In 1981, the year the last recession began, the federal government had a deficit of $78 billion. Two years later, when that recession had run its course, the deficit had almost tripled to $207 billion.
This year, according to the latest Congressional Budget Office estimate, the deficit will be $210 billion. If another recession hits and the pattern of the past holds, one can imagine annual deficits ballooning by the end of the Reagan administration to the staggering level of more than one-third of a trillion dollars a year.
That nightmare possibility has entered the discussions in Washington because of the recent spate of nervous economic indicators. On successive days last week, you could read that business sales dropped, inventories rose, factory output and capacity utilization stagnated and home construction slumped. While few economists were predicting a recession, the head of Chase Econometrics said, "There is no reason to expect a major improvement."
Rudolph Penner, the head of CBO, said "the economic outlook remains very uncertain," and he warned that with deficits in this time of general "prosperity" running at more than $200 billion a year, they "don't allow any margin for safety if the economy performs worse than expected."
All this makes it pertinent to ask just what this country would do if the economy staggers into another slump under the burden of the incredible debt accumulated during the Reagan years.
The standard Keynesian prescription for dealing with a recession is to cut taxes and/or increase government spending and thereby stimulate demand, in hopes of bringing the economy out of its nose dive. That is what Reagan did in 1982, and eventually it worked -- but at terrible cost to the budget.
At a session last month of his personal think- tank, the Center for a New Democracy, Sen. Gary Hart (D-Colo.) assembled a group of people to see if they had any ideas other than traditional "pump-priming" remedies. When I read the transcript of that session, I realized that there are other options. But all of them would require more courage and imagination than either Congress or this administration has shown.
The main point that emerged from the meeting was that -- lacking flexibility to apply traditional fiscal stimulus -- the government should try to promote increased flexibility in the labor market. That point was stressed by economic consultant and author Pat Choate of TRW, economics writer Robert Kuttner and Professor Martin Weitzman of the Massachusetts Institute of Technology. It was that point to which Hart, eyeing a second bid for the presidency in 1988, seemed most responsive.
How do you get more flexibiity in the job market?
Choate offered several practical answers. Improving the existing U.S. employment service is one way to get a better match of people and jobs. Today, he said, "that system is barely functional. Only 7 percent of job-seekers receive counseling, only 2 percent receive training and less than 25 percent are eventually placed in jobs."
The problem, he said, is miserliness. "For example, fewer than half of all states have computerized offices. The Department of Labor still exchanges information about job vacancies between states by mailing it to Albany, N.Y., where it's sorted by hand and then mailed out again to the individual states."
Choate estimated the cost of computerizing the system at $60 million. The time to make that investment is now, not after the next recession has begun.
Both Choate and Kuttner argued persuasively that, whether there is a recession or not, retraining of today's workers for tomorrow's jobs has to be given higher priority. One way to do it is to shift some unemployment compensation funds into training programs and even subsidized reemployment. Another is to change the tax law so that employers get the same write-offs for improving their employees' skills as they do for modernizing their plant.
Weitzman offered a more far-out notion: shifting the basic compensation system so that less of a worker's income comes as wages and more as profit-sharing. That way, he said, fewer people would be laid off in the next recession and more firms would weather the storm.
Hart provided a public service by launching the discussion on steps to take now to ease the pain of the next recession. But it will take more than discussion. We better recognize that the familiar medicine of counter-cyclical deficit spending has been squandered by the foolish fiscal policies of the past five years. If we don't find new medicine, we may not recover next time.