BEYOND THE PAIN, A REVIVAL OF THE AMERICAN DREAM

By SUNEEL RATAN

The pain seems all too immediate. benefits are cut, programs terminated, federal employees laid off. But would a balanced budget bring any quick payoff for the average American? Yes, according to many economists and Wall Street analysts. A deficit-free America would enjoy widespread benefits in the form of lower interest rates for mortgages and business loans. That would spur a boom in housing construction and business investment, creating jobs and raising incomes.

It may sound like trickle-down economics, but the process is much more reliable. Eliminating the deficit would ease the government's demands on America's already shallow pool of savings, which by some estimates keeps interest rates percentage points higher than they would be under a balanced budget. Tear up Uncle Sam's credit card, and interest rates drop, allowing the private sector to grow as the government retreats. "What's at stake is nothing less than rekindling the American Dream," says Matthew Miller, a former Clinton budget official who quit this year over the White House's refusal to continue cutting the deficit.

Would-be home buyers would be the clearest winners. Ann and John Pask, a Dallas couple in their early 30s, have been nervously eyeing mortgage rates as they contemplate buying a home to fit the family they plan to begin in two years. The Pasks, who support balancing the budget, hope it would bring them something tangible: a lower monthly payment. At current mortgage rates of about 8%, the Pasks would pay $734 a month on a $100,000 loan, which would be cut to $665 if rates dropped 1 percentage point. They would save $28,246 over the life of the loan, enough to put one of their future children through a year of college. "We have friends who have bought expensive homes," says Ann Pask. "With children, they have had to cut back on everything because the mortgage is just draining them."

Many Americans would find the good news spreading to their paychecks. Economists say the nation's anemic savings rate of 4%, in contrast to Germany's 12% and Japan's 17%, is a key reason behind the stagnation in many workers' wages since 1973. If the U.S. government stops depleting America's savings pool, it would lower businesses' costs of borrowing and enable them to invest in the new equipment that makes their employees more productive, thus fattening their paychecks. Lower rates would also help companies create jobs by building new factories and opening new shops. Roger Brinner, chief economist with the forecasting firm DRI/McGraw-Hill, estimates that balancing the budget would raise America's yearly output an extra 2.5% over the next 10 years. That would mean an average of an extra $1,000 a year for each American family. He adds that the economy would create 2.4 million more jobs by 2005 than if the deficit remained unchecked.

Balancing the budget would ease financial pressure on the government itself, leaving more room for tax cuts. One of the fastest-growing items on the government's books is interest on its $4.8 trillion debt. This year the government will pay $235 billion in interest, an amount that exceeds its deficit of $176 billion. Without further deficit reduction, the Congressional Budget Office estimates, annual interest payments by 2002 would balloon to $334 billion -- money that goes to bondholders such as Ross Perot, who in 1992 reported that a chunk of his then $3.3 billion fortune was invested in low-risk government securities. Interest is one of the items targeted for massive cuts under G.O.P. budget plans -- $155 billion under Senator Pete Domenici's proposal. Moreover, the cbo states, mere passage of a credible balanced-budget plan could lead the bond market to bid down interest rates almost immediately, lowering the cost of financing the government's existing debt an additional $170 billion over the next seven years.

Some economists believe budget cuts create economic distress if they go too far, too fast. Senior Clinton economic adviser Laura Tyson last week claimed that the massive budget cuts the Republicans envision might tip the economy into recession. Such statements strike some analysts as politically driven, since the Administration only two years ago pushed through a $325 billion, four-year deficit-reduction plan that it claimed would lead to lower interest rates and a healthy economy. That assertion has since proved correct.

Still, there is the prospect that in the short run, certain Americans would end up losers. Senior citizens, for instance, would not only have to bear cuts in Medicare; those who depend on investments in certificates of deposit might see their incomes drop as interest rates fall. But they could take heart from realizing that they were helping their children and children's children. "People have to make short-term, identifiable sacrifices in exchange for the promise of distant, diffuse and amorphous benefits of a stronger, healthier economy," says Martha Phillips of the Concord Coalition, an antideficit group. "It's a big leap of faith, and what's amazing to me is how many people are willing to make it."

--With reporting by Ratu Kamlani/New York

With reporting by Ratu Kamlani/New York