Up to Our Ears
Most of the economic news from Washington these days suggests an economy going slightly sour. The economy has gone sour enough to cause recessions eight times in the years since World War II. In those cases government usually has increased borrowing and federal spending to prime the pump and soften the blow. If the economy doesn’t pick up, it will be different this time. By letting the national debt double since it took office, the Reagan Administration has in effect canceled the nation’s anti-recession insurance policy. Washington is itself mortgaged to the hilt, paying nearly two-thirds as much on interest as it does on defense, and is in no position to lend a hand.
This is what economic sourpusses on Wall Street have been warning might happen during the entire five years of tax cuts and President Reagan’s fling with supply-side economics. But as long as the gross national product kept rising, however modestly, and business was good generally, a $2-trillion (as in $2,000-billion) national debt was an abstraction as remote for most Americans as Arctic moss.
The steady flow of gloomy economic reports in recent days makes the debt far less an abstraction. The economy, measured by the output of all goods and services, went virtually flat between April and July, growing by just 0.6%--the worst per-formance since the 1982 recession. Because the economy is soft and federal revenues are down, the deficit in the 1987 budget that Congress will face when it reconvenes after Labor Day will be $20 billion higher than the limit of $144 billion that Congress imposed on itself with the Gramm-Rudman law. The starts of new housing construction turned down again last month. Tax reform will spur the economy over the next several years, but it may slow growth even further in coming months.
But the gloomiest news of all involves debt, public and private. Consumers, not producers, have kept the economy going in recent years. Manufacturers are using, on the average, only 78% of the capacity of their plants. To finance their trips to automobile showrooms and appliance stores, consumers have been going into debt in the past few years almost as fast as the federal government and far faster than the pattern of the past 40 years. Farmers have been forced into debt and default, as have energy companies that took it on the chin when oil prices fell. That has forced many banks in farm and energy states to fail, and has left others shaky. They would be even shakier in a recession whose effect could not be softened as it has been in the past by increased federal spending.
How long will consumers carry more and more debt in order to carry the economy? There are signs that they are already beginning to go to the credit card less often.
There are few things that a government with so much red ink on its hands can do. There are more things, however, that it cannot do.
It cannot call for a general tax increase to hold down the deficit. It cannot pour as much good money after bad as it planned to do mere weeks ago on such things as research on “Star Wars,” the nuclear-defense program. And it cannot withhold $20 billion from the economy by going along with the Gramm-Rudman targets. As Rudolph G. Penner, the director of the Congressional Budget Office, said this week, honoring Gramm-Rudman deficit limits would mean dismissing “more than a couple hundred thousand” soldiers and Pentagon employees. Domestic programs, already cut 30% below their levels of five years ago, would have to be cut 7.6% more.
What the government can do is look to taxes on liquor, cigarettes and gasoline, all of which should be raised anyway. Perhaps it could find $20 billion in revenue there. And it can hope that Wednesday’s cut in the discount rate means that the Federal Reserve Board, which produced the one bright spot in the economy by hammering down the inflation rate, plans to be as forceful about hammering down interest rates.
