Of pensions, production, and the economy
Henry Smith, pensioner, opens his monthly check and calls to his wife, Mary. It's been raised, he exclaims! Instead of $856.70 a month, it's now $919.00. That's . . . ho-hum . . . that's an increase of $747.60 a year. Not enough to shout about, maybe, but it could help paper the living room.
A scene like this (generally with smaller amounts) has been going on in tens of thousands of American homes this month with the increase in social security payments July 1. Will it help to ease the recession?
President Reagan thinks so.
But it will also add to the deficit. Budget Director David Stockman says the federal deficit ''is not the consequence of the administration's tax policies, or its defense policies,'' but of nondefense ''entitlement'' spending.
What's entitlement spending? It embraces largely social security and federal pensions. Mr. Stockman says increases in this and other categories have jumped from $60 billion 12 years ago to around $292 billion last month. This has raised a paradox in Washington.
While Republican Party advertising ties President Reagan with the social security increase and tax cut (despite protests from Democrats), Congress is also discussing a constitutional amendment to require a balanced budget. Next year's deficit may exceed $100 billion. As amendment supporter Sen. Orrin G. Hatch (R) of Utah, member of the Senate Budget Committee, puts it, a constitutional amendment could make Congress ''face the consequences of deficit spending.''
President Reagan is sympathetic to the idea. Many Washington observers don't think the amendment will clear the ratification process, but the political reward for supporting the measure in Congress is obvious.
Federal Reserve Board chairman Paul A. Volcker is scheduled, meanwhile, to tell the Senate Banking Committee tomorrow (July 20) the latest decisions on interest rates and growth targets. There are two related developments here. The recession appears to have deepened in June with declining industrial production and an increase in wholesale price inflation. Simultaneously, pressure continues on the Fed to help stimulate the economy by raising its money growth targets and thereby reducing high interest rates.
Critical matters of the economy including inflation, unemployment deficits, and politics are interconnected. Currently unemployment is 9.5 percent and amounts to 50 percent or higher among black teen-agers. It is estimated that each 1 percent increase in unemployment raises federal expenses by $28 billion.
The economy has had two setbacks. A big gasoline price hike lifted wholesale price inflation at an annual rate from zero in May to 13.3 percent in June - the biggest jump in 15 months, according to the US Department of Labor.
The consumer price index is temporarily back to double-digit inflation, or a rate of 13.3 percent if carried through for the year. Mr. Reagan has pointed to the slower rate of inflation recently, and it is featured in Republican campaign appeals.
''We hope that the June price surge is temporary,'' said White House spokesman Larry Speakes. ''We're looking at world oil prices, which have declined considerably in recent weeks. In the coming months we can probably see a decline in the cost of energy, with inflation back in single digits.''
The second unfavorable economic report came from the Fed. The nation's factories operated at only 69.8 percent of capacity in June. This is the lowest in more than seven years. Several forecasters have put back estimates of economic recovery.
Robert Ortner, top economist at the Commerce Department, reflected the developing situation by saying here that it would not be damaging for the Fed to relax its anti-inflationary high interest policy and consciously allow easier money. So far the Reagan administration has supported the Fed's policy, and observers are watching closely to see if the trend is developing.