A Tale of Two Countries?

By GEORGE J. CHURCH

Before energy prices collapsed, the conventional wisdom held that America's economy was being split along have and have-not lines: a prosperous Sunbelt and a rusting Frostbelt. Now, however, there is talk about a different sort of "two Americas." In the new version, the haves are the high-tech industries and financial-service firms stretching from New Hampshire down the Eastern seaboard and from California's Silicon Valley down to Orange County; the have-nots include the farmers, energy producers and heavy manufacturers in between. The split that some see emerging counterposes booming coasts against a problem-plagued heartland.

That is the intriguing, though debatable, conclusion of a study that Democratic campaigners are seizing as ammunition for the approaching 1986 elections. The study is partisan in origin: it was produced by the Democratic staff members of Congress's Joint Economic Committee. But at a time when the growth of the nation's deficit-ridden economy has slowed to a barely perceptible crawl, and when new uncertainties have been raised by the sweeping tax reform that is likely to become law, the study highlights some eye- catching trends in jobs and incomes.

Titled The Bi-Coastal Economy, the study asserts that economic growth during the Reagan Administration has been concentrated in California and 15 states lining the Atlantic Coast, while the rest of the country has been almost stagnant. From 1981 through 1985, these 16 coastal states enjoyed a lopsided 69% of total growth in personal income. Put another way: income from wages, salaries, rents and proprietary income in the 16 states rose a robust average 4% a year, vs. an anemic 1.4% in the other 34 states. The coastal states, where 42% of all Americans live, attracted 58% of the 8 million new jobs created since 1981. According to this month's Census Bureau figures, the Midwest has replaced the South as the area of the country with the lowest average family incomes.

While the coasts have enjoyed rapid growth in high technology and such service industries as banking, advertising and insurance, many heartland states have been held back by their dependence on depressed agriculture, oil and declining smokestack industries. The virtual disappearance of inflation (consumer prices did not rise at all in July, and for the first seven months of 1986 they actually declined .2%) has had uneven regional effects. % Overall stability has masked what a Reagan Administration official calls a "worldwide deflation" in commodity prices that has struck hard at farmers. More recently, the collapse of oil prices has depressed states in the energy belt from Colorado to Louisiana.

The Democrats zeroed in on another factor: the U.S. trade deficit, which hit a record $148.5 billion last year and is running even higher in 1986. Their purpose seems to be to build support for import-limiting legislation. But the trade deficit has hurt farmers, who have lost foreign markets, and smokestack industries, beset by import competition, far more than service and high-tech businesses.

Tony Coelho, chairman of the Democratic Congressional Campaign Committee, suggests a more general use that Democrats may make of the study. Giving his party's reply to one of Reagan's Saturday radio talks, Coelho spoke of a "populist revolt brewing" in the heartland. He added, "Nobody in the Administration pays attention as they fly over central America on their way from one coast to the other." That line hardly seems likely to go over in coastal states, but it could stir angry echoes inland.

Politics aside, the study seems accurate in broadest outline, but it conceals striking differences within regions. Not everything is booming along the coasts. The authors of The Bi-Coastal Economy managed to make it look that way only by excluding from the ranks of "coastal" states timber- producing Washington and Oregon and steel-dependent Pennsylvania (which lacks a coastline but is considered part of the Mid-Atlantic region). Nor is all gloom in the heartland. Michigan, one of the most depressed states a few years ago, has achieved a remarkable turnaround, thanks to heavy spending by the auto companies to battle import competition and successful efforts to attract electronics and other high-tech industries.

Moreover, economists discern some trends that could change the coast-vs.- heartland pattern. The big jump in defense spending that has benefited coastal states more than inland ones is over. Falling oil prices seem likely to help fuel-burning industries in the Midwest even more than they hurt the fuel- producing states. Says Robert Z. Lawrence of the Brookings Institution: "The one thing you learn when you look at regional developments is how transitory they are."

For the moment, little growth is visible anywhere in the economy. Revised figures show that total output of goods and services rose a mere .6% in the ; second quarter, the slowest pace since the end of the 1982 recession. In an effort to give a boost to the economy, the Federal Reserve cut the discount rate at which it lends to member banks a half-point, to 5 1/2%, its lowest level in nine years. That should encourage further interest-rate cuts by the banks. The Reagan Administration and many private economists still expect a second-half pickup. Right now, though, the slowdown has presented policymakers with a painful dilemma. According to the latest Government forecasts, the federal deficit will total $163.4 billion during the fiscal year that begins this October, about $20 billion above the target set by the Gramm-Rudman law. But some economists fear that new cuts of even $10 billion in Government spending could be enough to tip a weakening economy into recession.

The immediate effects on the economy of the tax-reform bill that Congress is expected to pass this fall "has to be a guess at best," says one senior Administration official. Those who would lose tax benefits under the final bill put together by a House-Senate conference committee filled the air with predictions of doom. Real estate operators warned that the bill would force up rents; college and university chiefs protested that it would crimp charitable donations. One major complaint is that by wiping out deductions and special rules, the bill would automatically make more income subject to tax in many states that tie their own tax systems to Washington's. Unless the states act quickly to soften the blow, residents of such states as New York, Ohio and Colorado may have to hand over to state tax collectors much of the money they would save by having their federal tax rates cut.

In the long run, tax reform should boost the economy by lowering individuals' federal taxes and removing many distortions caused by unequal tax treatment of different businesses. Some Administration officials foresee a more immediate benefit. They attribute the current slowdown partly to uncertainty over what Congress would do about taxes; that uncertainty has now been cleared up. "It took a brave man to risk a business decision in early 1986," comments one high official. With budget and trade deficits remaining enormous, valor will still be required.

With reporting by Laurence I. Barrett/Washington, with other bureaus