Why Washington frets over deficits and trade despite 1,200 Dow
''We are tearing ourselves apart with the kind of budget deficits'' that the United States government is running. Thus Treasury Secretary Donald T. Regan, economic point man for the Reagan administration, described what he regards as the ''greatest threat'' to the economic recovery now under way.
One evidence of growing business confidence was a jump in the Dow Jones industrial average Tuesday to 1,209.46 - the first time this widely watched indicator had closed above the 1,200 mark. And US proir6l,8pductivity - or output of goods and services per hour of work - advanced at a healthy clip during the first quarter of 1983, the government reported Wednesday.
Still, the Treasury secretary remains cautious. ''We can put up with the deficit this year,'' Mr. Regan told reporters at breakfast. ''We can put up with the deficit next year. But we can't put up with deficits in the range of $200 billion in years ahead.''
With Congress and the White House sharply at odds over the proposed fiscal 1984 budget, there is no sure sign that deficits will be coming down.
''We can have 17 Paul Volckers in charge of the money supply,'' said the Treasury chief, referring to the chairman of the Federal Reserve Board, whose tight-money policy played a major role in reducing inflation. ''But interest rates will not come down unless budget deficits (begin to shrink).''
On this point Reagan administration officials and the Democratic and Republican leadership in Congress no doubt agree. Where they differ is on how to achieve that goal.
The congressional versions of the budget, now pending in the House and Senate , would trim the growth of defense spending, add billions of dollars to other domestic programs, and one way or another increase taxes.
Much of this is anathema to President Reagan, who insists on further tax cuts , not boosts, plus defense spending higher than either chamber appears willing to approve.
In the first six months of fiscal 1983, which began Oct. 1, 1982, said Mr. Regan, the Treasury borrowed a whopping $130 billion, well over half of the $210 .2 billion shortfall the administration projects for 1983.
Regan says no ''crowding out'' of private borrowers is expected, because the nation's pool of savings - buoyed by the creation of huge numbers of individual retirement accounts (IRA) - appears to be sufficient to meet borrowing needs. But, he warns, ''with deficits at the current level, year after year, we will get crowding out.''
According to administration officials, spending under the fiscal 1984 budget would total 24 to 25 percent of gross national product (GNP) - higher than the 23 percent seen by the proposed presidential budget.
The problem, experts agree, is that under current tax law, US Treasury revenues will remain at about 19 percent of GNP, locking in a structural deficit in years ahead.
The administration stresses that to narrow this gap, there is a need for more cuts in domestic programs, plus minimal tax increases in 1984 and 1985. Budget versions approved by the full House and by the Senate Budget Committee, by contrast, call for $30 billion in new taxes in fiscal 1984 and even more in following years.
Analysts say such tax hikes could be achieved only by eliminating the 10 percent income tax cut scheduled to take effect in July and perhaps by shelving the indexing of income taxes to inflation, beginning in 1985. President Reagan digs in his heels on both points, insisting on the July 1 tax cut and on the indexing of taxes to inflation.
A second threat to the incipient recovery, Mr. Regan says, is the massive debt burden - roughly $600 billion - owed by developing nations to Western banks.
''If there were a default (by a debtor nation), and the banks pulled back on further lending,'' said the Treasury chief, ''it would have very damaging effect on the US recovery.'' He cited Mexico, which to save foreign currency has cut imports by $8 billion yearly - mostly from the US. Losing that much business means jobs lost for Americans. Only if US and other Western banks keep on with their lending, supplemented by financial aid packages mounted by the International Monetary Fund, can debtor countries keep on importing from abroad.
Already, says Regan, ''medium-sized and smaller banks in the US, plus some in West Germany and Japan, are pulling back (from new lending). The major banks are unable to make up the shortfall.'' The international debt problem, he said, will be a major topic of discussion at Williamsburg, Va., next month, when seven Western nations meet.