Political forces are making it extremely doubtful that much is going to be done about the massive federal budget deficit. If not, budget director David Stockman's warning that the deficit "will be stuck at $200 billion as far as the eye can see" is right on the mark.
As Wall Street analyst Sam Nakagama pointed out in a recent commentary, "With the 1984 elections looming ahead, neither the Republicans nor the Democrats are eager to make further large cutbacks in non-defense spending."
For the same reasons, despite heroic efforts by Sen. Bob Dole (R-Kan.), no one is really willing to bite the bullet on tax increases. On the contrary, Congress is rolling over and playing dead for the banking-industry lobby, reversing last year's effort to install a modest and proper withholding procedure for taxes owed on dividends and interest.
The only organized effort that will help in the reduction of the budget deficit is the bipartisan refusal of Congress to go along with the president's request for a 14 percent increase--10 percent real--in defense spending. But even this only cuts the five-year costs for arms from $1.8 trillion to $1.6 trillion.
Yet the importance of reducing the budget deficit can hardly be exaggerated. In the recent euphoria associated with the booming stock market, it's almost been forgotten. But the deficit is one of three main elements--the others being what he calls the "international debt blockage" and the failure of any major nation to encourage economic expansion--that cause economist Henry Kaufman serious concern.
At best, Kaufman said in an interview, worldwide economic recovery "is flying at a low level, and you've got to be sure you don't hit the trees when you're flying at a low level." He sees debt problems piling up, not being solved.
And although bankers like to say that the problem is just one of "liquidity"--a temporary shortage of cash-- Kaufman believes that many of the debtor nations could be heading into "solvency" problems, that is, going broke or bankrupt.
Robert V. Roosa and William M. Reichert of Brown Bros. Harriman, a private New York banking firm, recently delivered a rather grim analysis of budget prospects. They pointed out that deficits of the magnitudes that Stockman and other realists now foresee almost surely negate the possibility of a sustained economy recovery.
They say the conflict between the deficits--which absorb most of the nation's savings--and growth "would extend beyond U.S. borders, for the rest of the world is extremely sensitive to U.S. economic growth and interest rates." This point has also been made forcefully in the discussions in Paris this week at the Organization for Economic Cooperation and Development.
Europeans agree with Roosa and Reichert that once the American economy emerges from recession--and the Reagan administration insists that the recovery in the United States is broader than Europe has yet conceded --"large deficits become restraining rather than stimulative."
They argue, as well, that the deficit will eventually push up real interest rates (unless the Federal Reserve softens monetary policy considerably). That will continue to keep the dollar overvalued in foreign exchange markets, which in turn depresses American exports.
Because both Democrats and Republicans find it politically difficult to do more than trim around the edges of the deficit via fiscal policy, economic policy resides--by default--mostly in the hands of the Federal Reserve. That makes all the more interesting recent White House complaints about the "independence" of the present chairman, Paul Volcker. It begins to sound as if the way is being paved to dump him.
"If the Fed pursues a non-inflationary path and is forced to curtail the expansion of credit, real interest rates might go higher . . . possibly aborting the recovery," say Roosa and Reichert. "If, on the other hand, the Fed monetizes a significant portion of the deficits by allowing the money supply to grow rapidly . . . inflation may re- emerge. . . . This leaves economic policy between a rock and the hard place."
Their net conclusion, after making allowance for the probability that no projections are ever exact, is that in the years that lie ahead, taxes will have to be boosted (further reversing the giveaways of Reaganomics), defense spending will come to be reduced, and inflation and interest rates will still be higher than anyone wants. That means the prognosis for economic growth and jobs is poor. In turn, that suggests that the sooner politicians get up their courage to regain control of the budget, the better.