Newspaper article THE JOURNAL RECORD

Budbet Trends Threaten U.S. Economic Stability

Newspaper article THE JOURNAL RECORD

Budbet Trends Threaten U.S. Economic Stability

Article excerpt

report, just warned that the U.S. budget and trade deficits pose a clear and increasing risk to the nation's and the world's economic stability.

E. Gerald Corrigan, president of the New York Fed, wrote that the gaps between American exports and imports, between domestic spending and output, and between saving and investment constitute ``the most formidable problem facing the U.S. and the global economy over the next three to five years.''

The report warns that the current federal deficit of about $135 billion is not sustainable in the long run.

If, for instance, both interest rates and growth, including inflation, in the gross national product average 7 percent in the coming decade - relatively optimistic assumption - the U.S. foreign debt will reach $3.5 trillion, or 32 percent of GNP, by the year 2000.

And a decade later, at that rate, the nation's foreign debt would hit $8.7 trillion, or 40 percent of GNP.

The returns on investment, assuming this trend could continue, would increasingly go to foreigners, not Americans, arresting the rise in our living standards.

The New York Fed's report, written mainly by Akbar Akhtar, a vice president of the bank, stresses the importance of reversing this country's sharp decline in net investment relative to GNP, which would require a shift from consumption to saving and investment.

That will be vital to enable the capital stock to meet the needs of a growing population, to keep productivity rising and to check the decline in the nation's living standards.

A failure to eliminate the budget and trade deficits, the report predicts, would undermine confidence in the dollar, breed inflation, and, by forcing up interest rates, choke off domestic investment.

How to get out of the jam?

The best way, says the New York Fed, is to change the mix of fiscal and monetary policy: shrinking the budget deficit to clear the way for a less restrictive monetary policy.

Viable alternative policies, it argues, simply do not exist; history provides no support for the hope that private market forces will shift resources smoothly from consumption to saving, investment and the international sector.

To minimize the risk of economic failure, the report adds, ``A credible plan to eliminate the budget deficit over the next few years must be set up sooner rather than later.''

The report is unlikely to excite rave notices in Washington, where the Bush administration and Congress have patched up an agreement on the budget that allegedly would hold it below the Gramm-Rudman-Hollings target of $100 billion for the fiscal year 1990. …

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