Right now the federal deficit is the economic bogyman in Washington. It pushes up interest rates. It kills investment. It will remain massive far into the future.
Federal Reserve Board chairman Paul A. Volcker, for instance, told the Joint Economic Committee last week: ''The current prospect that federal budget defi-xrcits will remain exceptionally large into the indefinite future is a major factor propping up interest rates.'' Those deficits, he continued, pose a serious risk to financial market stability and threaten the prospects for a sound, long-term economic recovery.
Is Mr. Volcker right?
No economist has been widely quoted as saying that today's massive deficits are a good thing. But the gloomy Volcker thesis is being increasingly challenged.
First, the vigor of the recovery means that the deficit will not be so large because tax revenues will rise and social payments, such as unemployment insurance, will drop.
Frank Mastrapasqua, an economist with Smith Barney, Harris Upham & Co., says, ''. . . current deficit forecasts will be consistently revised downward, and investors' expectations will be favorably influenced by these positive changes.''
Last week's news that the economy grew at a lively 7.9 percent annual rate in the third quarter promises even lower deficits.
Mr. Mastrapasqua figures Washington will need to borrow only about $40 billion in the current quarter, whereas the Treasury had anticipated earlier it would need $60 billion to $65 bil-rr
lion. Moreover, he is estimating the fiscal 1984 deficit at $165 billion, well down from the $195 billion or so in the fiscal year that ended Sept. 30.
Second, the tendency of federal borrowing to ''crowd out'' other lenders will be offset by cash surpluses elsewhere in the economy. State and local governments as a whole have a growing budgetary surplus. It ran $30 billion to $ 35 billion during the 1978-82 period, and was up to a $51.7 billion annual rate in the second quarter.
Combining federal deficits and state and local surpluses, the total government deficit has already dropped from a $227 billion annual rate in the third quarter of 1982 to a $114.4 billion annual rate in the second quarter of this year.
A. Gary Shilling, an economic consultant, figures the combination of higher profits and accelerated depreciation could mean that business will be a net saver, to the tune of $200 billion in 1984 and $250 billion in '85. That dramatic shift from net borrower to net saver would more than cover any deficit.
He figures the new ''accelerated cost-recovery system'' will augment depreciation, which is running about $400 billion, by $48 billion in 1984 and $ 62 billion in 1983.
Of course, the extra depreciation also enlarges the federal deficit. But Dr. Shilling comments: ''The large deficit may scare people, but to a great extent, all it really amounts to is a round trip for these funds.''
He concludes: ''All in all, concern over 'crowding out' is greatly exaggerated. We're not condoning the large deficit, and its psychological effect at home and abroad cannot be minimized. We think, however, that even if it remains above $200 billion, it can be easily financed in the years ahead.''
Confirms Mr. Mastrapasqua: ''Over the next year, the expected clash between public and private credit demands could well prove elusive once again.'' He predicts lower interest rates.
Albert M. Wojnilower, an economist with First Boston Corporation, goes even further. ''Government deficits,'' he says, ''may well promote rather than deter investment.'' The government, he explains, may use some of its borrowed money for its own investments. Or its borrowed money may be tranferred through ''grants-in-aid'' to state and local governments for their investments. Further, government borrowing supports investment tax credits, accelerated depreciation, and other subsidies for privaate investment.
The First Boston economist does not advocate larger deficits, but he does point out that these could be associated with larger profits and investment than if the deficit were smaller.
Actually, the national income accounts are a form of double entry bookkeeping , with the bottom line a deficit or surplus. From the standpoint of policy, the deficit itself can be, as one economist put it, ''a misleading nuisance statistic that deflects public debate from the important issues.'' A deficit during the start of a recovery is, as he put it, more likely to ''crowd in'' extra business profits or even personal savings than crowd out private investment.
A tax cut (boosting the federal deficit) would raise business cash flow while lowering borrowing to match. A tax increase (lowering the federal deficit) would lower cash flow to business and raise borrowing by an equal amount. So businesses might be more inclined to expand capital budgets with a tax cut rather than a tax increase.
Nor do big deficits automatically raise interest rates, though there may be some psychological impact now. Interest rates rose as the deficit fell during the early 1970s. When the deficit rose sharply in 1975, short-term yields fell dramatically while long-term yields did not change. The deficit fell gradually over the next four years so that the budget was nearly balanced in 1979; yet both long- and short-term rates rose once again. In 1982, yields fell as the deficit rose. Nor do ''real'' interest rates - those after subtracting inflation - show any consistent correlation with the deficit. Actually deficits rise in recessions when interest rates and inflation rates tend to fall. Deficits fall in recoveries when interest rates and inflation rates tend to rise.
Chairman Volcker may be trying to persuade Congress to cut the deficit by his dire warnings. But the economic impact should not be so great as he would make out.