The Crash: Panic Grips The Globe

A crisis spotlights Washington's failures

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The problem is hideously complicated in detail but simple enough in outline. Ever since the giant tax cuts of 1981, the U.S. has been running deficits on a scale never seen before. True, Reagan announced at his press conference that the deficit in fiscal 1987, which ended on Sept. 30, dropped to $148 billion, from $221 billion the prior fiscal year. But the new figure is still far too high, and it is likely to rise again soon; much of the 1987 reduction was due to one-shot effects of the tax-reform law. Concurrently, the U.S. has swung from a surplus of exports over imports of $3 billion as recently as 1975 to a trade deficit of $156 billion last year.

One result is that America has run up a foreign debt of about $250 billion. Economists across a broad spectrum of ideological positions warn almost with one voice that this situation is precarious in the extreme. Foreigners will not continue forever to finance American profligacy, and the stock-market crash was a relatively mild foretaste of what could happen if they pull their money out. The nation would then face a grim choice of financing the deficit by ruinous printing-press inflation or a sudden, brutal cutback in spending that might trigger a real economic bust.

No wonder, then, that stock investors have been nervous. Whatever the precise mix of emotions and events that triggered last week's collapse -- and to establish that mix would require probing into millions of minds around the world -- its root cause was a dim but accurate perception that U.S. prosperity was not sustainable with present policy. And with Congress and the President perpetually wrangling over the most modest proposals to reduce the budget deficit, they could see no sign that policy was about to change.

In truth, even with the most brilliant policy, the passage to a sounder prosperity is likely to be tricky, dangerous and painful. Lowering the trade deficit will take years, and will probably require a cut in American consumption -- meaning, in other words, at least a temporary reduction in the standard of living. Many economists think the dollar will have to fall further too, reluctant as both U.S. and foreign moneymen are to see that happen. The reluctance is understandable. Unless a decline is carefully managed, it will raise two dangers: a renewal of inflation and a panic flight of foreign capital from the U.S. (since foreigners would not be eager to hold dollar- denominated investments that shrank in value against their own currencies).

But there is an impressive consensus, in the U.S. and abroad, on how to begin to correct the imbalances in the American economy. The President and the Democratic-controlled Congress must agree, right away, on a package of measures that hold some real promise of reducing the budget deficit steadily and substantially. Certainly these must include painful spending cuts. But ^ they must also include tax increases, much as Reagan hates the thought. Not because they are any panacea; indeed they carry a serious risk. Higher taxes might reduce consumer spending just when a recession is beginning, and deepen the slump. But no significant budget cut is possible without at least some sort of modest tax increase, and no progress toward solving the nation's fundamental economic problems is possible without a real deficit reduction.

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