Steering a course toward growth

MANAGING the giant United States economy these days -- with all its confusing economic signals -- may strike Washington officials like driving a five-ton truck over hazardous mountain terrain: So far so good, as the truck lumbers forward. But if the drivers takes a wrong turn, or allows his eyes to drift from the roadway, the truck could find itself in peril. The direction for US economic policymakers seems fairly clear to read: how to promote sustained economic growth without reigniting inflation. Beyond that, however, is a more difficult challenge: How to revive the nation's sluggish manufacturing sector, which has been pummeled by the high value of the dollar. The strong dollar makes American exports expensive when competing against products from abroad; at the same time, US consumers are attracted to lower-cost imports. The nation's service sector, by contrast, continues to show considerable strength.

Unfortunately, there are no easy answers for promoting the industrial sector, particularly in a period when clear signposts to the economy's future are not to be found. The government recently announced that industrial production was off during April. The unemployment rate, meanwhile, appears stuck, with no sign of major easing. Consumer debt is high. What does it all mean?

Some economists expect no recession through 1986; others expect a mild one. Whatever, economic growth could prove sluggish next year, in the 2 to 3 percent range. This would indicate what economists call a ``growth recession'' -- a period in which expansion would not provide the new jobs needed by entrants into the labor market, leading to an increase in the unemployment rate.

For just such reasons, Congress must act as quickly as possible to enact a budget-deficit reduction package that, at the least, cuts the projected federal deficit in half during the next three years. This said, it is also important to observe that a deficit reduction package could have its downside. Deficit reduction, at a time of economic sluggishness, can have an effect similar to that of a tax increase. It is nonstimulative.

Still, reducing the deficit could be helpful in lowering interest rates -- by curbing the borrowing needs of the federal government. This would put downward pressure on the dollar, which would assist US exports.

The Federal Reserve Board, by cutting its discount rate, has already taken an important step toward easing interest rates. The Fed's action has led a number of banks to reduce their prime rate.

Will lower interest rates lead to stepped-up consumer purchases, thus spurring growth? That remains to be seen. Private debt (as well as national and corporate debt) is already running at its highest level since World War II. Consumers still have some latitude for acquiring additional debt. But how much additional debt would they feel comfortable taking on because of lower interest rates? And how much additional debt would be considered ``safe debt,'' particularly if the economy went into a slide?

What should be done:

Congress should enact a deficit reduction package as quickly as possible. And Congress, the Federal Reserve Board, and the White House need to keep a wary eye on the economic roadway, quickly shifting gears to more stimulative fiscal and monetary policies if the economy suddenly veers off course.