The Zesty Forecast for '85

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In the long run, though, investment could be stunted by the federal budget deficit, which is expected to hit a record $222 billion this year. As the economy expands, business borrowers will be competing more and more intensely with the Government for the limited pool of private savings, and that could put upward pressure on interest rates. So far, only the influx of foreign money, which amounted to $62 billion in the first three quarters of last year, has prevented a crunch. Perhaps the most sinister aspect of the budget deficit is that its effects are gradual and masked by the general prosperity. "Deficits are not explosive," said Heller. "They are corrosive." Most disturbing, the U.S. will become a debtor nation this year for the first time since 1917. Peter Peterson, former chairman of the Lehman Bros. Kuhn Loeb investment firm and a guest at the TIME board meeting, said that unless action is taken to bring down the deficit and the dollar's value, America could owe foreigners $1 trillion by the end of the decade. Observed Heller: "We're fattening our own standard of living today, at the expense of a leaner diet tomorrow when we have to pay it off."

TIME's economists agreed that the budget deficit should be attacked now, before the economy shows signs of weakness. They applauded President Reagan's goal of carving $50 billion out of Government spending in 1986, but said that the White House will have to compromise with Congress on where to cut. The economists expect Congress to insist on spending less for defense and more for social programs than is in the Reagan budget.

Alice Rivlin, director of economic studies at Washington's Brookings Institution, pointed out that the Reagan budget was "not seriously aimed at cutting the deficit so much as changing what the Government does." She noted that the budget calls for drastic cuts in such programs as public housing and small-business loans, which are activities that the White House thinks should not be supported by federal dollars. But at the same time, the Administration has left Social Security and defense, which consume 50% of the budget, almost untouched. Said Rivlin: "Anyone who is serious about reducing the deficit has to go after the big things."

Harvard Professor Martin Feldstein, who was President Reagan's economic adviser between 1982 and 1984, said that a growing number of Congressmen seem willing to trim Social Security, despite the political risks. The lawmakers will certainly not cut the size of current benefits, but they might reduce future cost of living allowances (COLAs), which are payment increases linked to the inflation rate. One option, Feldstein suggested, would be to limit COLAs to the amount of inflation in excess of 3%. They would then be "diet COLAs," he quipped. If that strategy were adopted for Social Security and all other programs with COLAs, including federal employee pensions and veterans' benefits, it would save an estimated $50 billion in 1990.

Schultze maintained that the Pentagon should be a primary target for budget cutters. The budget calls for appropriations for weapons and equipment to more / than double between 1980 and 1986, even after adjustment for inflation, to $107 billion. Said Schultze: "I think you can say that while some buildup is needed, the magnitude of the recent and proposed increases in defense spending is unwarranted."