Wall Street economist Henry Kaufman warned yesterday that interest rates would rise again unless the Reagan administration stepped up its plan to balance the budget, instead of raising defense spending and cutting taxes.
Kaufman said it's unlikely that President Reagan will achieve his promised $45 billion budget deficit for fiscal 1982 with the rapid buildup in defense spending announced earlier this week. "One of the problems of achieving credibility is that you just cannot promise to balance the budget three to four years from now."
Treasury Secretary Donald T. Regan said, "I completely disagree with him."
Regan argued that people would be disappointed if the administration did not go ahead with its tax cuts. "I don't think you'll see those castastrophic type of [interest] rates," he told a group of reporters, if the Federal Reserve Board achieves smooth growth in the money supply, as it aims to do. Last year both money supply and interest rates were very volatile, despite the best efforts of the Fed.
Meanwhile, budget director David A. Stockman told a Senate committee there would be "startling and major" cuts in federal loan programs in the administration's final budget proposals next week. He said that the cornerstone of the Reagan program was "reliable tax and budget policies" to back up the Federal Reserve Board's firm money policy.
Another prominent economist told the House Ways and Means committee that the administration's program could be inflationary. Otto Eckstein, president of the private economic forecasting group Data Resources Inc., said, "while I gladly endorse the president's program in broad outline, it does have one major fault and can stand improvement in some other regards."
The fault, he said, was that "desite its conservatism in general" the program was expansionary and thus could worsen inflation. Also testifying before the committee, Alan Greenspan, one of the administration's outside advisers on the economy, stressed the need for deep spending cuts if inflation is to be lowered.
"The president's expenditure cuts in the nondefense area, in my judgement, are a minimum," Greenspan told the committee. But he said Congress should not wait to cut taxes until the spending cuts are all approved. Cutting taxes would force Congress to reduce spending, he said, whereas if the tax cut were delayed for the spending cuts, then the tax cut would probably never come.
Regan echoed this theme, saying that those who argued that Congress should take the tax package one year at a time were "saying that they can spend money better than the American people can." He said he expected substantial progress by July 4 on the administration's economic program. Because the administration was still in the "first inning," the Treasury secretary said he was still predicting that Congress would pass a tax package along the administration's lines.
Legislators in the House in particular have indicated that they may change the administration's proposals substantially, including in the first tax bill now under consideration some of the special tax measures that the administration would like them to save for a second bill.
Regan left the possibility that a second bill would close some tax loopholes, or tax expenditures, although there is considerable caution within the administration about taking any tax-raising measures.
The Treasury secretary hinted that there may be some extra money for additional tax cuts if interest rates fall faster than the administration has forecast. He said that very conservative forecasts on interest rates and the cost of debt repaid that very conservative forecasts on interest rates and the cost of debt repayment had been built into the economic forecasts. However, some economists disagree with this.
Interest rates will come down, Greenspan said, only when there is "hard evidence that federal expenditure and credit growth will slow." They will not reduced solely "as a consequence of eloquent utterances of optisism by the admimistration or of pledges of lowered money supply targets by the Federal Reserve."
Regan gave an indication of how the administration may react to further demands from Chrsyler for government loans, saying "I think it's up to Chrysler now." He added, "I took Bill Miller's (former Treasury secretary G. William Miller) word that Chrysler was a viable corporation."