THE AMERICAN economy's disappointingly slow growth greatly tightens the squeeze on the budget. The government's statisticians reported yesterday that in the spring quarter the economy was expanding at an annual rate of only 1.1 percent, a sharp deceleration from last winter. That number may be substantially revised in the months ahead. But it has unusual significance because it is among the last indicators that will appear before the next cycle of the Gramm-Rudman-Hollings deficit-cutting procedure begins in mid-August. When Congress committed itself last December to the G-R-H deficit limits, it was counting on much faster growth than the country has seen since then -- or is likely to see over the next year.
What should Congress do? One possibility is to go back to the 1987 budget resolution that it passed last month -- a resolution that also was based on last winter's optimistic forecasts -- and cut spending further. To get safely under the G-R-H deficit limit for next year might require additional spending cuts of, say, $20 billion. At that point another danger arises. More spending cuts would probably result in still slower economic growth, requiring still more spending cuts and so forth right into a recession. That's not an attractive prospect. Another possibility is to try to fudge through the summer with slightly bent numbers and hope for faster growth next year. But the fudge supply is running low. A better idea is a tax increase, introduced on a predictable and gradual schedule.
The United States has got itself into a bad position. The recovery from the last recession shifted from high gear into low gear two years ago, just after the foreign trade deficit began to soar. That was not a coincidence. The foreign trade deficit is acting as a brake on the economy. The Reagan administration had hoped to diminish the trade deficit by increasing American exports, but that's very difficult as long as the other two great trading powers, Japan and Germany, cling to low-growth policies and defend their own huge trade surpluses. As long as they run surpluses, somebody else has to run a deficit. The only way to force them into a better balance of trade would be to reduce American consumption, which, again, probably means a recession.
The budget deficit over which Congress keeps struggling is the domestic counterpart to the foreign trade deficit. Both characterize a country that is consuming far more than it produces, and is borrowing the money to do it. The two deficits can be brought under control without a recession, but only if the United States achieves better cooperation with its allies abroad. The poor performance of the economy here is a warning that the two deficits have to be resolved together.