A new Treasury analysis of a proposal by Sen. Ernest F. Hollings (D-S.C.) to reduce the budget deficit shows that it would have a far less dramatic impact on the economy than indicated in a preliminary analysis released last week by the House Republican Conference and reported in The Washington Post.
The Post story dealt with the belief of many economists that if the deficit is reduced and monetary policy is unchanged, the economy in the short run will turn down rather than up, and unemployment will rise.
The new Treasury analysis shows that the Hollings proposal, which would reduce budget deficits by nearly $400 billion over the next three years by raising taxes and cutting spending, would leave the unemployment rate between 7.5 and 8 percent in 1985 instead of at 10.8 percent as initially calculated, according to Deputy Assistant Treasury Secretary Steven Entin.
Entin also confirmed that all of the analyses have been done by Treasury using the econometric model of Data Resources, Inc., rather than by DRI itself, as indicated last week by a spokesman for the House Republican Conference.
Treasury's initial analysis was redone when it was learned that the figures used for spending cuts were larger than those proposed by Hollings, Entin said. In addition, after economists on Hollings' staff complained that an incorrect assumption was used for future monetary policy, yet another computer run was made showing money supply growth remaining close to 5 percent for the next three years. That is still somewhat less than Hollings is assuming, although it is more than the long-term target of the Federal Reserve Board.
As it now stands, Entin said, the analysis shows the Hollings proposal would reduce disposable personal income per household by $2,100 in 1985 compared to the level indicated for that year by the current DRI forecast. Similarly, the gross national product, adjusted for inflation, would be 1.8 percent lower that year than shown by the DRI forecast. The unemployment rate would be 0.7 percentage points higher, bringing the rate to between 7.5 percent and 8 percent.