A group of Brookings Institution economists said yesterday that a sustained economic recovery will not occur unless Congress and the Reagan administration cooperate in sharply reducing future federal budget deficits. They recommended cutting a projected $230 billion deficit for 1985 by $150 billion.
However, the economists also warned that the economy would remain mired in recession if the large tax increases and spending cuts needed to reduce the deficits take effect this summer as proposed by some of the congressional leaders and administration officials now trying to hammer out a budget compromise.
"Timing is the critical issue," declared Barry P. Bosworth, one of the economists. The spending cuts and tax increases some of the budget negotiators have in mind would "simply offset the July tax cut," he explained. If that happened, and there was no easing of monetary policy, "then we would get a continuation of recession."
Charles L. Schultze, chairman of the Council of Economic Advisers in the Carter administration, when asked what would happen if no deficit-reducing compromise is reached, replied, "That is a world that we don't even want to think about."
If monetary policy stayed tight, interest rates would remain high and the economy would be "very, very unbalanced" with private investment falling significantly, Schultze predicted. If the Federal Reserve, on the other hand, eased its present tight stance without a budget compromise, a substantial inflation could result. "The Fed can't really budge until some action is taken," he said.
Bosworth, Schultze and the other economists spoke at a press conference at which they released Brookings' annual study of the budget, "Setting National Priorities: The 1983 Budget."
The authors warn, as they did a year ago, "Fiscal and monetary policies appear to be on a collision course in the years immediately ahead. . . . In circumstances such as those now prevailing in the economy, output and employment may grow for brief periods. But any sustained expansion is likely to be choked off by rising interest rates, as increasing credit demands run up against the tight monetary targets.
"This is what happened in the aftermath of the 1980 recession, and the experience is likely to be repeated in the coming years unless the mix of fiscal and monetary policies is significantly altered."
Joseph A. Pechman, editor of the series, noted the enormity of the task. President Reagan has proposed a set of spending cuts and tax hikes that would reduce the 1985 deficit by $96 billion. To reach the level of about $80 billion that the economists think is tolerable for that year, another $54 billion worth of spending cuts and revenue raising measures are needed, Pechman said.
"In this situation, you need something of everything"--defense and nondefense cuts, including Social Security benefit reductions, and higher taxes--for a compromise to be politically acceptable, Schultze said. So far, Reagan has refused to consider postponing the third year of his three-year set of personal income tax cuts, which would become effective next year. Some congressional Democrats, including House Speaker Thomas P. O'Neill Jr. (D-Mass.), are equally adamant that Social Security cost-of-living increases not be touched.
The Brookings group suggested a 12 percent across-the-board tax surcharge as a possible revenue raising step. The third year of the president's cut would go into effect, but then everyone's tax bill would be raised by 12 percent.
Schultze and the other economists said they think government economic policies should be intended to achieve a rate of growth of real output of no more than about 4 percent a year for the next several years. Such a course for the economy would keep enough pressure on labor and product markets that inflation could continue to come down.
On the other hand, growth no faster than that would reduce unemployment--now at a postwar record 9 percent--so slowly that it would not get down to 6 percent until 1985 or possibly 1986, Schultze said.