Greenspan Saw 1989 Recession as Probable : Reagan Nominee Also Warned in April Interview That Deficits May Produce ‘Economic Accident’

In a taped interview broadcast Sunday, Alan Greenspan, President Reagan’s nominee to chair the Federal Reserve Board, said a recession is probable in 1989 and warned that continued deficits make the economy vulnerable to “some economic accident.”

Greenspan, former chairman of the Council of Economic Advisers, sketched an outline of his brand of laissez-faire conservatism on April 8 in a brief interview intended for use in an upcoming CBS television documentary. However, after Greenspan’s nomination last Tuesday to succeed Paul A. Volcker as head of the nation’s central bank, the network decided to broadcast his remarks during Sunday’s edition of “Face the Nation.” Greenspan, whose appointment still must be confirmed by the Senate, has avoided public comments since his nomination.

‘Growth of Debt’ Cited

Asked in the interview whether the nation will have a recession, Greenspan replied: “We always do; it’s just a question of when. My guess is it’s probably 1989.” Greenspan said he was “uncomfortable with the growth of debt,” and warned that if nothing is done about it, the federal deficit, now estimated at about $140 billion for fiscal 1987, “will probably get worse.”

“At some point, some economic accident would likely happen . . . and we could be in the worst economic straits for any period since the 1930s,” Greenspan said.

Greenspan voiced concern that Americans are spending too much and saving too little, warning: “If America does not increase its capital investment rates, which means increase its basic savings, we are going to fade from the scene as a huge superpower eventually.”

While he found no evidence of a return to double-digit inflation, Greenspan agreed with other economists that there is evidence suggesting “a moderate increase in inflation, enough to make it uncomfortable, enough to bring it back on the political agenda.”

As he has before, Greenspan recommended increased income taxation of benefits paid to upper-income citizens under all entitlement programs, which include Social Security, now partly tax-exempt, and Medicare, which is fully exempt.

The question of a general income tax increase, which Greenspan endorsed last February, drew a cautious response from Treasury Secretary James A. Baker III, who was interviewed at the economic summit in Venice for ABC’s “This Week With David Brinkley.”

Must ‘Exert Discipline’

Baker did not argue against a tax boost as a “long-run solution” to the deficit problem, but said that before the issue gets serious consideration, “we need to make sure that we exert as much discipline as possible to reduce spending.” Spending amounts to 24% of the nation’s gross national product, he said, while taxes are 19% of GNP.

Following the Administration line on the question, Baker said talk of tax cuts dispels the “political will . . . for spending cuts . . . because it’s easier to raise taxes than it is to cut spending.”

Two economists who also appeared on the Brinkley show foresaw problems ahead for Greenspan at the Federal Reserve.

‘Difficult Tightrope Act’

Robert Hormats, former assistant secretary of state for economic affairs, said Greenspan “will have a difficult tightrope act” because keeping inflation under control is likely to require increases in interest rates, an approach the Fed used regularly under Volcker when the economy heated up. Hormats said he is also worried that interest rates might be raised “to try to sustain the dollar at its overvalued level” in world money markets.

Martin S. Feldstein, who served from 1982 to 1984 as chairman of the Council of Economic Advisers, predicted that “over the next couple of years we’re going to see at least another 15% or 20% decline in the dollar.”

Such a change will presumably bring further reductions in the heavily unfavorable U.S. trade balances with other nations, particularly Japan and West Germany. This will mean, Feldstein said, that “even if we have a recession here, it’s going to be a recession with growing exports from the U.S. and shrinking imports from the rest of the world.”

Another result, he said, is likely to be an increase in U.S. interest rates because reduction in the trade imbalance will bring a lowered rate of foreign investment here, which will intensify competition for capital between the government and American businesses and home builders.

Feldstein discounted the value of U.S. efforts to encourage Japan and West Germany to stimulate their economies so they will be able to buy more American goods.

“We can essentially forget about the pace of economic activity in Japan and Germany as the driving force in correcting our trade balance,” Feldstein said. “Our trade balance is improving, but it’s improving because the dollar is coming down.”