Expert Panel Brews Bitter Tonic for U.S. Fiscal Malaise : Economy: Precise cure remains in dispute, but most in group agree Americans should be prepared for sacrifice.

JACKSON, Wyo. —  Amid the splendid isolation of the Grand Teton Mountains, many of the world’s leading economists staged a remarkable debate this weekend on the issue underlying the 1992 presidential campaign: the long-term economic decline of the United States.

The economists, led by Federal Reserve Board Chairman Alan Greenspan, fiercely disagreed on the cures for the nation’s economic malaise. One former Bush Administration economist even argued that there is no real long-term problem, simply a gross under-estimate of economic growth by federal government statisticians.

But most economists, who came from the United States, Europe and Japan, ended up agreeing on one thing: The policy options that would really make a difference--that could boost the nation’s rate of savings and investment and thus improve productivity and economic growth--all require sacrifice and unpalatable choices that American political leaders and voters have rarely seemed willing to make.

Indeed, the presidential candidates willing to discuss the need for the nation to swallow bitter economic medicine, most notably Democrat Paul E. Tsongas and independent Ross Perot, ultimately dropped out of the race.

“The promise of blood, sweat and tears has not won elections for many politicians,” said Stanley Fischer, an economist at the Massachusetts Institute of Technology.

“In some sense, this problem of long-term decline is not a crisis,” said Fred Bergsten, an economist with the Institute for International Economics and a former undersecretary of the Treasury. “It is a case of termites in the woodwork. And the United States rarely moves to take action except in a crisis or in the first year of a new presidential Administration.”

To a great extent, the structural problems debated by the economists, who gathered here for a conference sponsored by the Federal Reserve Bank of Kansas City, are the same factors now responsible for the nation’s inability to pull itself out of its lingering downturn.

“What we economists are struggling with is the fact that our short-term forecasts for the economy, which are based on our modern experience, are no longer adequate, because the economy is facing these longer-run problems that are unlike anything we have seen since World War II,” Greenspan said.

Most economists agree that the American economy has been suffering a long, slow decline in its rate of growth since the early 1970s. Rising inflation, the oil price upturns of 1973 and 1979, and a flood of imported Japanese manufactured goods had broad shock effects on the national economy, leaving much of America’s industrial base obsolete.

In the 1980s and early 1990s, huge budget deficits soaked up most of the nation’s ability to save, leaving relatively little for private investment in new factories and machinery. Today, the need to finance the federal budget deficit and the nation’s $4-trillion total debt absorbs the equivalent of 60% of the nation’s total private savings.

Thus, there is hardly enough money left for Americans to invest in modernizing factories to remain competitive with Japan, which has a net savings rate three times that of the United States.

“Our savings rate is way below the ranges in just about every other industrialized nation,” said Martin Feldstein, a Harvard economist and president of the National Bureau of Economic Research.

That low rate of savings and private investment has led, in turn, to a sharp decline in America’s productivity--the nation’s output per worker and the main factor behind overall economic growth. In the 1960s, American productivity grew at a rate of 2.5% per year. It fell to 1.4% in the 1980s--less than half of the Japanese pace of 3%. “That is, in a nutshell, what the Japanese call the American problem,” Bergsten said.

The easy part of the answer, the part most economists agree on, is for the nation to boost its savings and investments in order to buoy productivity and economic growth. The hard part is to develop policies that will do that without creating nasty side effects.

Reducing the federal deficit is the fastest way to increase private investment, most economists here agreed. It also is the most unlikely to happen anytime soon, because most also believe that it would require steep cuts in such sacrosanct federal programs as Medicare and Social Security.

Neither President Bush nor Democratic presidential nominee Bill Clinton have proposed deficit-reduction programs that were taken seriously by economists here.

“I have spoken often and loudly about the need to reduce the deficit, and it has been addressed only very slowly in Washington,” said Feldstein, former economic adviser to President Ronald Reagan.

A few economists were willing to propose brutal choices. “Today, about 2% of gross domestic product goes to Medicare payments for people who are within six months of dying,” said Allan Meltzer, an economist at Carnegie Mellon University. “And I think that is a waste.”

Norbert Walter, chief economist of the Deutsche Bank Group of Germany, also proposed traumatic change: scrapping the nation’s progressive income tax system and replacing it with taxes on consumption and wealth. That would reduce the incentives to consume and force greater savings rates, he said.

It was left to Michael Darby, a former Bush Administration economist and now a professor at UCLA, to offer a defense of the Reagan-Bush economic performance. Darby, who formerly headed the agency that produces most of the government’s economic data, argued that federal statistics have badly misjudged the rate of economic growth over the past decade.

In a controversial speech, he said the growth rate has been as much as one-half of one percentage point per year higher than officially stated because the government has not found a good way to measure the output of high-tech and service industries.

“So I think the worries about a decline in long-term growth trends in the economy are simply wrong,” he argued.