When the new President walks into the Oval Office come January, one of his top priorities will be to wean the American people and government away from the spending spree of the past eight years. The time of reckoning has come. Although Americans are still enjoying an unprecedented period of economic growth - fueled by the policies of the Reagan administration - they now confront a sober reality: The United States is no longer the preeminent player on the global economic scene. And unless it puts its debt-ridden economic house in order and competes abroad more vigorously and effectively, it faces the prospect of relatively lower living standards and a diminution of its role in the world.
``We are no longer the major actor in the world, but only the biggest kid on the block,'' says C. Michael Aho, a trade expert at the New York-based Council on Foreign Relations.
``The United States is in the competitive fight of its 200-year history, fighting not only for markets, but to sustain high living standards. If it wants to remain No. 1, the United States is going to have to work for it. The competition can no longer be taken lightly. Others may be striving harder.''
HOW to foster a productive, dynamic economy capable of leading the world - without causing a recession or inflation - will thus be a priority concern of President-elect George Bush. Economic strength will be the key, not only to maintaining prosperity at home, but to sustaining a strong foreign policy and protecting the nation's security interests.
Most business leaders do not share the alarmist view that America is in decline. But they stress that the US is in a difficult period of adjusting to a more interdependent world and that for the first time in history, an incoming US president faces these challenges:
Huge budget deficits, hovering in the range of $150 billion a year, that limit the nation's ability to invest and to address pressing economic and social problems.
Equally huge trade deficits, caused in large part by the heavy borrowings from Japanese and other foreigners to finance the budget deficits. The United States, once the world's largest creditor, now has the dubious distinction of being the world's largest debtor nation, owing nearly $500 billion.
The US, in a nutshell, is borrowing and consuming more than it saves and produces. Not only is government spending far more than it takes in; corporate debt is also soaring to record levels, and private citizens, hooked on credit cards, are borrowing, not just for such traditional items as homes, but for stereo sets, vacation vans, and college tuition.
``We're living beyond our means,'' says Alice Rivlin, an economist at the Brookings Institution and former head of the Congressional Budget Office. ``That's our basic problem.''
Reaganomics: mixed report card
How did the nation arrive at this point? Many economists point to the Reagan administration's preoccupation with short-term performance over long-term economic strength.
President Reagan set three major objectives when he came into office: to shrink the size of government, to put the wobbly economy back on a path of sound growth, and to rebuild national defense. He launched bold policies that had the broad support of the American people, who felt that government activism had gone far enough, and that it was time to reinvigorate America's self-esteem and standing in the world after the humiliations of Vietnam and Watergate.
Looking at the results today, economic analysts give Mr. Reagan a mixed report card. On the positive side is the administration's success in curbing inflation. This was due primarily to the tight monetary policy pursued by Paul Volcker, former chairman of the Federal Reserve Board, but the policy had the support of the White House.
Inflation was running out of control at 13.5 percent in 1980. And, though the inflation rate has begun to edge upward again, it reached a low of 1.9 percent in 1987 and remains below 5 percent. The decline was more rapid than economists thought possible.
``Reagan gets credit for not stopping the Fed's policy and for not panicking during the [1981-82] recession, which was the worst in 40 years,'' says Stuart Eizenstat, President Jimmy Carter's domestic policy adviser. ``He let the recession run its course and drain inflation right out of the system.''
Even as the Fed began putting the squeeze on the money supply, Reagan, with extraordinary political skill, browbeat Congress into adopting key elements of his economic program. Within seven months of his inauguration, he won deep reductions in federal spending, tax cuts, and sharp increases in defense spending.
Despite the deep recession of 1982, the economy rebounded (as did Reagan's low job ratings). The US has had the longest peacetime economic recovery in this century. During the past six years the economy has grown about 3 percent annually, well below the average for most of the postwar period, but higher than during the Carter administration. More Americans are working than ever before, and unemployment has dropped from more than 10 percent to less than 6 percent.
On the plus side of the Reagan ledger, economic analysts also put the Tax Reform Act of 1986, for which Congress also deserves credit. Top income-tax marginal rates were reduced, many loopholes for the wealthy were removed, and millions of poor taxpayers were freed from tax liability.
``We have a fairer tax system,'' Dr. Rivlin comments. ``It's not perfect, but the marginal rates will on balance be good for the economy.''
Avalanche of debt
While the Reagan years have seen steady growth and created a general feeling of affluence in the country, however, the prosperity has been built on an avalanche of debt and deficits. Although Reagan put more money in the pockets of Americans through the tax cuts, he was not able to bring about comparable slashes in domestic spending, largely because he insisted on a rapid military buildup and because neither he nor Congress was willing to reduce middle-class entitlements, including social security.
A few figures tell the story. According to the bipartisan Congressional Budget Office (CBO), government spending totaled $591 billion in fiscal 1980. It reached more than $1 trillion in fiscal 1988, an increase of more than 80 percent in eight years. Interest on the national debt rose from $53 billion in fiscal 1980 to $151 billion in fiscal 1988, a 185 percent increase. Defense spending grew from $134 billion to $293 billion, or 118 percent. Social security, medicare, and other mandatory programs increased from $278 billion to an estimated $498 billion, or 79 percent. Nondefense discretionary spending - Reagan's primary target - registered the smallest growth, increasing from $157 billion in 1980 to an estimated $178 billion in 1988, or 13.3 percent.
So while Reagan slowed the rate of growth of government, government has not shrunk. Spending today accounts for about 22.3 percent of the gross national product, about the same proportion as in 1980. Revenues, meanwhile, are 19 percent of GNP, the difference representing the massive deficit.
Paradoxically, the government is finally taking in almost as much as it spends on federal programs and services. But the interest payments on the national debt, which has tripled under Reagan to $2.8 trillion, keep the government in the red. Interest is expected to total about $163 billion in fiscal 1989, more than the deficit itself.
When he launched his conservative ``supply side'' revolution, Reagan argued that lower taxes and less government spending would stimulate savings and investment and bring in more tax revenues. That has not happened. National savings, which provide capital for individuals and businesses - to finance purchase of a house, for example, or to expand a factory - have declined in the 1980s.
The CBO calculates that the net domestic savings rate averaged about 3 percent in the years 1980 to 1987. That compares with 8 percent in the 1960s and 7 percent in the 1970s. Britain, France, West Germany, and other advanced industrial countries all have appreciably higher saving rates.
With the domestic savings pool shrinking and government borrowing more to finance the deficits, less was available for productive business investment. Today, such investment is lower than when Reagan took office, although it is now edging upward. According to CBO figures, net business investment averaged 4.7 percent in 1980-87, compared with 6.9 percent in the 1970s and 7.1 percent in the '60s.
Moreover, as the deficits and consumer borrowing pushed up interest rates, foreign investment poured in, drove up the value of the dollar, made US goods more expensive overseas, and created a huge trade imbalance. Last year the trade deficit shot up to $171 billion; in 1980 it was $36 billion.
Impact of deregulation debated
To finance these deficits, the US has grown increasingly dependent on Japanese, European, and other foreign investors. Its already mammoth debt to them is expected to reach $1 trillion in the next decade - a heavy burden for the next generation of taxpayers.
In assessing Reaganomics, many economists are also concerned about the impact of deregulation. Reagan completed the deregulation of the airlines and partial deregulation of trucking and rails. He also removed many onerous government regulations on business.
But the lifting of federal controls has had adverse as well as positive effects. The thrift institutions, for instance, are in a state of crisis following deregulation, and the airlines are dogged by problems.
The wave of corporate mergers, resulting from a shift of policy in the Justice Department's antitrust division and virtually restructuring American industry, is also drawing fire. While some companies have benefited from corporate takeovers, critics say, many others have suffered, as decisions are driven by a grasp for quick profits rather than a desire to produce better goods and services.
Meanwhile, today the American people are having to work harder to improve their living standards. Figures on income and wage levels during the Reagan years are a matter of dispute. But most analysts agree that the heady era of the 1950s and '60s, in which Americans could expect a rapid rise in their earnings, has passed.
Beginning in the mid-'70s, the growth of family income began to slow. The trend is not fully understood, but it is thought to be linked to such factors as the decline in productivity, the oil shocks, recessions, a long period of inflation, and the shift toward a service economy.
While real wages have remained static, however, family income continues to increase, because there are now two earners. ``So Americans are living better but working harder to get it,'' Rivlin says.
George and the deficit dragon
Today's economic realities mean that the new administration cannot avoid dealing with the budget deficits. This will demand close scrutiny of government spending, including social security and defense. It will also require, in the opinion of most analysts, an increase in taxes.
The task is all the harder because it comes at a time when the nation's neglected domestic needs, from education and the environment to infrastructure and health care, cry out for attention. A prospective bailout of the tottering savings-and-loan industry, which could run as high as $100 billion, adds to the squeeze.
``It's the collision of these two - the dilemma of the deficit plus all the needs - that will make government so difficult in the next four years,'' says Mr. Eizenstat.
Further complicating the picture is the possibility of another recession. This is why many business executives urge the President-elect, who will enjoy start-of-term popularity and the traditional honeymoon period, to come out quickly with a four-year plan for reducing the fiscal deficit. Delay could mean having to postpone deficit action indefinitely.
As the incoming President and new Congress address the problem, the urgency of closing the gap between consumption and production and boosting US competitiveness will be central to their decisions. There is hardly a corporate leader today who does not call for fiscal policies that will encourage savings, spur investment in plant and equipment, expand civilian research and development, and rebuild the educational system.
``If we don't get investment in the US, we will continue to go downhill,'' says Robert Noyce, chief executive officer of Sematech, a semiconductor-manufacturing-research consortium. ``The whole issue is whether the savings rate is high enough.''
As he pursues policies that foster an export-oriented economy, President-elect Bush will also have to devise strategies to ensure world economic growth. This includes alleviating the crushing $1.2 trillion debt burden of developing countries, which will require more than the stopgap debt plan of former Treasury Secretary James Baker III. Unless the developing nations bring that burden under control, grow economically, and create a demand for foreign goods, Americans will have less opportunity to sell their products abroad and improve their own standard of living.
``The next president is going to look at the potential for reducing the trade deficit and realize that he cannot deal with it without growth in Latin America, and that means dealing with the debt issue,'' says John Sewell, head of the Overseas Development Corporation.
In light of the growing importance of trade to the US economy, Reagan gets high marks for resisting protectionism and fending off forces in the country that wanted to stiffen trade barriers to protect domestic jobs. The new trade bill hammered out by Congress and finally signed by the President is viewed as moderately positive. It allows for a future lowering of barriers and a new round of trade negotiations, while bolstering the president's ability to resist unfair practices.
The Reagan administration is also lauded for strong, if delayed, leadership on the international financial front. Attacking the trade deficits, Mr. Baker institutionalized a process of coordination among the advanced industrial nations to manage exchange rates and bring down the value of the dollar, which priced American exports out of the world market. He also pressed Japan and Europe to stimulate their economies so they would absorb more imports from the US.
As a result of these and other measures, there are some indications of progress. Figures show that the US economy is beginning to shift from import-oriented to export-oriented growth.
But public officials and business leaders warn of the challenge ahead. How quickly the US digs out of the hole of deficits and debt - and gets itself on a production roll - may well determine the success or failure of the next presidency.
Tomorrow: Strengthening the social fabric.