AS THE DOW JONES average floats merrily above the 5000 mark and interest rates keep dipping ever so nicely, balanced-budget negotiators on Capitol Hill would be wise to heed Federal Reserve chairman Alan Greenspan's admonition.
If they fail to come to an agreement and allow tax and spending issues to remain unresolved through the 1996 election campaign, Mr. Greenspan warns, "there will be a sharp increase in long-term interest rates." And, of course, a sharp drop in stock prices.
His words are of far greater significance than the current posturing in budget talks. Politicians know well that the reaction of the financial markets to gridlock would impact quickly on voters, even if changes in government operations are backloaded past the election. A sharp rise in long-term rates would increase the cost of mortgages, dampen the housing market, discourage business investment and reduce job formation. The public would hold incumbents responsible and ratchet up interest in third party or independent candidates.
It is this reality, more than any other factor, that may indeed produce a budget agreement by Christmas despite the huge divide that now exists. The president's men may brandish threats to let tax-and-spending issues fester unresolved until next November; Newt Gingrich's minions may threaten to shut down the government again if the White House thwarts their plans to cut taxes and reduce social programs beloved by Democrats. But in the end the threat to incumbents may be the best insurance for a semblance of sanity in D.C.
In the end, neither President Clinton nor Speaker Gingrich will have his way. The rational compromise comes, rather, from moderate and conservative lawmakers who will insist on few if any tax cuts and advocate a middle ground between administration and GOP proposals on Medicare, Medicaid and other out-of-control entitlement programs. These are lawmakers who view government not as a hungry maw or a cornucopia but as a potent force that must be shaped for the common good.
We would guess that Mr. Greenspan would be comfortable with a plan that holds tax cuts to a minimum and puts the government on a credible path to budget balance by 2002. Just the expectation of the latter result, he has testified, has been a "significant" part of the 2 percent drop in long-term interest rates over the past year. With inflation well in check, this has prolonged a national recovery that has already produced a revenue bonanza that has cut tens of billions from the current deficit.