Why Worry?

The deficit debate may seem like an esoteric argument among economists and politicians," says Irwin Kellner, an economist at New York City's Manufacturers Hanover Trust, "but it is actually very much a part of people's lives." Indeed, the Government's record deficits are making an almost direct hit today on the average American's checkbook. The major effects:

Interest rates. When consumers borrow money to buy a house, car or dishwasher, they are paying higher rates because of the deficits. Historically, the cost of borrowing funds is about 3% higher than inflation. At present, many loan rates are approximately 7% over inflation. Reason: fear among moneymen that the Government will borrow so heavily that less funds will be available for consumers and businesses. During the recovery after the 1973-75 recession, mortgage rates stood at about 9%, but they now average 12%. Says Jack Carlson, chief economist for the National Association of Realtors: "Consumers have to scrounge around for the crumbs. In the process, they are bidding up interest rates."

Employment. Federal red ink could result in fewer jobs than the recovery had promised. Businessmen wary of high borrowing costs have avoided making expensive capital investments for things like new factories, which create more employment. In addition, the overvalued dollar that has resulted from the deficits and high interest rates is costing Americans work. C. Fred Bergsten of the Institute for International Economics in Washington estimates that the U.S. will perhaps lose as many as 1 million jobs this year because the strong dollar abroad has reduced American exports and increased imports.

Inflation. Reluctance on the part of businesses to invest more in new factories could lead to faster price rises before long. If the recovery proceeds without sufficient investment, it may mean shortages of some products, and that could push inflation higher than the current rate of about 4%. Moreover, if the Federal Reserve bends to political pressure and increases the money supply in order to help finance the deficit, the inflation level could begin rising quickly.

In the end, deficit spending is a way of robbing from the future to pay for a better standard of living right now. A future generation will have to cut back on its expectations in order to pay off the debts that are being built up today.