"A Little Terrifying"

By GEORGE J. CHURCH

That was the word for deficits as Reagan and Congress prepare to do battle

On the surface, the mood ranged from cozy to playful as members of the 98th Congress convened to be sworn in last week. In the Senate, New Right Curmudgeon Jesse Helms of North Carolina, whose filibusters made him a renegade late last year, embraced two of his colleagues at once, while newly elected Virginia Republican Paul Trible, 36, sat down for a deferential chat with sixth-term Mississippi Democrat John Stennis, 81. In the House, children crawled around the floor and squalled lustily as their parents took the oath of office. Bluegrass music twanged through the Rayburn Office Building, where Freshman Democrat Bob Wise of West Virginia staged an impromptu folk dance.

Underneath the jollity, however, most legislators were deeply troubled, and with good reason. Rarely has a new Congress, and the President from whom it seeks guidance, faced such a menacing array of dangers: gargantuan deficits, ominous unemployment, a threat of Social Security bankruptcy, growing pressures for trade protectionism, uncontrolled illegal immigration. The consequence is a logjam of issues that must be confronted. Neither the White House nor Congress could allow itself the luxury of bickering and indecision much longer.

There were hints of a breakthrough on only one of the problems. Fortunately it was the most important: runaway deficits. For the first time, President Reagan softened his formerly obdurate opposition to any reduction in the giant military buildup he has planned.

The signs of progress came at the end of a week that opened in discouraging fashion. As they arrived in Washington, Senators and Representatives read shocking new figures from the Office of Management and Budget: a deficit now estimated at $185 billion for fiscal 1983, which ends Sept. 30; $200 billion or more for fiscal 1984 if nothing is done; an incredible $288 billion by fiscal 1988. As Government borrows to make up the shortfall, it will corner 73% of all private savings this year and 79% in 1984, leaving far too little lendable money to finance business investment and consumer buying. The all-too-predictable result: abrupt choking off of any worthwhile recovery from the recession that drove the jobless rate in December to 10.8%, a minor increase from a revised figure of 10.7% in November, but still a 41-year high.

Scarcely had the opening-day ceremonies ended when six leaders of the Republican-controlled Senate visited the White House for breakfast with Ronald Reagan. Finance Committee Chairman Robert Dole of Kansas summarized their message: "We told the President that we could not live with those big deficits." Paul Laxalt of Nevada, Reagan's closest friend on Capitol Hill, described the red-ink figure to reporters as "a little terrifying."

The Senators told Reagan bluntly that if he persisted in reported plans to submit a budget containing only cuts in domestic social programs, such as food stamps and school-lunch subsidies, many of which have already been trimmed close to the bone, Congress would turn it down flat. That would trigger months of chaotic wrangling during which the deficits would inexorably mount. The lawmakers pleaded for a much broader spending reduction, including cuts in entitlement programs, such as Social Security and Medicare, and above all military outlays. At first they thought they had got nowhere. Laxalt lamented that the President seemed "very close to set in concrete."

In fact, Reagan did hear the Senators' message. It reinforced loud signals he has been getting for months from the most varied sources: his own White House staff and Cabinet, the voters who in November increased the Democratic majority in the House by 26 seats, even his natural allies in the business and financial community. Investment Banker Peter Peterson, for example, prepared an ad proclaiming that the looming deficits threaten "to keep the nation's economy stagnating for the rest of the century." The list of 380 people he hopes will sign the ad constitutes a cross section of the nation's business, financial, legal and academic Establishment. The common theme from all these sources is that Reagan, by insisting on tax cuts and a huge military buildup offset only by inadequate reductions in social spending, is isolating himself on a course dangerous to the economy and to his own prospects for exerting presidential leadership.

Reagan showed the first signs of give at his midweek news conference. He expressed more worry about deficits than he ever had before, and even observed of the military budget: "If it can be cut, it will be cut." By week's end he had instructed Secretary of Defense Caspar Weinberger to see what reductions might be made in military outlays in the fiscal-1984 budget, which goes to Congress on Jan. 31.

Aides reported that Reagan was also "attracted to the concept" of a freeze on a wide variety of Government programs. The most extreme form of this idea is known in Congress as "Fritz's freeze," after Democratic Senator Ernest ("Fritz") Rollings of South Carolina. Rollings advocates holding at present levels social spending, entitlement programs including even veterans' pensions, military outlays, federal pay--just about everything. Fifty-five Representatives of both parties last week signed a letter to Reagan drafted by Georgia Republican Newt Gingrich that advocates precisely that.

Administration insiders are guessing that the President will settle on a reduction of anywhere from $5 billion (the Pentagon's wish) to $8 billion (the hope of some White House aides) in planned military spending, which originally seemed likely to hit $247 billion in 1984. That would be combined with a freeze on enough nonmilitary activities to bring the total spending cutback to a range of $30 billion to $35 billion. Asserts one high-ranking adviser to Reagan: "I'd say the odds are now much better than fifty-fifty that he is going to send up a credible budget." But what seems credible to the White House may look very different on Capitol Hill. Cuts of $30 billion to $35 billion would be little more than the President once hoped to take out of social spending alone, and would leave a deficit of $165 billion or more for fiscal 1984. Indeed it is questionable whether any combination of spending cuts can whittle the deficit to manageable size unless taxes are raised also, and on that subject Reagan has shown no flexibility. He declared last week: "Increasing taxes is not the way out of a recession."

Nonetheless, Reagan seems to be groping toward an opening position in the budget battle that would be realistic enough to permit fruitful negotiations with congressional leaders. The prospects are less cheerful on the other major problems:

UNEMPLOYMENT. Reagan last week ticked off a series of hopeful signs: rising retail sales and housing construction, lower interest rates. Said he: "The economy is getting better, not getting worse." Maybe. But what he carefully did not say is that his economic advisers foresee a recovery so puny that in the fourth quarter of 1983 national output of goods and services will be a mere 1.4% higher than at the end of 1982. Such anemic growth might keep the jobless rate above 10% all through this year. Moreover, Council of Economic Advisers Chairman Martin Feldstein believes five years may be required to bring the rate down to 6% or 7%.

Congress resounds with talk about public-works job programs and various other pump-priming schemes to put the unemployed back to work more quickly. Said Tip O'Neill, on being elected last week to his fourth term as Speaker of the House: "It is time to stop waiting for an economic theory to work and instead do what we have done before--stimulate the economy." There is even some perverse sentiment that the giant deficits make such a course attractive: if red ink is likely to total $200 billion a year anyway, what does an extra billion here or there matter?

Most Congressmen and Senators, however, are rightly skeptical. A public-works bill modest enough to slip past Reagan's veto would be almost irrelevant compared with the size of the problem. One indication of its severity: when Chicago Mayor Jane Byrne created 3,800 temporary city public-service jobs last week, 20,000 people lined up to apply on the first day.

SOCIAL SECURITY. The system needs an additional $150 billion to $200 billion to keep pension checks going out on time through the 1980s. A combination of increases in the payroll tax and a limit on the growth of benefits is required, but both arouse furious public opposition. So the White House and Congress in December 1981 responded the way they so often do when faced with a painful decision: they appointed a bipartisan study commission. With the commission due to report this week, time is running out on that ploy.

Chairman Alan Greenspan can probably get twelve of the 15 commission members to recommend a realistic combination of proposals, but only if they have advance assurance that the President and O'Neill will go along. Reagan last week refused to provide that assurance, contending that if he told the commission what he would accept, "the same old political football would be seen going up in the air like a punt on third down." (Reagan's third-down kick may hark back to his playing days, when cautious teams did that if they were pinned deep in their own territory.) A more apt gridiron metaphor would be that each party is afraid of being lured into a blind-side block: the Republicans if they propose benefit limits that Democrats portray as hurting the old, the Democrats if they advocate tax boosts the G.O.R condemns as burdens on the young. The commission probably will only list a set of options, which would amount to lateraling the football back to the butterfingered politicians. If something is not done, pension checks could be delayed as early as July.

PROTECTIONISM. Pressures are rising for legislation to limit imports. The House last year passed a bill that would have forced foreign automakers, mainly Japanese, to curtail their sales in the U.S. severely unless they met impossibly high standards for including more "domestic content" (that is, American parts and labor) in their cars. The bill died in the Senate, but is certain to be revived. There is much talk too of reciprocity bills that would limit imports of a wide range of Japanese goods unless Japan buys more American products.

Such measures would deepen, rather than relieve, the U.S. slump. That downturn is part of a worldwide recession that is already being aggravated by stagnation in world trade. But protectionist pressures are difficult for Congress to resist because the damage from foreign competition to workers in industries like steel and autos is far more direct and visible than the benefits consumers get from an unimpeded international exchange of goods and services.

IMMIGRATION. Some half a million immigrants, mainly Mexicans, enter the U.S. illegally every year, joining any where from 3 million to 6 million who are already here competing against U.S. citizens for jobs. The 97th Congress blew a chance to stem the tide by failing to pass the Simpson-Mazzoli bill, which combined amnesty for illegal aliens who have escaped detection so far with a system of fines on employers who knowingly hire illegal entrants in the future. The new Congress must start afresh. It will be hampered by the same troubles that blocked the bill last year. To the great majority of Americans the benefits of easing the immigration crisis would be indirect and hard to measure. Meanwhile the bill offends a wide variety of special interests: businessmen fearful of fines; farmers who want to hire cheap, though illegal, labor; union leaders opposed to temporary work permits for seasonal immigrants; Hispanics who fear that penalties against employing illegal aliens may cause businessmen to shy away from hiring any Hispanics.

Congress will not even begin to act on this interlocking set of woes until President Reagan formally sorts out his priorities and explains his program. Both the House and the Senate recessed last week for a respite that legislators will probably find all too brief. They will reassemble Jan. 25 to hear Reagan's State of the Union speech, followed six days later by his budget message. After that, the action will be real, with the stakes enormous and the prospects distressingly uncertain.

--By George J. Church. Reported by John F. Stacks and Evan Thomas/Washington

With reporting by John F. Stacks, Evan Thomas This file is automatically generated by a robot program, so viewer discretion is required.