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Bipartisan Panel May Be Shaping Fate of Economy

Times Staff Writer

As the presidential candidates stagger toward the finish line of a campaign filled with vague rhetoric and negative attacks, the National Economic Commission, ensconced in a barely furnished townhouse across from the White House, is quietly going about its work.

Never heard of the National Economic Commission? Don’t worry, you will.

Better known to Washington insiders as the Strauss Commission, after its flamboyant co-chairman, Democratic mover-and-shaker Robert S. Strauss, the bipartisan group was established by Congress last year to recommend how the winner of this campaign should cope with the daunting budget problems he will face as soon as he moves into the White House.

Members of the commission, made up of six Republicans, six Democrats and two appointees to be named soon by the next President, maintain that their only goal is finding the fairest plan for what will be a very painful, but necessary task. That is, reducing the huge federal deficit so that the nation’s economy can keep growing at a healthy pace.

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But a growing chorus of critics--from both the Republican right and the Democratic left--warns that what this panel is actually doing is preparing a pro-Wall Street, anti-consumer agenda that would impose a harsh regime of belt-tightening austerity and higher taxes on an unsuspecting American public.

As Election Day approaches, the group and its work has come to be at the heart of what author William Greider calls the “shadow debate” over the future of the American economy.

“There’s a conspiracy of silence that governs the present campaign,” argues Jeff Faux, president of the Economic Policy Institute, a labor-sponsored think tank here. “There seems to be some kind of quiet agreement that the American people cannot bear to hear of the economic pain that the financial Establishment has decided will be necessary to administer after the election.”

The clash of views will finally erupt into the public arena when the federal budget process begins next year. But until then, “behind the scenes, the policy debate is in full swing and the stakes are very high,” says Faux.

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The debate--being carried out in a plethora of opinion leaders’ studies, advisory group reports and academic forums--reflects major, internal divisions over future economic policy within both the Democratic and Republican camps.

Within both party hierarchies, a broad mainstream is convinced that the nation’s highest priority must be to slash the federal budget deficit in order to make resources available for long-term investment in the economy. They believe that only if this done, by disciplining consumers to spend less and save more, will the United States be able to produce the reservoir of money needed to rebuild hard-hit domestic industries and wean itself from a threatening over-dependence on foreign capital.

Such a retrenchment could run the risk of a mild recession, such analysts concede, but it is a risk worth taking to avoid an even worse outcome later on.

“Take your action early, like Reagan did,” C. Fred Bergsten, head of the influential Institute for International Economics, said earlier this year in a speech summarizing the advice of 33 international economists for the next U.S. President. “Make your adjustments early and take your recession, though probably a recession will not be necessary this time. But if so, take it early in your term and be in a recovery mode in time for your own reelection campaign.”

Minority View

But both parties also harbor important minorities who insist that budget cuts and tax increases on the middle class aimed at curbing the deficit, if carried too far, threaten to plunge the nation into economic ruin. Instead of promoting investment, they argue, such a policy would undermine the future demand that drives business to build new facilities and expand production.

These factions regard themselves as victims of a conspiracy of silence aimed at shielding the average voter from their views. And, they believe, the economic mainstream is equally intent upon shielding the affluent from the austerity it proposes.

“There’s this strong Calvinist streak among the Eastern elites that somehow believes that pain is good for us,” said Alan Reynolds, a prominent conservative analyst who is chief economist at Polyconomics Inc. in Morristown, N.J. “And when it is somebody else that is going to have to bear the pain, so much the better.”

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Some fast-rising economists on the left, while holding different views, echo Reaganite “supply-siders” arguments on this point. “We see the solution for the current economic dilemma as producing more rather than consuming less,” said Walter Russell Mead, who was instrumental in drafting a recent New York state analysis on the budget predicament. “You can’t impoverish yourself into prosperity.”

To mainstream economists, however, the critics are exaggerating the dangers of budget cutting because they, too, have their own hidden agendas. As middle-of-the-road analysts see it, Republican conservatives want to keep the deficit high to discourage Congress from spending more money. Meanwhile, the Democratic activists, they say, are itching to spend money on new social programs and willing to run the risk of much higher inflation to achieve their goals.

“If you want to be able to look forward to a better economy in the 1990s, the first order of business has to be to clean up this budget deficit mess,” said Carol Cox, head of the Committee for a Responsible Federal Budget and a consultant to the Strauss Commission. “But the extreme liberals and the extreme conservatives make it sound like we’re advocating some kind of harsh purgatory because they want to continue pretending we don’t have to change anything.”

Strauss, who is co-chairman of the economic commission with former Transportation Secretary Drew Lewis, got an early taste of the mine field policy-makers will face next year when he suggested in a talk to a small elite conference here last month that the candidates were not confronting the real budget issues.

‘No Easy Choices’

“There are no easy choices left,” Strauss said. “We have to go to Social Security, Medicare, entitlements generally. We have to go to defense. . .. That’s where the money is.”

Moreover, asked about Vice President George Bush’s repeated vows on the campaign trail that he will oppose even the slightest tax increase, Strauss replied: “I know George Bush and I think he knows better. . .. I hope after Nov. 8, (Bush) will take a calmer look.”

The political backlash was immediate and fierce.

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Mark Goodin, a spokesman for the Bush campaign, said that Strauss’ suggestion of a change of heart by the GOP candidate on taxes was “ludicrous, absolutely ludicrous. When the vice president says no new taxes, he means it.”

Meanwhile, other members of the commission vowed to prevent any cutbacks in Social Security, by far the federal government’s largest domestic spending program. Member Lane Kirkland, president of the AFL-CIO, vowed to “strenuously oppose any such misguided and self-defeating approach to the (deficit) problem” that included cuts in Social Security benefits.

Out of this discord the commission plans to formulate a way to close the budget gap steadily over the next five years. The deficit now amounts to about $155 billion.

Many analysts agree that this target, even with greater agreement on methods, would be a difficult one to reach. Further, some are also worried that financial investors both here and abroad may be expecting Washington to go the extra mile by taking a particularly big bite out of the debt in the first year.

“The Wall Street alarmists are going to play the tune that the new Administration and Congress have to move fast on a tough budget,” said Steven Bell, former staff director of the Senate Budget Committee and now a Washington representative of the Salomon Bros. investment bank. Their expectations must be respected because they can have an impact on the volatile financial markets.

“But it seems to me that the overwhelming goal has got to be to keep the economy growing, buy time for the future and keep our fingers crossed,” Bell says.

Underscoring that more patient approach, David Hale, chief economist for Kemper Financial Services in Chicago, said recently: “The big issue facing the next President is whether to go for a quick hit--a recession in ’89 or ’90--or for a stretched-out adjustment over four or five years. The (financial markets) would like to have a full-scale recession right now and get it out of the way. But I don’t think the system can take it.”

The leading advocate of a sharp cutback in government domestic spending programs to restore fiscal balance to the economy is Peter J. Peterson, who served as secretary of commerce under former President Richard M. Nixon and is now head of the Blackstone Group investment house in New York.

‘Well-Off People’

“I think the single most egregious thing is the idea that in a time of profound fiscal stress in this country, we’ve got billions and billions of dollars going to well-off people under the guise of universal entitlements,” Peterson said in a recent interview with Time magazine. “If we’re going to find the resources to reinvigorate this country, we’re going to have to make some real choices that are not costless.”

But Faux, among others, argues that Peterson’s cure is worse than any of the nation’s current economic ills. By putting all his “emphasis on cutting consumption and increasing saving,” Faux wrote in an article this summer for the World Policy Journal, “what Peterson is proposing, in effect, is Reaganomics II--a tougher and more brutal version of the original. Peterson, the pin-striped Robespierre of the Reagan revolution, believes that still more blood must be spilled.”

Despite the pressure from Wall Street and the Washington Establishment for an immediate solution to the deficit, it seems more likely the new President and returning lawmakers will spend months wrangling before compromising on any budget package.

“In the end, I think there are enough brakes on the political process that Washington won’t be able to put the economy on an austerity diet,” said Larry Kudlow, chief economist for Bear, Stearns & Co. in New York.

David Mathiasen, executive director of the economic commission’s small staff, says that all the speculation about what the panel will propose will end on Dec. 21, its self-imposed deadline for its report.

Then, let the real firestorm begin: “Our first task is just to get people to understand the magnitude of the deficit problem they face.” he said. " . . . If bringing the budget into balance was an easy task, Congress and the Administration would have already done it.”


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