The day after his colleague William A. Niskanen announced to a conference of economists (mostly conservative Republicans) that "there is no direct or indirect connection between deficits and inflation," Economic Council Chairman Murray L. Weidenbaum asked another audience to rise, raise their right hands, and say with him in unison:

"Deficits do matter, do matter, do matter!"

It appeared that President Reagan was embarrassed by Niskanen's Confucius-like suggestion that inasmuch as deficits are inevitable, his administration might as well relax and enjoy them. Against standard GOP dogma, this was sheer heresy.

The administration, of course, is on a tough spot of its own making. The notion, offered again by the president at his press conference last week, that a balanced budget for fiscal 1984 had been merely a campaign "goal," not a promise, is a bit of disingenuous flim-flammery all can see through.

But Niskanen's excuses for the deficits, trotted out at the conference sponsored by the American Enterprise Institute, were more elaborate: deficits did not crowd out private borrowers, affect growth of money supply or interest rates. And the kicker: a better yardstick than federal deficits to measure the health of the economy is the net worth of the federal government--and in 14 of the past 15 years of Democratic and Republican red ink, net worth had increased.

Niskanen was merely articulating a standard pitch of monetarists, who blame inflation not on deficits or expenditures, but on excessive growth of the money supply. But such single-minded theorists--all too-powerful in this administration--ignore the real world of financial markets and political behavior.

Weidenbaum himself had raised eyebrows among Republican traditionalists not only by his silent acquiescence to Niskanen's offering at the AEI session, but by adding on his own initiative that large deficits could be tolerated because they are expected to shrink as a percentage of national output, and can be financed "without undue pressure on financial markets or on the Fed."

This was pretty close, after all, to what Democrats have been arguing for years. More important than the conventional deficit number, the Democrats have alleged all along, is the "high employment" deficit which shows whether the impact of the government on the economy is inflationary or deflationary.

Snapped Herbert Stein, AEI fellow and former chairman of the Economic Council under Nixon: "Thank you very much, Murray, for your reassuring explanation of the fiscal 1983 $160 billion budget deficit."

By the end of last week, Weidenbaum was trying to get himself and the CEA back in the mainstream. At a breakfast with reporters, he disavowed Niskanen's statement as merely an "academic exercise that wasn't intended to be a statement of administration policy, and I assure you it wasn't."

Deficits, Weidenbaum went on to admit, do tend to "crowd out" private borrowing, and make it more difficult for the Fed to restrain the growth of the money supply (both points contradicting Niskanen and adjusting his own rhetoric at the AEI). But the underlying and more important factor, he continued to insist, is reducing over-all spending, thus curbing the size of the federal sector and enhancing the power of the private sector.

The trouble is the deficit numbers are now of such a massive scale that mere common sense labels them unacceptable. Weidenbaum talks of holding the current year's red ink to no more than $99 billion, as if avoiding a triple-digit, $100 billion mark were a positive accomplishment.

But much more important than the theoretical question of whether or not deficits cause inflation is that the red-ink years the White House admits lie ahead demonstrate the fallacy of so-called supply-side economics.

Reagan, who now has publicly accepted the inevitability of large deficits over the next several years, is admitting that the economy is not going to grow sufficiently to make up for the tremendous revenues that he gave up in his devotion to huge tax cuts, coupled with the commitment to let the defense budget increase 6 to 7 percent annually in real terms.

That's the point that Reagan, so far, refuses to see. At his press conference, he stubbornly insisted that there would be no effort to narrow the deficits by tax increases of any kind--not even a windfall profits tax on natural gas, if the decontrol process is accelerated. Later, press aide Larry Speakes said that the president hadn't meant exactly what he said. Rather, the president was not going to withdraw any of the tax benefits for business and individuals passed this year. That still leaves open, Speakes said, plugging loopholes "and stuff like that."

So where are we left after the confusions and contradictions of the past two weeks? Does Reagan have any fiscal policy at all?

The administration, having abandoned one fiscal policy that called for a balanced budget in fiscal 1984 (to be precise, the original target was 1983), seemed in the wake of the Niskanen-Weidenbaum statements to be articulating a new one that said, in effect, "deficits are not a matter of concern."

Since that caused massive cardiac arrest at the AEI and among senior Republicans in the Senate, the administration nimbly shifted gears, saying, "yes, yes, deficits do matter, and we will keep the deficit under $100 billion in the current fiscal year, and progressively lower after that."

But Reagan, for all of his long years on the stump calling for a balanced budget and emphasizing the economic disasters caused by huge deficits (reiterated as recently as September 24 in a TV address to the nation) made clear in response to reporters' press conference questions that he had no new target year for balancing the budget--or for reducing the deficit to a precise number, say $60 billion, as some of his advisers were urging as a sop to financial markets.

Instead, he stated a new policy aimed at curbing unnecessary spending, but not aimed at "just single-minded pursuit of reducing the deficit." To do so would result in the "government being irreponsible and not performing the services that it is supposed to perform for the people," Reagan said.

So there you have it: although Herb Stein thought Ronald Reagan was the only member of the administration who still saw a cause-and-effect relationship between deficits and inflation, the president's priorities are now clear: the budget deficit is less of an evil than would be raising taxes to achieve a balance. In reality, the president is not too far from the Niskanen view.

Yes, deficits do matter in this administration, but not very much.