The rigid schedule in the Gramm-Rudman-Hollings law for reducing federal budget deficits to zero by 1991 calls for such large reductions in the deficit that it poses a threat to the economy, several prominent economists told a congressional symposium yesterday.
Robert Eisner of Northwestern University said that meeting the law's targets could result in "the worst economic disaster we have had in many years."
Eisner believes that official estimates of the deficit should be adjusted downward to show the effect of inflation on the real value of outstanding federal debt.
He said a balanced budget would mean that, in economic terms, the budget was running a huge surplus.
With a federal debt of nearly $1.8 trillion, a 4 percent inflation rate means that the real value of the debt to those who hold it has gone down by around $70 billion. The reported deficit ought to be adjusted downward by that amount, he argued.
The economists said they feared that reducing the deficit on the law's time schedule could seriously depress total demand for goods and services, and lead to a recession. This, they argued, would cause the deficit to balloon again.
Other analysts have argued that prompt action by the Federal Reserve Board to lower interest rates could offset the restraining effect of reducing the deficit.
The symposium was organized by the Joint Economic Committee to celebrate the 40th anniversary of its creation by the Employment Act of 1946.
Several economists agreed that the Fed should ease monetary policy once the deficit starts to fall. However, they questioned whether the central bank would be able to offset the full impact of the Gramm-Rudman-Hollings reductions.
John Makin of the American Enterprise Institute, Alan Blinder of Princeton University and former Council of Economic Advisers chairman Paul McCracken, now at the University of Michigan, agreed with Eisner that, economically speaking, it is not necessary presently to reduce the deficit to zero.
Makin proposed reducing the deficit to where the debt would rise no faster than the gross national product. That ratio of debt to GNP, which has risen sharply during the 1980s, could be stabilized if the deficit fell to about 2 percent of GNP, he argued.
According to estimates released this week by the Office of Management and Budget and the Congressional Budget Office, the deficit will be about $210 billion after the first round of spending cuts. That would be equal to about 5 percent of GNP, the budget agencies indicated.
Instead of the nearly $70 billion deficit reduction ordered by Gramm-Rudman-Hollings between fiscal 1986 and 1987 -- and the annual $36 billion reductions following that -- Blinder suggested a more modest $24 billion-a-year plan for three consecutive years.
With the saving on future interest payments, that would amount to about a $100 billion reduction in the deficit by 1991, Blinder said. That would be in line with what the economy needs, he argued.
"Gramm-Rudman does pose a clear and present danger to the economy," Blinder said.
"The deficit reduction we really need is about one-half what Gramm-Rudman calls for," he said.