Specter of US deficits is overplayed, economist says
Economist A. Gary Shilling was odd man out when he lunched with President Reagan, several senior administration officials, and some other outsiders at the White House earlier this month. Mr. Shilling, head of his own Wall Street economic consulting firm, told the group that the importance of the budget deficit is overplayed.
''Everybody was talking about the deficit,'' he recalled in an interview.
Mr. Shilling maintains that the nation can live with a large deficit for some years because its financing is no longer such a problem. Primarily this is because of the higher rate of savings of Americans, savings that flow through the capital markets into government issues of bills, notes, or bonds.
He explained that people are more financially cautious. They have been frightened by the high rate of unemployment. They are concerned about the social security system.
Moreover, it now pays to save. For most of the postwar years, those in top tax brackets buying Treasury bills lost money after taxes and inflation were deducted. In fact, at its worst in 1974, the negative rate of return was almost 8 percent in real terms.
Today, a three-month T-bill is paying about 8.98 percent. The top marginal tax rate has been cut to 50 percent; thus the government takes off 4.49 percent. So far this year inflation has been running only 3 percent on an annual basis. So the upper-income investor has actually made almost 1.5 percent in real earnings - a fact that encourages savings.
In addition, American companies are in a good position to take advantage of the current economic recovery without the need for borrowing much money. Mr. Shilling notes that business has done much during the slump of the last few years to cut costs. As sales now step up, cash flow will improve decidedly. Most of capital spending will go toward further cost reduction, rather than expansion. So, he concludes, corporations as a group will generate about as much spare funds as they borrow.
Indeed, Mr. Shilling believes that corporate profits could rise sufficiently to represent a larger share of national income. During the 1960s, corporate profits, after an adjustment that takes account of the impact of inflation on inventories and on capital consumption, amounted to 11 to 14 percent of national income. During the inflationary '70s, their share dropped to the 8-to-11-percent area. Shilling reckons that with the current sharp reduction in inflation, corporate profits could return to their former 13-or-14-percent share of national income.
Further, corporate dividends sent to individuals (rather than going to institutions) are paid mostly to high-income investors. These are more likely to save. Shilling notes that those with incomes over $50,000 a year, on average, save about one-third of their take-home pay. Those earning $10,000 and less usually spend $1.40 of every $1 of take-home pay - they're going into debt.
A similar factor affecting savings is that 40 percent of the Reagan tax cut, which concludes with a further 10 percent drop in income taxes July 1, goes to those making $50,000 or more. This group amounts to 6 percent of households.
Also easing the government's debt financing problem is the inflow of foreign money.
As a result of all these factors, Mr. Shilling, unlike many other economists, doesn't figure the financing of the massive deficit will seriously crowd out private borrowers from the capital markets. Thus pressures for higher interest rates will not be so great.
He adds to his relatively optimistic outlook by contending that the United States has basically licked inflation. With financial writer Kiril Sokoloff, he is the author of a new book with a fashionably long title, ''Is Inflation Ending? Are You Ready?: A sober look at the prospects for a decline in inflation and how it affects your business and investments'' (McGraw-Hill, $17.95).
The New York-based economist sees such a dramatic change in the attitude of Americans that he figures ''inflation is not going to be a major issue.''
Historically, he argues, inflation has resulted from rapid growth in the proportionate size of government. The Federal Reserve System has accommodated the political pressures by creating excessive money, and this results in rising prices.
But now voters are resisting higher taxes. Politicians in Washington are exercising greater budget restraint, which should eventually reduce the government's share of the economic pie, and, in turn, inflation. Deregulation of business, improved productivity, OPEC's weakening, and a strong US dollar should trim inflation further.
Reduced inflation means a new set of winners and losers for investors and others (see table). It's a different world, Shilling says.
When inflation ends -- who wins and who loses The winners The losers *Savers *Individuals and businesses *Business with little or no debt heavily in debt *Good-quality stocks and bonds *Real estate and commodity brokers *Low-cost producers *Housing speculators *The US dollar *Collectibles, objets d'art, antiques, *Venture capitalists and their dealers *Research and development *Luxury, foreign-made automobiles *Pensioners and others on fixed income *Producers of farm equipment *Efficiency and quality-control *Countries with high external debts experts *Entrepreneurs denominated in US dollars *US-made automobiles *Municipalities *Money market funds backed by *Farmland investors US government securities *Investors in hotels, office build- ings, and shopping centers Source: "Is Inflation Ending? Are You Ready?"