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Hollandaise on Ice

January 27, 1985

In just over five years America's economy has turned from malaise to hollandaise for just about everyone except the homeless and the more than 8 million people who can't find work.

The inflation rate was above 13% in 1979; the average for each of the past three years is just under 4%. The nation's total output of goods and services grew nearly 7% last year, the largest surge in the gross national product in more than 30 years. Interest rates are creeping down. Americans find good news nearly everywhere they look, and polls show that they expect to keep on finding it.

Prosperity did not come easily. President Reagan's tax cuts helped by leaving more money in the pockets of taxpayers, who in effect bought their way out of the 1982-83 recession.

The recession itself followed a decision by the Federal Reserve Board to cut the inflation rate by printing less money. That drove interest rates to record modern levels; instead of growing, the economy shrank. The shrinkage slowed the growth in wage rates. Labor costs are growing at about half the rate of a few years ago, and prices are growing about a fourth as fast.

But hollandaise curdles if the cook is careless. So it is with the good times predicted for 1985. Slower growth in wages accounts for part of the drop in the inflation rate. Imports of cheaper goods from abroad are at least as important. But imports have created huge trade deficits, and American industry cannot live that way for long.

Prosperity also owes much to the fact that the national debt has nearly doubled since 1980 as Washington has borrowed money to make up for the dollars that it lost to the tax cuts that left cash in consumers' pockets. So far that borrowing has not led to competition between the government and business for money, largely because foreign investors are pouring $100 billion into the United States every year. They may keep investing, but Washington cannot take that for granted because the competition for scarce capital would drive interest rates back up.

One problem is maintaining a sense of urgency about the deficit when the economic news virtually glows in the dark and when the federal debt has yet to cause real trouble.

We have said that the country is prosperous despite the $2-trillion national debt that lurks in the near future--the same way the passengers on the Titanic were having a jolly time just before they hit the iceberg. Charles L. Schultze of the Brookings Institution and former budget director and then chief economic adviser to President Jimmy Carter, says that it would be more like sailing the ship into an ocean of crushed ice. The ship wouldn't sink, but it would cool down and slow down and need repairs. It also would stick taxpayers who have yet to be born with the bill--in the form of hundreds of billions of dollars in interest payments--for pulling the ship free.

Congress can keep the economy out of the ice by cutting $100 billion from the deficit--for openers. An increase of $50 billion in taxes, which would not cause a ripple in the economy, and an equal cut in spending for defense and social programs would turn the tide. When its members have held all their press conferences and done all their posturing, that is precisely what they must vote to do.

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