Teaming up for recovery
There is no escaping what is demanded of the new 98th Congress and the President of the United States. They must put aside narrowly partisan thinking and work together for economic recovery. That means, first and foremost, getting the federal budget under control - reducing the soaring deficits that are now reaching the highest level in the nation's history. The American people will judge their leaders harshly if the latter fail to display the spirit of cooperativeness and the discipline needed to put the government on a sound financial footing.
Some may think that deficits, i.e., government spending more than it takes in , can serve the purpose of priming the economic pump in a time of recession. That may have been so in the past, and even now economists tend to be more worried about future deficits after recovery gets under way. But past deficits were not attended by such high real interest rates. The concern today is that, even if consumer spending rises, the deficits will be so huge they will crowd out private borrowers from credit markets and prevent the basic capital investment required to expand major industries and sustain economic growth.
A few figures tell the story. During the Carter years the deficits ranged between 1.2 percent and 2.3 percent of GNP. The deficit for fiscal 1982, under the Reagan administration, was 3.7 percent of GNP and it is expected to reach 5. 5 percent of GNP in the current year, or $190 billion. The projection for 1984 is 4.2 percent - still higher than the record of 4 percent set during the Ford presidency.
While the Reagan administration has managed to bring down the inflation rate through a tight monetary policy, its loose fiscal policy threatens to undermine this laudable achievement. Either the government must print money to cover the deficits, thus igniting another burst of inflation, or borrow heavily out of the savings of individuals and businesses, discouraging private investment. According to the Office of Management and Budget, Treasury borrowing will absorb more than 70 percent of private savings this year and almost 80 percent next year. Little is left for expansion of such key areas as housing.
So large are the deficits in fact that, even if the economy did begin to pick up, the revenue generated would not be sufficient to help the budget much, which has to absorb a $750 billion revenue loss over five years as a result of the Reagan tax cuts. The nation, in short, has entered an unprecedented period of what have come to be called ''structural deficits.''
What to do?
There is no mystery about the options. Both Congress and the White House know that, with many social programs already having been trimmed, there are only two main budget items where substantial savings can be made: defense and ''entitlements'' including social security. They also know that they can raise taxes - a step that would burden already distressed taxpayers and therefore would be politically sensitive.
Bluntly speaking, no solutions are going to be easy, but we reject the idea that they have to be economically painful or politically disastrous for either party.
* Take social security. The anxieties of the elderly and of those who one day will be beneficiaries themselves can only invite sympathy. But the public must be educated to understand, first, that the system has gotten out of control because of the addition of benefits over a period of years (including medicare) and that, second, reform is possible without depriving current recipients or greatly reducing growth in future payments. In fact, population and economic trends are such that, once the government can solve the short-term problem, the system will be in good shape in the medium term and will face another crunch only in the next century.
It should not be difficult for Democrats and Republicans to select the best mix from an array of proposals: slightly reducing the rate of growth of benefit payments; indexing benefit payments to wage increases instead of consumer price increases; gradually raising the retirement age for full benefits; increasing the contribution rate by 1 or 2 percent over the next few years; taxing social security payments above a certain level. These steps would bring in sizeable savings to help cover the social security budget, now running at $230 billion a year. One economist estimates that lowering the cost-of-living adjustment by 1.5 points a year (below the consumer price index) could bring the federal budget into balance by the end of the 1980s.
* Then take defense spending - at $230 billion an equally large item in the budget. Of course the US needs to modernize its military arsenal and improve its readiness. Everyone agrees on this. But why does the buildup have to be at such hectic pace; why must the Pentagon be given every item it wants, even when its military value is in doubt? President Reagan first talked of increasing defense spending by 7 percent a year (as compared with 5 percent under the Carter administration). Yet his first five-year budget called for a real increase of 9. 2 percent and, with the inflation rate down, the real rate today is even higher. And, judging from past experience, the momentum created in defense production will fuel even bigger increases in the future. Such an unrestrained buildup must be brought under control - not only for the sake of fiscal soundness but of a better balanced economy (military spending is the least productive generator of economic activity) and of a more effective, less wasteful military.
This is not to neglect still other areas of government spending which could and should be cut back: military and civilian pensions, revenue sharing (some local governments get federal funds even though they have no budget problems), farm subsidies, unnecessary dam and water projects. There is, too, the perennial need for tax reform which would eliminate or reduce so-called ''tax expenditures'' - deductions of consumer-credit interest, mortgage-interest deductions (for second homes), oil depletion allowances, and so on. In this connection the revenue side of the federal budget could also be given a boost by postponing the indexing of income taxes for inflation. Thanks to this tax benefit, the government is expected to lose $9 billion in fiscal 1985, when the measure is scheduled to start, and as much as $40 billion in fiscal 1987.
To sum up, the agenda for restoring solvency to government and confidence in the business community is plain. The only question is whether Congress and the administration will consume their energies in partisan politicking - or collaborate for the national good. The economy awaits the latter.