Newspaper article THE JOURNAL RECORD

Postponed Debts to Make Deficit More Painful

Newspaper article THE JOURNAL RECORD

Postponed Debts to Make Deficit More Painful

Article excerpt

``Read my lips,'' repeats George Bush: ``No new taxes.''

But professional campaign watchers prefer to read his eyes, and many discern hints of the Big Wink.

Suppose, though, Bush means what he says. Or suppose he can't extricate himself from the tax pledge and can't patch together significant cuts from a budget that largely consists of military spending, interest on the debt and sacred entitlement programs. What then?

Standard deficit-stalemate scenarios end with a bang - a spasm of inflation, a fierce recession. But six years of growth and a trillion dollars of debt into the Reagan boom, it is difficult to discount the possibility of an end that comes years down the road, and then only with a whimper.

Until 1985, the overvalued dollar was widely viewed as the weak link that would bring down the American economy. Unless Washington exercised some budget discipline, it was argued, foreign investors would reconsider their enthusiasm for dollar securities.

Attempts to diversify assets to other currencies would start a run, which could only be contained by a drastic tightening of credit. This, in turn, would lead to a recession likely to be long and deep because Washington would be unable to cut taxes or increase government spending.

Dollar pessimists underestimated the tolerance of foreign investors and the ingenuity of government bankers. The dollar did finally fall by 30 percent, and U.S. interest rates did rise. But European and Japanese central banks prevented panic by absorbing more than 100 billion unwanted dollars while making a show of having planned the dollar's orderly decline.

Moreover, the psychological framework has already been laid for another orderly retrenchment. Economists, including Bush's adviser, Martin Feldstein of Harvard, openly speculate on the desirability of a managed 20 percent depreciation to set American trade accounts in long-term order.

Those who remain convinced that budget deficits must lead to a hard landing now focus on the limited room left the Federal Reserve for policy manuevers. With the fiscal spigot stuck at wide open, the only way to contain inflationary pressure is to tighten credit.

But changing the supply of money, they argue, is a clumsy and unreliable way to contain demand. One day, they say, the Fed will overshoot, pushing the economy into recession.

But one day could be years from now - or perhaps never. Unfortunately, the alternatives to a hard landing hardly seem better.

Benjamin Friedman, a Harvard economist, has written a devastating critique of Reaganonomics, a new book called ``Day of Reckoning. …

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