For the moment, how to cope with recession is Ronald Reagan's biggest problem. The slump this year has brought activity down to a point just over the levels prevailing three years ago. That's stagnation--it started with Jimmy Carter's endorsement of a tight monetary policy--and represents millions of lost jobs and billions of dollars in lost output and federal revenue.
The housing industry, says Michael Sumichrast, economist for the home builders' association, is "decimated," with starts in October at the lowest level in 15 years. The spill-over effects of what amounts to a deep depression in the construction industry are widespread, including a devastating but little-noted impact on the lumber industry in the Northwest.
Murray Weidenbaum, chairman of the President's Council of Economic Advisers, now admits that the recession will be neither mild nor brief, but equal to at least the average contraction during the postwar period. Instead of a real growth rate of 4.2 percent in 1982 (a questionable forecast the administration used early in the game--remember the "Rosy Scenario"?), Weidenbaum now admits that the growth rate will be only 1 percent next year.
And that rate assumes a smart recovery in the second half of 1982, with "the worst of the recession . . . hopefully behind us as 1982 unfolds." But the trouble is that once it's under way, no one can predict the exact length or depth of an economic downturn. The 4.2 percent guess of last February was whittled to 3.4 percent by July, to 2 percent 10 days ago by Treasury Secretary Donald Regan, and now to 1 percent by Weidenbaum. In all probability, the administration will stick with the 1 percent estimate next January for budget purposes, but who knows where reality lies?
Alan Greenspan, who was President Ford's chief economic adviser, anticipates a very sharp decline in the economy for the balance of this year and in the first three months of 1982. Even assuming no heavy sell-off of business inventories, which would make things much worse, Greenspan expects a 4 1/2 percent slide in the real GNP in the current quarter, followed by a 2.8 percent dip in the first quarter of 1982. And if there is a heavy inventory liquidation, then things would be worse. "All of the short-term risks are on the downside," Greenspan told me.
The "consensus" forecast among most economists is not essentially different from Weidenbaum's latest guess: a slide lasting much or all of the first half of 1982, with a recovery possible in the second half of 1982. The divergence comes in assessing how strong the upturn may be and how long it will take interest rates--now sliding back because of recession--to turn up again.
Even if recovery is not strong, the administration expects a political benefit from a second-half upturn, led by the two sectors now most depressed, housing and autos. The Kemp-Roth bill's second-stage tax cut on July 1, 1982, should act as a counter-cyclical measure by reducing individual tax liabilities 10 percent at that point. Improvement in inflation and lower interest rates, Reagan's men hope, will far outweigh still sticky unemployment levels, so long as the jobless rates are below the peak and edging down.
Although he's a sharp critic of Reaganomics, economist Walter W. Heller, who was chairman of the economic council under Presidents Kennedy and Johnson, agrees that the upward direction of the economy is likely to work to the benefit of Republicans in the 1982 congressional elections. Heller first issued this warning before a meeting of elected Democratic officials in Baltimore on Oct. 17, observing that the real costs of the Reagan program may be more obvious by the 1984 elections.
Wall Street seer Henry Kaufman also anticipates a moderate recession, with the recovery accelerated by an easier monetary policy. Kaufman's guess is that the prime bank lending rate will move below 15 percent by the end of 1981. "The Fed should err on the side of easier money now, rather than restraint," Kaufman told me. Kaufman believes that with the economy so weak, Wall Street would not take a shift in Fed policy as a new danger to inflation, but as a proper adjustment to conditions.
The key question, of course, is whether President Reagan will in one way or another tighten his fiscal policy without unwinding the Kemp-Roth bill, so as to remove some of the burden placed on monetary policy. The idea would be to avert a rapid new peaking of interest rates once the recession has run its course. Kaufman believes that Congress is unlikely to take any significant action raising taxes until there is clear evidence that the nation is coming out of the recession. He hopes that Congress will reconsider its hasty action that indexes the tax system beginning in fiscal 1986.
One new idea on how to raise revenue in fiscal 1983 and beyond, floated by an influential outside adviser to the Reagan administration, is a windfall profits tax on natural gas to accompany acclerated decontrol, raising $20 billion to $30 billion a year. And on Capitol Hill, Sen. Pete V. Domenici, chairman of the Budget Committee, has mulled over a duty on imported crude oil, raising another $20 billion. A total of $40 billion to $50 billion in new taxes would surely inflate consumer prices. But the revenue applied to the budget deficit could easily lower the whole range of interest rates by two or three full points.
Greenspan, like Stockman a worrier about growing federal budget deficits, is concerned about raising taxes "because it is not clear what proportion of those tax increases wind up as a reduction in the deficits." The long-term budgetary problem, Greenspan feels, is on the expenditure side, and therefore he would go along with some indirect tax increases "as part of a package to reduce outlays."
Greenspan is probably close to the thinking of Regan and Weidenbaum on that point. On "Face the Nation" last week, Weidenbaum left the door open to tax increases for fiscal years 1983 and 1984, although he said he would give "primary attention" to more budget cuts as a way of narrowing the deficits that worry both Stockman and Wall Street.
Perhaps the first clue that the nation will get on whether the president will be willing to change his economic policy mix, away from its excessive reliance of monetarist theory, will come when he names a vice chairman of the Federal Reserve Board to replace Frederick Schultz early next year. It has been widely rumored that the president would name Treasury Undersecretary Beryl Sprinkel to that post and perhaps replace Paul Volcker as chairman with Sprinkel when Volcker's term expires in 1983. But if Reagan appoints a nonmonetarist--someone the business community would label a pragmatist--it would be a sign that evolving policy would rely less on monetarist theory than it has heretofore.