Getting the Red Out

...The debate should never have occurred...

...For a number of years now, American domestic economic policies have been a bone of contention within the Alliance...

...In a simple Keynesian model, a deficit is regarded as a demand-stimulating strategy...

...The President remains adamantly opposed to a significant tax increase and a reduction in military expenditures...

...The heavy burden prior to the Reagan tax cuts was due not so much to a large Federal tax yield relative to income, but rather to a too narrow tax base...

...suffered in 1983, they are also undermining our commitment to the liberal trade philosophy that has informed our foreign economic policy since 1945...

...What, then, is to be done...

...The huge capital inflows have been mainly responsible for the appreciation of the dollar against most major currencies...

...The situation is similar in the case of military expenditures...

...It merely served to obfuscate important questions and provide a rationale—beyond a crass political one —for failing to take appropriate action...

...It has been estimated that the dollar is now overvalued by approximately 30 per cent...

...Under the existing system taxes certainly could be raised somewhat, but there is clearly a limit beyond which it would be unwise to go, and it would surely be reached well before a significant dent were made in the deficits...

...During periods of broad unemployment, unutilized capacity and excess of savings, the goods and services a deficit permits a government to command are newly created, augmenting the total demand...

...Our European allies argue that the deficits have raised real interest rates in the U.S...

...It is hard in these circumstances to oppose protectionist demands as vigorously as one should...

...The long-term impact of the projected deficits on the stability of the Atlantic Alliance is equally serious...

...Elliot Zupnick, a new contributor to the NL, is Professor of Economics al Columbia University and Director of its Institute on Western Europe...

...Over the long run, this has to impede growth...

...But it would still leave a "hard core" deficit of at least $100 billion, with a high probability of more red ink ahead...

...There is an alternative, though, that deserves serious consideration—a badly needed tax reform designed to broaden the tax base...

...in 1982, for example, personal income taxes amounted to approximately 10 per cent of national income...

...They are endangering the impressive progress made recently in dampening inflation and reducing unemployment, and they threaten to slow down the growth rate as well as impose heavy strains on the Atlantic Alliance at a time when it is being tested on other grounds...

...The exaggerated claims of the extreme supply-side advocates should not obscure the fact that before the Reagan tax cuts, the tax bite produced strong disincentive effects...

...Finally, the large Federal deficits have placed a heavy burden on U. S. export and import industries...

...In their perception, the American deficits are responsible not only for the weak European recovery from the recession, but also for the low growth rates they anticipate...

...Although the Administration has abandoned its attitude of benign neglect regarding deficits, its new budget provides no means of dealing with them, and realistic proposals from other quarters seem in short supply...

...At the present, the most binding constraint on the economy is the relative shortage of what used to be called "loanable funds...

...This is the so-called down payment the President has requested...

...With annual savings in the United States amounting to $450 billion, it is incredible that even the most unorthodox economists in the President's entourage could have truly believed financing deficits of this magnitude would not, in the absence of an accommodating increase in the money supply, lead to higher interest rates...

...At the present juncture, the deficits represent the most serious macroeco-nomic issue facing the country...

...Perhaps it is not too much to hope that such legislation will be high on the agenda once the process of choosing the next President is over...

...exports are subject to a 30 per cent tax, while foreign imports are receiving a 30 per cent subsidy in the American market...

...Almost all economists agree, therefore, that deficits of the magnitude currently projected would put severe pressure on the credit markets, driving up interest rates and crowding out private capital formation...

...Thus the President's admission that his own deficit projections are intolerable, and his call for a bipartisan effort to resolve the problem, while not earthshaking and long overdue, are nevertheless welcome...

...At the moment, only a relatively small proportion of income is subject to tax...

...There can be no better prescription for disaster than to try to eliminate the deficits in this way...

...DEFICITS DO MATTER Getting the Red Out by elliot zupnick President Reagan's Budget Message and Economic Report have at least put an end to what surely must be viewed as the most peculiar economic debate in recent times —namely, do Federal deficits in the neighborhood of $200 billion per annum really matter...

...The relationship between deficits and growth is not generally understood...

...That is another way of saying that U.S...

...or could have thought a rekindling of the inflationary fires would be avoided if the Federal Reserve agreed to monetize the expanding debt...

...The Democratic controlled House refuses to countenance further cuts in social programs...

...When these conditions do not prevail, however, an increase in the value of goods and services absorbed by the government through deficits must be offset by a corresponding decline in other sectors...

...Most recently, concern has centered on the effect of American deficits on capital inflows into the United States...

...Because the deficits are largely responsible for the $69 million trade imbalance the U.S...

...In varying degrees there is some justification for both positions...

...As for social services, since it would be extremely difficult to cut back those enjoyed by the articulate, highly political middle income groups, any meaningful reduction would inevitably fall on the shoulders of the very poor...

...above their own, inducing a transfer of capital to these shores and forcing them to adopt more deflationary policies than would otherwise have been necessary...

...The Pentagon budget certainly contains some fat, yet it is not at all apparent that given the present pace of Soviet rearmament, defense spending can or should bear the brunt of the deficit-reducing measures...

...As matters stand, it would ultimately have to be eliminated by "biting the bullet" and taking the consequences...

...Our inability to eliminate the huge deficits suggests that the United States can no longer afford to permit so large a proportion of its income to go untaxed, It is unlikely, of course, that a major reform will be initiated in an election year...

...According to reasonable estimates, the present budgetary deficit can be lowered one-third to one-half by judiciously paring outlays and raising taxes...