Passage Likely This Week : Budget Bill: A Travesty or Long-Overdue Step?

Some economists think it is a long-overdue first step toward a responsible federal budget. Others call it a “travesty.”

But this much is certain: The budget landscape will never be the same again if President Reagan signs legislation, designed to balance the budget by 1991, that won the endorsement of key House and Senate negotiators Friday and is expected to obtain full congressional approval this week.

The balanced-budget legislation would establish a schedule of declining deficits, beginning with $171.9 billion this year and reaching zero in 1991. The legislation, dubbed the Gramm-Rudman bill after its key sponsors, Sens. Phil Gramm (R-Tex.) and Warren B. Rudman (R-N. H.), would trigger automatic spending cuts if Congress failed to meet the deficit targets on its own.

Prediction of Prosperity

Martin Anderson, a senior fellow at Stanford University’s Hoover Institution and President Reagan’s chief domestic policy adviser in 1981 and 1982, calls this a prescription for vigorous economic health. “I think what Congress has just done is ensure the future prosperity of this country for many years,” he said Saturday.

Ambitious Targets

But Donald Ratajczak, an economist at Georgia State University, believes the Gramm-Rudman bill, for all its ambitious targets, will not come close to drying up today’s annual $200-billion floods of red ink. He said he would give “20-1 odds we will have at least a $100-billion deficit in 1991.”

And, even if Congress accepts the tough spending cuts or tax increases that would be required, many economists see a short-term danger of a recession. At the same time, however, they forecast lower interest rates and increased business investment from what Allen Sinai, chief economist of the New York investment house of Shearson Lehman Bros., called, for all the uncertainty, an “extraordinarily positive step.”

The major uncertainty is whether Congress could swallow the bitter medicine needed to bring the deficit down. The automatic spending cuts that could be triggered by the Gramm-Rudman bill would fall equally on defense and non-defense programs, while Social Security, six benefit programs for the poor and two for veterans would be exempt.

Isabel V. Sawhill of the Urban Institute, a nonpartisan Washington research organization, predicted that Congress would spit the medicine out. Labeling the bill “a travesty,” she said, “The best face you can put on it is that it’s an attempt to impose discipline on the budget process.”

Automatic Spending Cuts

Because so much of the budget would be off limits to the automatic spending cuts, she said, some programs would have to be slashed beyond recognition. And, on the defense side of the budget, she said, “it is hard to imagine the President would go along with the cuts this version calls for.”

For similar reasons, Irwin Kellner, chief economist of Manufacturers Hanover Bank in New York, doubts that the automatic spending cuts would ever be implemented.

“Gramm-Rudman doesn’t really chart a credible route toward a balanced budget,” he said. “It’s analogous to King Canute ordering the tides not to come in.”

Ratajczak of Georgia State predicted that Congress would postpone the deficit targets by a year or two at a time rather than accept the spending cuts they would require.

Tax Hike Called Likely

Alice M. Rivlin, former director of the Congressional Budget Office and now an economist at Washington’s Brookings Institution, pointed out that Congress and the President could avert the automatic spending cuts by agreeing on budgets that met the deficit targets. A tax increase, she said, would almost surely have to be one of the tools--despite Reagan’s unremitting opposition in the past.

“Gramm-Rudman certainly makes a tax increase more likely,” she said. She held out the possibility that the prospect of automatic spending cuts in defense might help Reagan modify his stance on tax increases.

If the deficit targets of the Gramm-Rudman bill are actually achieved, economists predict a host of consequences, many of them positive:

--Long-term interest rates could decline as investors, more confident that the deficits would not contribute to future inflation, no longer demanded high interest rates as a hedge against rising prices. “Long-term rates have already declined about half a percentage point in the last month,” largely in the expectation that Gramm-Rudman would become law, said Kathleen Cooper, senior vice president and economist at Security Pacific Bank in Los Angeles.

Reduced Trade Deficit

--As interest-bearing U.S. securities grew less attractive, the value of the dollar could fall in international currency markets, and that in turn would gradually help reduce the nation’s record trade deficit. Stanford economist Michael J. Boskin said U.S. goods could be more attractively priced overseas if the Gramm-Rudman bill worked as intended.

--Business confidence could grow as the specter of massive deficits for the indefinite future waned. Anderson predicted a boom in business investment in plant and equipment and cited soaring stock prices as evidence that investors see good times ahead for business.

“All this should augur well for long-term economic growth,” Boskin said, “if we don’t screw up and cause a recession in the short run.”

To many economists besides Boskin, that is a big “if.” Cooper said that 1987, which would be the fifth year of the economic recovery that began at the end of 1982, is already a likely recession year, and substantial federal spending cuts or a tax increase would act as an economic drag and make a recession still more likely.

Offsetting Economic Drag

Sinai, of Shearson Bros., said that the Federal Reserve Board could offset the economic drag by loosening monetary policy and letting short-term interest rates fall. The Fed could safely take such action without risking inflation, he said, because the danger that massive and unending deficits would reignite inflation would be gone.

But Cooper pointed out that the Fed might share the widespread skepticism that Congress will lack the will to meet the Gramm-Rudman deficit targets. “Only if the Fed believed this was a workable plan would it have more room to allow short-term rates to decline,” she said.

That skepticism may be the Gramm-Rudman bill’s greatest enemy. “Where the economy comes out depends on the extent to which the program is implemented,” Boskin said. “Congress might do it for a year or even two, but beyond that, I just don’t know.”