Secretary of State George P. Shultz today proposed a "program of international action" to protect the world economic recovery, with the United States' major contribution a reduction in its budget deficit.
In a less optimistic speech than other administration pronouncements in the past, Shultz said there are important links between the nation's economic problems -- that the budget deficit is among the reasons for the record trade deficit, high value of the dollar and large flow of foreign capital into this country.
Warning that the United States could have a net debt to other nations of $100 billion by the end of the year, Shultz said, "these imbalances are interrelated, and they must be corrected if we are to maintain the momentum of our economic success." He called for spending cuts to reduce budget deficits, but ruled out tax increases.
"The main objective, and the key to success, is to accelerate growth in the world economy. That's what this is all about," he said.
His remarks suggested positions the United States will likely take at next month's economic summit in Bonn.
Western European countries, he said, should adopt policies to stimulate investment and economic growth rather than relying on a growing level of exports to the United States.
At the same time, he said, the Japanese not only should open their markets to foreign goods but, like the Europeans, also should seek to boost investment and domestic consumption. That would allow Japan to continue to have full employment without the need to maintain a large trade surplus to offset the restraining effects of its unusually high savings rate, he said.
Developing nations "should continue to make the structural adjustments needed to stabilize their economies, reduce the economic burden of government, expand their trade and stimulate growth," he continued. They should encourage domestic savings and more private foreign investment.
"The emphasis [in developing nations] should be on the positive," he said. "Austerity is not an end in itself."
In his speech at Princeton University's Woodrow Wilson School of Public and International Affairs, Shultz did not spell out why he believes that a smaller federal budget deficit would reduce the other imbalances.
The Treasury Department under former secretary Donald T. Regan, now White House chief of staff, argued repeatedly that budget deficits have had little if any link to high interest rates. Treasury economists, Regan and the president all have asserted that the strong U.S. dollar is sign of economic strength, not a problem.
Shultz acknowledged that the dollar's high value has helped to hold down inflation by reducing the cost of imports and keeping competitive pressures on U.S. producers.
But he added, "The dollar's strength is causing painful structural adjustments in many of our export-related industries; it is altering the character of the American economy in a basic and, in my view, undesirable way. Lower costs in other countries -- due to exchange rates -- are leading many American firms to locate abroad production facilities that would otherwise be competitive in the United States."
The growth of imports also "is spurring protectionist demands for tariffs, nontariff barriers and export subsidies," he said. "Whatever short-term relief for specific industries such measures might provide, the overall long-term cost to the mettle of the American economy, to the American consumer, and to the world economy would be devastating."
Shultz said budget deficits "are simply not sustainable indefinitely . . . . As our expansion begins to stretch our resources, continued large deficits pose an increasing danger to that very expansion."
To reduce the deficits, he said, "The president has shown the way with his proposals and in his negotiations with the Congress. Special interests must give way to the general interest . . . . Significant cuts must be made now."
As to the Europeans, the secretary said that there has been "essentially no net job creation" in Europe since 1970, compared with the U.S. record of more than 26 million new jobs during the same period.
Half of Western Europe's economic growth last year "came from export sales to the United States. These exports amounted to $75 billion, or nearly 22 percent of total U.S. imports last year," he said.
Shultz said he welcomed "as a laudable and encouraging beginning" the speech this week by Japanese Prime Minister Yasuhiro Nakasone with its promise of lower trade barriers, and his government's recent package of specific trade measures. But he cautioned, "More specifics must come."
Meanwhile, in written responses to questions from The Times of London made public today, President Reagan said the strength of the dollar is "primarily" due to a strong U.S. economy.
He said government intervention could have a "very limited and temporary impact in the absence of changes in the underlying fundamentals." In the past, Reagan has said these include improvement in U.S. trading partners' economies.
Reagan repeated his administration's position that it is prepared to intervene "to counter disorderly markets in instances where we believe it would be helpful."
"But policies that promote a convergence of economic performance, including those designed to increase incentives for stronger noninflationary growth, are the key to achieving greater exchange-rate stability," Reagan said.
Reagan also predicted passage of a deficit-reduction package in Congress this year and said he will resist further defense spending cuts or tax increases.
On trade, Reagan said "we are anxious to proceed" toward preparations for a new round of international trade negotiations.
"We do not think it is right to link progress on these negotiations with international monetary questions; issues in each should be addressed on their merits when they arise," he said.