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Dissecting the US Economy



New York: W.W. Norton, 146 pp., $12.95.

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by Herbert Stein, New York: Oxford University Press, 145 pp., $17.95.

LAST year, Benjamin Friedman, professor of economics at Harvard University, came out with a much-acclaimed book about President Reagan's fiscal policy with a title that hints at its tone, ``Day of Reckoning: The Consequences of American Economic Policy Under Reagan and After'' (New York: Random House). The volume, since picked up by a book club, warns that the budget deficit will damage the American economy gradually and subtly. Friedman wrote:

``Without economic growth, American society will ultimately lose its vibrancy, its dynamic sense of progress, its capacity to accommodate the aims and objectives of diverse groups within the population, its ability to offer such remarkable social mobility and individual opportunity. Without a strong and competitive economy, America as a nation will watch others take its place in the world order.... If we do not correct America's fiscal course, our children and our children's children will have the right to hold us responsible.''

It's pretty gloomy stuff.

This year, Robert Heilbroner, an economics professor at the New School for Social Research, and Peter Bernstein, a financial analyst, offer something of an antidote.

``By no stretch of the imagination can `reducing the deficit' be considered as America's number-one problem, as it is considered by 44 percent of the population and probably a larger percent of eonomists,'' they write in their book, ``The Debt and the Deficit.'' ``If it were America's number-one problem, we would be very well off indeed.''

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The two admit that it is certainly possible to amass a debt that will cripple this country or to run up deficits that would plunge the economy into chaos. But ``there is nothing in the immediate situation to warrant such imaginings.''

Written as a ``primer'' for those concerned about public affairs, this short book is clear - and mostly easy - reading. It offers a relatively liberal view of such matters as the national debt and who owns it, the deficit and how to measure it, the difference between public spending for investment and for consumption, and the view that public-debt financing crowds out private financing.

The book is a good buy.

Herbert Stein's book, ``Governing the $5 Trillion Economy,'' written as an essay for the Twentieth Century Fund, also includes sound analysis of fiscal policy. Indeed, Dr. Stein is one of the most authoritative economists on the subject today. His knowledge is reflected in this volume.

As chief economist of the Committee for Economic Development after World War II, he helped define early concepts of budget reform that became highly influential in government circles. Later he was appointed chairman of President Richard Nixon's Council of Economic Advisers, and has been writing and studying in the area of government economic policy ever since.

Unfortunately, this book is not brightened much by the sardonic wit that makes some of Stein's other books so readable. But it does outline the history of fiscal-policy theories. It does manifest Stein's usual realism in detecting the economically unproven. It, for instance, criticizes the Laffer Curve - the view held by some in the early days of the Reagan administration that a sharp tax cut might so stir up economic activity as to eliminate the budget deficit. But for those not deeply involved in the budget in practice or as a student, the book may be heavy going at times.

As to conclusions, the Heilbroner-Bernstein book argues that the national debt is not large, measured by historical or international comparisons. It will not impoverish our grandchildren, since the bulk of the interest paid on the national debt is a transfer from American taxpayers to American interest receivers. Nor is a deficit necessarily a drain on national well-being since it can stimulate the economy at appropriate times, and it can provide ``a convenient and sensible means'' of financing capital undertakings.

Also, Heilbroner and Bernstein calculate that the deficit is smaller than most people think since the usual measurement does not take account of the impact of inflation on the national debt. Further, all federal government spending is treated as consumption when 5 to 20 percent is really investment. Indeed, the two favor a regular deficit of $100 billion to $150 billion in ``growth-promoting expenditures on a capital budget.''

Though most of the points made by these authors may be valid, probably the American public prefers a more cautious budgetary policy. They may worry that a large proportion of the debt will be bought by foreigners, that, given the chance, Congress will define too many projects as capital expenditures rather than consumption. With the economy slowing down, perhaps entering a recession, the budget deficit likely will grow again. That could make financial markets nervous. Washington may be faced with the necessity of budget restraint in a weakening economy.

Stein makes at least two important suggestions in his book. One is that the budget be seen as an instrument for allocating national output - not just government spending.

``Although we are a very rich country, we are not allocating our resources well,'' he writes. ``The government's decisions have a major influence on this allocation, but we are not making these decisions well and are not even recognizing the problem for what it is.'' He holds that the misallocation of national output ``endangers the national security and the quality of life in America in the future - not next year or the year after but in the next decade or two.'' (An echo of Benjamin Friedman?) He wants a four-year budget plan to better direct this allocation process. (A five-year plan would smack of socialism?)

A second recommendation is that the Federal Reserve System be required to state an economic target for the four years of a budget planning period. That's because the Fed's control of the money supply and to some degree of interest rates makes its influence on the economic cycle dominant. Then the economic assumptions encompassed in the budget would have to comply with the Fed's targets.

Stein's ambitious proposals, though of much merit, are not likely to be adopted soon.