The public and private debt the United States owes to other countries, which reached $209 billion last year, threatens to reduce standards of living and may lead to a recession, a congressional report warned yesterday.
"To continue on the present course will risk either an enormous further run-up in our external debt obligation or a sharp recession," said the midyear report by the Democratic staff of the Joint Economic Committee. "Either foreign investors will continue to lend us money, adding to our future obligations, or the foreign lending will stop, forcing a severe adjustment.
"Neither outcome is desirable for the long-term health of the U.S. economy."
Without policy changes, the debt owed to foreigners could grow to $700 billion by 1993, the study said.
When direct investments and stocks owned by foreigners are included, the negative investment position of the United States was $263.6 billion in 1986.
The debt has been accumulated because of the large trade deficits the United States has been generating for the past five years. As Americans bought more from abroad than they sold, money from overseas flowed in to finance the difference.
Some of the foreign cash was invested directly in American enterprises, but much of it bought government securities -- financing the budget deficit -- and was loaned to private firms. As the new money came into the country, the value of the dollar in relation to foreign currencies went up.
Separately, the joint committee's Republicans also issued a midyear report yesterday that displayed considerably more optimism.
Noting that the economic expansion is expected to hit its 59th month in October and thus become the second-longest boom since World War II, ranking GOP member Chalmers P. Wylie (R-Ohio) said, "A five-year trend of rising real income, employment and productivity is noteworthy enough, but it is downright remarkable given where we came from -- years of stagflation and malaise."
Sen. Paul Sarbanes (D-Md.), chairman of the committee, noted that the dollar has been declining in the past year.
But, he said, "The report underscores, once you've gotten into the box, the difficulty in coming out of the box."
In a statement, Sarbanes said: "The rapid slide into debtor status also raises the sobering possibility that U.S. influence as a world power will be weakened. No country has ever managed to be a great power and a great debtor at the same time."
The stronger dollar also has obscured the efforts of U.S. industry to become more competitive, Sarbanes said.
He noted that the report said unit labor costs rose more slowly in the United States from 1982 to 1986 than in any other country but Japan. But when those labor costs are converted into dollars, thus taking into account the currency fluctuations, the United States showed the worst performance of any of the 10 nations studied.
The report made several recommendations to bring down the trade deficit, and thus reduce debt cumulation, in an orderly fashion. Among them:
Improve the productivity and competitiveness of American industry.
Enhance the skills of American workers.
Resolve the Third World debt crisis.
Invest more in infrastructure.
Produce an appropriate exchange rate for the dollar.
Create a better balance between savings and investment.
Establish fairer rules of international trade.
The GOP report warned that the nation still faces record budget deficits -- the deficit was $220 billion last year and is expected to be about $155 billion this year -- and trade deficits.
The trade deficit was just under $170 billion in 1986. But, the report warned, the economy could be harmed by the wrong solutions to these problems.
"Attempts to reduce the budget deficit by raising taxes, and efforts to cut the trade deficit by imposing unjustified and counterproductive protectionist trade barriers, will result in weaker economic growth," the report said.
"As the last five years should have taught us, the solution to the twin deficit problem is the promotion of higher economic growth -- lower taxes, a further reduction in the expansion of government and freeing our economy to do what it is designed to do best -- compete," it said.