have been financing US deficits for some years now don't see decisive moves in Washington soon after Jan. 20, they might pull out of US markets, leading to a fall of the dollar, recession, protectionism, default on third-world debt, and so on.

Conventional wisdom has it that the Republicans will be the election-day beneficiaries of the continuing economic expansion. But the Democrats, less committed to avoiding tax increases, might be in better position to push austerity.

On the ``opportunity'' side of the equation, we note that, happily, it may not take a recession to bring the deficits under control. The 67-month-old expansion has been a period of slow but continual (not steady) growth. Inflation remains low, and wage demands moderate, despite low unemployment: 5.3 percent in June, the lowest since May 1974.

This adds up to less of a ``boom,'' which could mean in turn less of a ``bust'' down the line. Some economists are proclaiming the end of business cycles as commonly understood. This surely goes too far. But instead of a recession in the usual sense, Americans may experience a period of stagnant consumer spending as more production capacity goes to turning out exports.

How serious is the inflation threat? Probably greater than the recession threat, which is what economists would be worrying about if they weren't worrying about inflation. Carlyle didn't call it the ``dismal science'' for nothing.

The Federal Reserve has already moved three times since March to tighten credit to control inflationary pressure after the release of better-than-expected statistics on economic growth. And Fed chairman Alan Greenspan told the Senate Banking Committee last week that the Fed ``at this juncture might be well advised to err more on the side of restrictiveness rather than of stimulus.''

The stream of good or at least not bad news continued to the end of the week, on producer prices, the prime rate, and the trade deficit. The twin deficits, however, should remain the major concern.

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