Does It Play in Peoria?
By GEORGE J. CHURCH
The issue is the economy, and both parties are dodging
Political campaigns are wretched forums for debating economic policy. Passionate partisan oratory invariably oversimplifies, when it does not downright distort, what by their nature are formidably complex issues. And that is the case, in spades, for the mid-term election campaign now plodding toward its conclusion at the polls next Tuesday.
The issues, certainly, are pressing. The nation is racked by the highest unemployment rate in 42 years. Recovery remains elusive, as was demonstrated by last week's economic news, a maddeningly familiar mixture of plus and minus signs. The pluses: lower interest rates, higher housing starts, more stock-market exuberance. Big minus: very sluggish production. The Congress to be chosen next week will have to decide how to trim gargantuan budget deficits that threaten to choke off the recovery whenever it does come.
Unfortunately, though probably inevitably, the campaign has developed little in the way of reasoned debate on how to deal with these woes. Instead, it has turned into an exercise in finger pointing. Democrats blame the recession on Ronald Reagan. He retorts that it is the inevitable consequence of years of Democratic tax-and-spend policies that he is slowly correcting. "I didn't cause this recession," Reagan last week told a rally of several thousand Republicans in economically distressed Peoria.
Neither side is offering the electorate reliable guidance in assessing the truly vital questions: How should one strike a balance between the successes and failures of the complex of policies that goes by the name of Reaganomics, and do the Democrats have a genuine alternative? In the end, of course, each voter must decide, but it is possible to make a constructive analysis that can help illuminate the choices.
To begin with, a prolonged and severe recession probably would have been the result of any determined attempt to bring inflation under control. And, as Reagan points out, that attempt had to be made. The experience of the 1970s proves that no lasting prosperity is possible in an inflation-ridden economy. Throughout the decade, surges of inflation kept undermining every economic advance, and the rates of both price increases and unemployment rose irregularly but seemingly inexorably. Democrats who assail the Republican President for inducing a slump conveniently forget that Jimmy Carter all but openly engineered a recession in 1980 as a means of reducing inflation. That downturn, however, was too short to accomplish much.
The current slide has had much more effect. As Reagan constantly reminds the nation, the rate of price increases has tumbled from 12.4% in 1980 to 5.1% so far this year, an accomplishment that few economists would have thought possible two years ago. A major reason is Paul Volcker, chairman of the independent Federal Reserve Board (and a Carter appointee). Volcker has been tenaciously holding down the growth of the money supply, thereby starving inflation of monetary fuel. No matter: Reagan has consistently supported Volcker and is entitled to share in the credit.
Where Reagan can be faulted, legitimately and severely, is in telling the nation, and initially himself, that the transition from runaway to moderate inflation could be accomplished without serious pain. Throughout his first year in office, Reagan promised to reduce both inflation and unemployment simultaneously. The three-year 25% tax cut that he rammed through Congress would spark a job-creating boom, he insisted, while deep cuts in social-spending programs and the tight-money policy would whittle down inflation.
No doubt the President really believed it, but it should not have been difficult to see that his policies were at war with each other.
In a 6,500-word article in this week's New York Times Magazine, the paper's White House correspondent Steven R. Weisman reports that many of Reagan's closest aides and allies early realized that the deep tax cuts, combined with enormous increases in military spending that Reagan and Secretary of Defense Caspar Weinberger insisted on, would produce dangerous deficits. These doubters allegedly included White House Chief of Staff James Baker, former Domestic Affairs Adviser Martin Anderson, former Council of Economic Advisers Chairman Murray Weidenbaum and Senate Majority Leader Howard Baker. According to Weisman, however, "loyalty, uncertainty, timidity, miscalculation, expedience and general weariness combined" to keep them from forcefully voicing their misgivings to the confident President until after the policies had been locked in place.
The mix of incompatible policies probably made the recession longer and deeper than it had to be. Deficits did indeed soar, to about $113 billion or so in the fiscal year that ended Sept. 30, compelling the Federal Reserve to intensify its money squeeze. That brought down inflation, but at the price of continued high interest rates that clamped down on consumer-credit purchases, hindered business borrowing for investment, and drove many businesses into bankruptcy. In the past few weeks the Fed has been pumping out more money, a move that Reagan approves, and interest rates have fallen. But if deficits had been lower, the Federal Reserve might have let up on its squeeze sooner, interest rates could have declined earlier and faster, and the recession might have been less prolonged.
Even now, Reagan tends to gloss over the amount of pain that must yet be endured if inflation is to be kept down. The President has been talking of an imminent recovery since the start of the year, but waiting for it so far has been about as frustrating as waiting for Godot. There were some genuinely hopeful signs last week: a 14% September jump in housing starts, which traditionally lead an upswing; a 1 % rise in consumer spending; a continued stock-market surge that lifted the Dow Jones industrial average above 1,030, its highest point in more than nine years. But total output of goods and services, adjusted for inflation, rose only .8% in the third quarter, vs. a 2.1% gain in the preceding three months. Production almost surely will be too low to make any dent soon in the 10.1% unemployment rate; unemployment may even go a bit higher in the next few months.
Moreover, when a recovery does start, it is unlikely to be the "solid" one that Reagan spoke of as recently as his Sept. 28 news conference. The consensus among economists is that production gains in 1983 will only be about half as strong as the 7% that has been traditional in the first year of recovery and that the unemployment rate at best is likely to stay close to 9% through 1983. It may be that no more vigorous rebound can be expected without reigniting inflation, but that fact ought to be faced rather than evaded.
All this makes an irresistible target for Democratic attack. But would the opposition party do any better? There is little reason to think so. Worse, those Democrats who talk of alternatives to Reaganomics frequently put forward ideas that could all too easily make the economic mess even worse.
The leading Democratic campaigners, former Vice President Walter Mondale and Senator Edward Kennedy, have begun talking a jingoistic line that unmistakably implies moves to limit imports of foreign goods. Says Mondale: "We have to stop showing the white flag, to start running up the American flag, and to turn around, fight." Says Kennedy: "We must take whatever steps we must to see that Americans in the 1980s and 1990s will be buying American products." Both made these remarks to a convention of United Steelworkers in a transparent effort to win labor endorsement for their expected contest for the 1984 Democratic presidential nomination.
Unfortunately, their pressure may be having an effect. Though Reagan generally has resisted protectionist pressures, his Administration last week concluded an agreement with the European Community, under which that ten-nation group, pledged to hold steel shipments to the U.S. to 1 million tons under the 1981 level of 6.5 million tons. Any further move toward protectionism would almost surely destroy more jobs than it would save by provoking foreign retaliation that would crimp American exports--now 12% of the gross national product--and by impeding world trade enough to deepen the worldwide recession.
Old-line liberal Democrats urge public-works programs to create jobs. Says Henry Reuss, chairman of the Joint Economic Committee: "Our streets, schools, water systems, ports, railroads are falling apart. That's what F.D.R. was up against 50 years ago. Then the Government rolled up its sleeves and found jobs for people." True enough, but heavy spending on public works now would deepen the already alarming deficits. Other Democrats assail Reagan's cuts in such social programs as food stamps, welfare and student loans, implying that were they in control they would spend more. But where the money would come from is a subject they usually avoid.
The so-called Atari Democrats talk a more responsible line. Putting their faith in high technology to strengthen the economy, they advocate a, so far, distressingly vague program of tax and investment incentives to spur expansion of rising industries such as semiconductors and computer software, as well as job retraining programs to cushion the plight of workers laid off in declining "smokestack" industries such as steel and autos. As an option for the future, the strategy is well worth debate, presuming that somehow the money could be found, but it is not much help in confronting the overwhelming problem facing the Congress that will be elected next Tuesday.
That issue, without question, is the ocean of red ink. The Office of Management and Budget has compiled figures indicating that without further cuts in spending or increases in taxes, the deficit might soar to $175 billion in fiscal 1984 and $220 billion in fiscal 1989. Deficits of anything close to that scale would force enough Government borrowing to kick up interest rates again, cutting short a recovery or preventing it from ever getting started, unless the Federal Reserve poured out enough new money to risk firing up inflation once more.
Neither party is squarely facing up to the problem. Some White House aides fear that Reagan will not even recognize its existence. The President talks of bringing down the deficits by further cuts in social programs. That may be necessary, but it will be far from sufficient. Reagan's aides figure the most that can be saved is $50 billion a year. Alternatively, Reagan tells his aides that the long-awaited recovery will stem the red ink. That is an equally wan hope: by one Administration estimate, an upswing that would reduce the jobless rate to 7% next year, which is far more of a boom than anyone dares to predict, would still leave a deficit of about $100 billion annually.
The only strategy that offers much hope for a deep reduction in the deficits would be a combination of cuts in social programs that so far have largely escaped the ax--above all, Social Security--a slash in the military budget and a rise in taxes. But Reagan will not even discuss paring back military spending, and he said in his latest news conference that only a "palace coup" could move him to accept higher taxes. The Democrats have also shied away from advocating less military spending or higher taxes, while some call for publicworks programs that would make the deficits even worse.
Social Security is a prize example of the way ideological bickering and the passions of the campaign are keeping both parties from facing economic reality.
The trust fund on which the system's pension checks are drawn almost ran dry in October. It will have to borrow $1.5 billion from the separate Medicare and disability-insurance funds to send out on time the checks that are to be mailed Nov. 3, the day after the election. The trust fund will need another $7 billion to $11 billion to maintain prompt payments through the first six months of 1983. After that, its borrowing authority expires.
Even if that authority is renewed by Congress, the three funds together are likely to go broke some time in 1984. Collections of the Social Security payroll tax, which have been held down by mass unemployment, simply are not large enough to maintain benefits that by law rise automatically with increases in consumer prices.
There is no secret about what must be done: either the payroll tax must be raised further, or some limit must be imposed on future benefit increases, or both. But Reagan has declared himself opposed to any increase in the payroll tax, and the Democrats have been railing against any thought of limiting benefit increases. The Democratic National Committee a few days ago sent voters a mailing designed to look like an official Social Security announcement. The envelopes resembled those that contain Social Security checks and proclaimed, in large letters, IMPORTANT SOCIAL SECURITY INFORMATION:
INTENTS REQUIRE IMMEDIATE ATTENTION. Inside, voters found a letter from Party Chairman Charles Manatt warning that "unless you and I act--and act immediately [obviously by electing more Democrats to Congress]--Social Security benefits could be drastically reduced or destroyed."
Despite such demagoguery, the ecoomic prospects are by no means entirely bleak. Politicians who thunder their intractability during campaigns are some-times amenable to compromise afterward. And if the looming deficits can somehow be brought down, there is a strong chance that with inflation on the wane a recovery next year, no matter how distressingly slow at first, could be lasting. So staunch a liberal Democrat as Economist Walter Heller concedes that the Reagan Administration could "luck into" a period of rapid, noninflationary growth beginning in the mid-1980s. The'prospects for that happy outcome, says Republican Economist Herbert Stein, "will be enhanced if after Election Day all parties will forget what they said during the campaign." --By George J. Church. Reported by David Beckwith and John F. Stacks/Washington
With reporting by David Beckwith, John F. Stacks
This file is automatically generated by a robot program, so viewer discretion is required.