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The Issue We're Afraid to Debate : DAY OF RECKONING The Consequences of American Economic Policy Under Reagan and After by Benjamin M. Friedman Random House: $19.95; 321 pp.) : RENDEZVOUS WITH REALITY The American Economy After Reagan by Murray Weidenbaum (Basic Books: $19.95; 290 pp.)

October 16, 1988|Reviewed by James Flanigan | Flanigan is a Times business columnist.

These books, by two noted economists, are the antidote to Campaign '88. In contrast to happy talk about "keeping this expansion going" and the "best America is yet to come," they look ahead to impending difficulties or impending doom.

The bleaker and more formidable of the two, "Day of Reckoning" by Harvard economist Benjamin Friedman, sees more than a passing threat to America's vibrancy and dynamic sense of progress, to the American way of life. For that, Friedman flays the Reagan Administration for running massive budget deficits and putting the country in hock.

Surprisingly, author Murray Weidenbaum, in "Rendezvous With Reality: The American Economy After Reagan," agrees we're in the soup. But Weidenbaum, assistant Treasury secretary under Nixon and chairman of the Council of Economic Advisers at the start of Reagan's first term, admires much of what the Administration has done, and tried to do. "Reaganomics was the most ambitious reform effort in the United States since the New Deal," writes Weidenbaum. Its emphasis on reduced government was in tune with the changing world, he maintains. "It has brought a new sense of realism to business and personal decision making.

"Nevertheless," he states, "chips are being called in: the bills are coming due. Citizens concerned with the future of America must take on a role akin to that of the cleanup crew the morning after the big blast."

Strong words. What are they talking about? The decade of the 1980s that began with a new President and a new theory called supply-side economics--and proceeded like the workings of a global Rube Goldberg machine to turn the United States into an economically weaker, debt-burdened nation.

Taxes were cut in 1981 to spur economic activity, but proposed reductions in government spending to accompany those tax reductions didn't materialize and government budget deficits began to grow.

Those deficits, and the expectation of further deficits to come, "drove up interest rates," explains Weidenbaum. High interest rates, in turn, discouraged investment in new plants and equipment but made it easier for the government to finance its deficits by borrowing from abroad--foreign investors becoming prominent buyers at auctions of U.S. Treasury bonds.

However, so much money invested in U.S. Treasuries raised the value of the dollar, hurting exports of U.S. products by attracting imports, which sent more dollars out in payment for goods so they could return as investments in Treasury paper.

The spiral of debt is unprecedented, writes Friedman. At the end of 1980, the United States was no more in debt--in proportion to its total economic output--than it had been in 1920 or 1870; at the end of 1987 its debt had doubled, while its economy had grown only at half its former rate.

The upshot is not only that the nation is poorer, not only that it has mortgaged its future but that the mortgage-holders are no longer American. Friedman lays blame solely on the Reagan Administration, but Weidenbaum sees the weakened condition as the result of two decades of American society avoiding hard choices. "Rather than choosing," he writes, "we have acted as if we had sufficient wealth, technology and knowledge to fight a major war and wipe out poverty . . . to cut taxes, increase spending and still balance the budget."

Now the game is up. Repent and change your ways is the message of both books--written, say their authors, to spur Americans to hard choices and renewed effort. Where Americans have spent, they must now save. Debts must be paid and deficits eliminated--which will be easier said than done.

The government budget deficit is now approaching 4% of the gross national product. No nation in history has ever reversed such a deficit--by imposing taxes and cutting spending--without incurring a recession or depression.

But a recession in the U.S. economy today could be disastrous, because the structure has been rendered fragile by debt and lack of investment. "The economy as a whole has been leveraged up," writes Weidenbaum. But the borrowing, both corporate and governmental, has gone to consumption and interest rather than to investment for future income.

In fact, so laggard has been business investment in this decade that the nation is now constrained from economic growth; we literally do not have the plants and equipment in place to produce a growing output of goods and services.

As one measure of how hard it will be to climb out of our hole, explains Friedman, Americans will have to reduce their own consumption of goods and services by 5% in order to export to others and pay interest on their loans to the United States. How much is that? "Five percent of our national income is about two-fifths of what we spend each year on food, or modestly more than we spend on new cars or clothing or to run our houses and apartments."

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