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With Spending-Cut Talk, Candidates Evade the Reality

<i> Ernest Conine writes a column for The Times</i>

To a man, the Democratic and Republican presidential candidates have cited the urgency of getting the huge federal budget deficit under control, and of doing something about the U.S. trade deficit. With the exception of Democrat Bruce Babbitt, however, they studiously avoid suggestions that the American people face unavoidable sacrifice whoever is elected.

Only Babbitt has forthrightly proclaimed the need for a significant, broad-based tax increase. And the Arizonan’s lackluster standing in the polls, plus his dismal finish in Iowa, do nothing to stiffen the backbones of the other candidates.

It’s true that the economy is growing. Unemployment is at the lowest level since 1979. Inflation is moderate. Manufacturing and agriculture are on the upswing.

Unfortunately, though, this isn’t the whole story. The average U.S. worker is earning less than in 1981. Many Americans have been forced into lower-paying jobs. More and more young families are unable to buy a house.

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Worst of all, from the national perspective, throughout the 1980s Americans as a people have spent more than they produced--making up the difference by borrowing against the future.

On the public spending side, the national debt doubled to $2.3 trillion in eight years as one big budget deficit was piled atop another. Interest payments on the national debt are now the largest item in the federal budget except for defense.

The Japanese, among others, have had larger deficits as a percentage of gross national product. But their deep plunges into the red were sporadic rather than chronic, and they saved enough to accommodate government borrowing. We don’t.

Americans are saving only 2.8% of their disposable income, on the average, compared with 15% for Japan and 13% for West Germany. So the U.S. Treasury must depend upon foreign lenders to finance our budget deficits.

A big consumption binge has made things worse. For five years the American people have consumed more than they produced, spending money they didn’t have to buy imported cars and other goodies. Last year consumer spending went up three times as fast as disposable income. The money to make ends meet has been coming, in effect, from abroad.

All told, the United States was in hock to foreigners to the tune of $421 billion by the end of 1987. The total may reach $1 trillion in the early 1990s.

President Reagan tells us not to worry, and some economists agree. However, their optimism overlooks troubling realities.

One is that, to keep foreign money rolling in, we have to offer high interest rates. When these percolate through our own economy, they act as a drag on economic growth and add to the cost of everything.

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In addition, foreign investors are cashing in their treasury bonds and purchasing real estate, buying U.S. businesses or establishing operations here.

That’s fine, except that it means more and more decisions affecting our livelihoods are being made in Tokyo, London and Dusseldorf. Also, foreign-owned businesses like to buy components from back home, rather than from U.S. suppliers.

Finally, foreign investors sooner or later take the proceeds home. This year we will shell out about $27 billion in interest, dividends and rent to foreign investors. The figure may reach $50 billion in 1990.

U.S. exports have expanded smartly in recent months and may continue to do so. But most experts say that healthier exports won’t cure the trade deficit unless something is also done to crimp imports. Given the national addiction to foreign-made consumer goods, that something must include a reduction in consumer spending.

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The options include credit restrictions and a further squeeze on wages. The most sensible approach, however, is a tax on consumption--which people could minimize by saving more and spending less.

A 5% value-added tax, a sort of national sales tax, would generate at least $45 billion after exemptions for food and other necessities. That would make a major contribution, too, to controlling the budget deficit.

Babbitt proposes just such a tax. But the other presidential aspirants, Democrat and Republican, generally prefer to talk about spending cuts as a solution.

A prolonged spending cap could indeed cure the budget deficit without new taxes. But the one-year freeze proposed by Bob Dole wouldn’t do the job--especially after the inevitable exemptions for Social Security and other untouchables--and the other candidates are painfully short on realistic suggestions as to just what should be cut.

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Their evasion reflects the American people’s own ambivalence. Everybody favors spending cuts--as long as their own favorite programs escape the knife.

We can, of course, do nothing. But that offers no escape from a squeeze on living standards, either. It would produce inflation, erode pensions and other fixed incomes, and ultimately bring stagnation and an end to the ability of Americans to control their own destiny.

The need is for straight talk from the man who would be President. But the American people aren’t getting it, and don’t seem to want it.


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