An "economic affliction of great proportions" confronts the United States, President Reagan declared yesterday in his inaugural address. He said this affliction encompasses sustained high inflation that "threatens to shatter the lives of millions of our people . . .," unemployment that causes "human misery and pesonal indeignity," and a crushing burdern of government taxation and intervention in Americans' lives.
It is now up to Reagan to find the correct policies, the policies that eluded the Carter administration, to relieve this affliction. The relief will take some time, even on the president's timetable.
"The economic ills we suffer have come upon us over several decades," he asserted. "They will not go away in days, weeks, or months, but they will go away. They will go away because we as Americans have the capacity now, as we have had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom."
What is it that needs to be done? Reduce taxes and the burden of government. "In this present crisis, government is not the solution to our problem; government is the problem," Reagan said.
Sooner or later, however, Reagan and his new team economic advisers are more realistically going to have to discuss, publicly and in details, just how they plan to get from a world of 7.4 percent unemployment and double-digit inflation rates to, in the president's words, "a healthy, vigorous, growing economy. . . "
None of the Reagan appointees has volunteered to describe, even in general terms, exactly what is supposed to happen quarter by quarter once the large personal and business tax cuts and government spending cuts planned are put in place, perhaps the former well before the latter. The key question is why, if a 7 1/2 percent of 8 percent unemployment rate has done so little to slow inflation, faster economic growth would do it?
Faster growth would reduce worker's apprehensions about layoffs and their employers' anxieties about their ability to pay higher wages in a depressed economy. Unless the rate of wage increase, which is now fully consonant with a double-digit inflation rate, comes down, inflation will not come down. And why should anyone settle for less when trying to keep up with such an inflation and when expecting job prospects to get better?
This is the real world prospect confronting Reagan. Of course, a large rise in productivity -- which has the effect of reducing labor costs to an employer -- could do the trick. But where is that to come from in 1981 or 1982?A higher rate of business investment in more modern plants and machines eventually should raise productivity, but only by a small amount over an extended period of years.
Meanwhile, the Reagan advisers have been urging the Federal Reserve to keep a tight rein on growth of the money supply. That is more or less the same thing as saying the economy should not grow rapidly.
This inherent conflict between the Reagan plans for stimulating the economy with tax cuts and the insistence that the nation's central bank keep the lid on growth can be resolved only if there is some sort of spontaneous drop in inflation this year or in 1982. If such a drop occurred, then the amount of money and credit available would be sufficient to finance both real economic expansion as well as the remaining rate of inflation.
There was no hint in Reagan's inaugural speech that the Fed's monetary but only at the cost of still more unemployment. The president made it all sound easy: tax cuts, faster growth, less government and "equitable" solutions "with no one group singled out to pay a higher price."
Throughout Reagan's campaign, with its emphasis on "supply-side" economics, there was the suggestion that fundamental economic relationships had changed, that the nation had returned to those pregnant days of the early 1960s when a tax cut indeed would lead directly to a prosperous, noninflationary growth. But even in those halcyon days, faster growth and lower unemployment did not produce lower inflation.
Now, however, that is the name of the game, how to lower inflation. Today's reality is a world of multiyear labor contracts, indexed government transfer programs, rapidly increasing food and energy prices, and a pervasive expectation that it all will continue.
So far there is no credible explanation of just how the new administration will deal with these and other problems while simultaneously reducing inflation and unemployment. We still don't know how they plan to get from here to there.
Reagan's first step yesterday was to declare a freeze on hiring of civilian employes by all federal executive agencies. But so did President Carter and his predecessors. In fact, Carter employment dropped 45,000 during Carter's term. It did not make much difference in the inflation rate.