That Monster Deficit

COVER STORY

Because of it, the President's men feud, and the recovery may be stunted

During the reign of France's Louis XVI, Marie Antoinette supposedly once asked the Royal Finance Minister, "What will you do about the deficit, Monsieur le Ministre?" His reply: "Nothing, Madame. It is too serious."

In many ways, the President of the U.S. could not ask for a better election-year economy. Unemployment is falling, sales and profits are surging, investment is perking, inflation seems under control. After presiding over a deep recession, Ronald Reagan can now boast of having engineered one of the most stunning economic turnarounds in U.S. history.

But if the economy is going up, why do so many people feel so down about it? Why is the stock market sliding? Why is Federal Reserve Chairman Paul Volcker warning of a "clear and present danger"? Why is Congress in an uproar over the President's economic policy? Why, after little more than a year of recovery, is the dread word recession even being occasionally heard from the President's economic advisers?

The answer to all the above: the federal deficit. In this fiscal year, the U.S. Government is expected to shell out $183.7 billion more than it takes in through taxes and other revenues. By the Reagan Administration's own projections, which private and congressional economists consider to be unrealistically optimistic, the cumulative budget shortfall from 1984 through 1989 will amount to about $1 trillion. Sums up Thomas Johnson, president of Chemical New York, the bank holding company: "Everybody wants to feel good because we've just come through three years of really excruciating difficulties. But we are working on borrowed money and borrowed time."

At the very least, Government deficits of such unprecedented magnitude threaten to boost interest rates, reignite inflation, discourage capital investment and hinder growth. At worst, the budget imbalance could stop the recovery cold. Warns Volcker: "If left unattended, the deficits will accumulate until they undercut all that has been achieved with so much effort and so much pain."

At the moment, the budget gap is indeed being left unattended. Though Rea gan in his State of the Union address called for a budget-reduction "down payment" of $100 billion over three years, negotiators from the White House and Congress have had only three halfhearted and inconclusive meetings on where to begin. Last week the President and the Democrats were pointing fingers at each other over who was really to blame for the huge deficits. Said Reagan in a press conference: "I am a little struck by these born-again budget balancers, who for 40 out of the last 44 years have controlled both houses of Congress and who have rel-giously had a policy of deficit spending and never raised their voices about il." Fumed House Speaker Tip O'Neill: "On the campaign trail, the President condemns deficits. Here in Washington, lie defends them."

Not exactly. Said Reagan last week:

"I'm as determined as they are to get deficits down. But I'm not going to get then down the way they want them down." The President opposes tax increases or substantial cuts in his military budget, while the Democrats are unwilling to reduce only social programs without