Persian Gulf, budget crisis could worsen recession


October 17, 1990|By JANE BRYANT QUINN | JANE BRYANT QUINN,1990 Washington Post Writers Group

NEW YORK -- The "R" word -- recession -- is turning up increasingly on the lips of economists who had been predicting only a "slowdown." If we aren't in a recession now, we are very likely on the cusp.

Two things make this recession more unsettling than most: the prospect of war in the Middle East and the failure of the voters (as reflected in the panic of our legislators) to agreeon how the nation's money should be raised and spent.

Iraq is the Doomsday Machine. Any interruption of production from the Saudi oil fields might send oil to $100 a barrel and threaten the functioning of the world's economies. Economically, war is often thought of as "good," because of the lift given to the economy by the jolt of military spending. But this war, if it happens, risks intense inflation and deep recession on the home front.

The battle of the budget also carries recessionary risks.

Irwin Kellner, chief economist of Manufacturers Hanover Trust, calls it "Hooveresque" to raise taxes or cut spending on the eve of an economic downturn, because that would make the downturn worse. He supports

deficit reductions, but not beginning in 1991.

By contrast, Allen Sinai, chief economist for the Boston Co., would take deficit reductions now, even though he says it would cause the economy to lose an extra half a percentage point of growth. The country would still endure only a "moderate recession," he says, and would emerge from the downturn with less inflation built in.

Sinai assumes that budget cuts would lead to lower short-term interest rates, as promised by the Federal

Reserve. Lower rates would prevent the downturn from getting too bad -- although he concedes "it's a lab experiment." Not since the 1930s has the government tightened the budget, rather than loosened it, as a recession began.

Without budget reductions, however, the recession might bring deficits to about $300 billion -- which could easily cost $21 billion to $24 billion a year to finance.

For the budgeteers, a potential escape hatch is in the making.

The proposed tax increases and spending cuts are being forced by the Gramm-Rudman law, which requires deficit reduction. But Gramm-Rudman can be suspended if the economy grows at the rate of less than 1 percent for two quarters in a row.

Last quarter, the economy grew by 0.4 percent. This quarter, it quite likely scraped the bottom again. We'll find out Oct. 30, days before the elections, when the Commerce Department releases its preliminary third-quarter numbers.

If the economy has indeed slumped, a resolution automatically goes to the Congress suspending the Gramm-Rudman deficit limits. However, the resolution has to be passed by Congress and signed by the president, which, at the moment, seems unlikely. How this game plays out depends not only on politics at home but also on how weak the economy appears to be.

If the budgeteers reach no agreement, the automatic Gramm-Rudman budget cuts take effect. They'd slash defense spending by 41 percent and domestic spending by 37 percent, according to the Congressional Budget Office.

For a nation that tends to feel that most of its tax money is being wasted, a couple of weeks under Gramm-Rudman budget cuts might not be a bad idea. With airline flights cut, certain social benefits slashed, parks closed and few personnel to process Social Security or Medicare claims, taxpayers would see that -- occasional spending scandals aside -- there really is a government honestly at work.

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