Soviet threat may 'turn off' US recession

Great economic changes in the years ahead may result from Soviet-American confrontation, symbolized by the Russian occupation of Afghanistan and President Carter's response.

Sharply higher US military spending already is forcing experts to revamp their predictions of how the huge American economy will perform this year.

Inflation is likely to be higher, unemployment lower, economic growth faster, and the budget deficit larger than had been expected, as the United States gears up to meet a Soviet challenge of undefined dimensions.

Recession, widely expected to drag down the economy this year, may not occur at all, as business -- spurred by the defense industry -- picks up steam.

Joseph A. Pechman of the Brookings Institution sees "a 50-50 chance that the recession will not happen," especially if businessmen and consumers indulge in anticipatory buying.

Corporations, foreseeing heavy demands by the military on available raw materials and supplies, might build up inventories in advance.

Consumers, with an eye on continuing high inflation, might keep up the high rate of spending -- fueled by heavy installment debt -- that so far has kept the US economy surprisingly brisk.

Effects of higher defense spending, says Lyle E. Gramley of the White House Council of Economic Advisers (CEA), already have been taken into account in the President's fiscal 1981 budget, to be unveiled Jan. 28, and Mr. Carter's Economic Report, due two days later.

He sees, therefore, little outdating of the 1981 Federal Budget and Economic Report, now clattering their way through government printing presses.

But Mr. Gramley, like Mr. Pechman, warns that things could change if businessmen stock up their shelves, consumers keep buying, and Congress -- with emotions running high over events in Iran and Afghanistan -- boosts defense outlays beyond the 4.5 percent increase (in real terms) proposed by President Carter.

"In the last three weeks we have not changed our omic forecast [despite Afghanistan]," says John White, deputy director of the Office of Management and Budget (OMB).

He and Mr. Gramley, both deeply involved in shaping administration economic policy, express a White House view that, to date, events have not shaken their projections for 1980.

Those projections reportedly include a slowing of the inflation rate to 10 or 11 percent, a rise in unemployment from the present 5.9 percent to the realm of 7 percent, and mild recession in the first half of the year, followed by a shallow recovery.

Most troubling to administration officials and to private economists is the possibility, as 1980 rolls on, that inflation may not subside.

This would bloat government spending, because social security and some other payments automatically rise with inflation and because goods and services would cost the government more to buy.

The cost of fuel alone for an expanding US defense establishment -- gasoline, diesel, and aviation fuel -- would greatly swell government outlays.

To restrain the budget deficit as the US Treasury borrows to pay bills, White House and Congress might forgo tax relief to beleaguered American families.

Higher tax payments increase government revenues and, to that extent, limit the amount of red ink in the federal budget.

Yet with much higher social security taxes coming down the road in 1981 -- and pushed by inflation into higher income tax brackets -- millions of families might be lacked to the wall without tax relief.