Are Economic Perils Still Lurking Ahead?

THE key to the political economy in 1989 probably lies in the things that did not happen in 1988: Have the dangers that didn't materialize last year been sidestepped or have they simply been postponed with redoubled stakes? Regarding 1988-89 pitfalls like a recession, a further downward leg in the stock market, a debt implosion, and new political directions on matters like tax, spending, and economic nationalism, the view ahead from January suggests caution.

Some of the problems that loomed so mighty early in 1988 after the October 1987 stock market plunge were at least sidestepped. No recession materialized, the market failed to complete its 1987-88 parallel with 1929-30, and the Democrats - Michael Dukakis, in particular - fumbled their chance to change United States economic priorities in a way that low income groups might applaud but business and investors would not.

In a larger sense, cyclicality may just have been postponed and the stakes raised. Take, for example, two pivotal situations:

The timing of the next recession. This present business cycle represents the longest peacetime US economic recovery in memory, and certainly the longest administered by the Republicans.

The caution is that the dynamics of latter-day GOP economics are just as unprecedented as the longevity. At the time of Ronald Reagan's first inauguration in 1981, he stood for relatively traditional conservatism: tax cuts, spending reductions, reduced government (the abolition, for example, of the Energy and Education departments), consideration of a return to the gold standard, and a balanced budget by 1984.

Jump ahead to 1985 and the beginning of Reagan's second term, and you have an incredible turnabout. The GOP had shifted to what became a triple stimulus package - record budget deficits as a percentage of peacetime gross national product, massive post-August 1982 expansion of the money supply, and deliberate large-scale currency devaluation. This combination arguably extended the recovery, now entering its 73rd month.

As a result of these atypical dynamics, the question, ``Where are we now?'' is hard to answer. The big worry is the overhang of debt, the consequence of mid-1980s borrow-to-expand strategies.

Debt as the dominant issue of 1989 politics. After four or five years in which intermittent fears of budget deficits gave way to political yawns, 1989 may be the year in which the issue climbs into the political driver's seat. Now, we're no longer just talking about the familiar federal deficit. Other debt issues are emerging.

The ramifications of a decade of looseness, laxness, and ``don't worry about debt'' supply-side theories are beginning to encircle the administration and Congress like a seamless web. Now we must deal with the savings-and-loan bailout, rising evidence of other shaky federal loan programs, proposals to tap the social security system for deficit reduction, partial loss of control over US interest rates to Japan, the emergence of the US as the world's top debtor nation, and the resulting ``selling of America'' debate.

Precarious circumstances like these could have become major issues of the 1988 presidential campaign. Indeed, they probably should have been a central point of discussion to lay the groundwork for public understanding and acceptance of serious remedies.

Of course, that would have meant a sizable loss of credibility for both the Reagan administration and conservative economics, and George Bush might well have lost the election. As things worked out, Mr. Bush must now manage the transformation of the US economy from what he more or less called a rose garden into what may become a political and legislative mine field.