4 Economists Link Deficit, Interest Rates

Senate leaders, setting the stage for the congressional session that begins today, called Wednesday for deep cuts in federal spending and brought in four leading economists to predict that current interest rates would fall if Congress agreed to slash the budget deficit in half by 1988.

Incoming Senate Majority Leader Robert J. Dole (R-Kan.), who chaired his last hearing as head of the Finance Committee Wednesday, vowed to make a “major assault on federal spending in 1985.” At the same time, he dismissed the Treasury’s proposed tax changes as “highly controversial” and likely to “impede progress on the deficit.”

The economists, including three former chairmen of the Council of Economic Advisers, insisted that large spending cuts would have to include a freeze on Social Security benefits, a position that generally drew support from both Republican and Democratic lawmakers. President Reagan has ruled out any move to block a scheduled cost-of-living increase in Social Security in the budget proposal currently being developed by his Administration.

The hearing seemed designed to line up support for the across-the-board spending freeze advocated by Dole and several other members of the Finance Committee--an approach that differs significantly from Reagan’s budget plan, which emphasizes further cuts in domestic programs while leaving Social Security and defense spending unscathed.

But both Martin J. Feldstein, formerly Reagan’s chief economic adviser, and Alan Greenspan, top economic adviser to former President Gerald R. Ford, expressed skepticism about the freeze proposal. Feldstein questioned whether a one-year freeze would achieve significant budget savings in subsequent years. Greenspan argued that cutting Social Security and other benefit programs should take precedence over defense spending reductions.

Meanwhile, Rep. William H. Gray III (D-Pa.), expected to be the next House Budget Committee chairman, issued the first major warning shot by a Democrat against Reagan’s budget, saying the “honeymoon is going to be over by February.” In an interview with the Associated Press, Gray said: “You already see Republican members of the House and Senate backing away from (Reagan’s) budget proposals at 1,000 miles per hour. And you see total indecision in the White House.”

For the most part, Democrats have avoided sniping at Reagan’s budget proposals ever since his overwhelming election victory in November, letting Senate Republicans take the lead in challenging the Administration’s spending priorities.

Cutting Deficit

At the Senate committee hearing, Sen. Bob Packwood (R-Ore.), incoming Finance Committee chairman, pressed the economists to agree that cutting the budget deficit would lead to significant reductions in current interest rates.

Greenspan and Paul Craig Roberts, a Treasury official during the first year of Reagan’s term and a leading “supply-side” economist, both agreed that interest rates probably would fall as long as Congress reduced the deficit through spending cuts rather than tax increases.

But Feldstein and Charles Schultze, chief economic adviser to former President Jimmy Carter, initially argued that slashing the deficit would only help prevent interest rates from surging--not reduce them. Eventually, however, they conceded reluctantly that the rates would fall if Congress were able to reduce the deficit to less than $100 billion in 1988 from an expected level of more than $200 billion this year.

The “bottom line” of the economists’ testimony, Dole said, was that reducing the deficit had to be Congress’s top priority this year. Such a goal is a “traditional conservative Republican concern,” he added, noting that Republicans are now being joined on the issue by Democrats like Sens. Daniel Patrick Moynihan of New York and Max Baucus of Montana.

Dole challenged Roberts’ argument, frequently repeated by some Administration officials, that the Federal Reserve Board is responsible for making the deficit worse by pursuing slow-growth policies.

FED Blamed

“Blaming Federal Reserve Board Chairman Paul Volcker is not the answer--it’s merely an evasion,” he said. “There are just no painless solutions around here, and it’s time to bite the bullet.”

Although all four of the economists supported the general goal of deficit reduction, they were reluctant to predict an immediate economic castastrophe if Congress fails to act.

“We’re not facing a crisis,” Schultze said. “But just because it doesn’t work in a hurry doesn’t mean we aren’t suffering from a subtle, long-term poison.”