Presidential adviser Murray Weidenbaum told a meeting of economists yesterday that "deficits do matter" despite President Reagan's postponement of the goal of a balanced budget, and stressed that the administration will strive to make "very substantial and credible progress toward" a balanced budget in fiscal 1983 and 1984.
But other top economists at the meeting of the American Economics Association argued that sizable tax increases, which Reagan has consistently opposed, will be necessary to bring down the deficit. Weidenbaum said that the battle to restrain the growth of government is being waged within the administration "on the outlay side of the budget." However, several senior administration officials favor some tax increases in the fiscal 1983 budget now being prepared.
Weidenbaum's predecessor as chairman of the Council of Economic Advisers, Charles Schultze, criticized the administration for cutting taxes "far too sharply" in legislation passed by Congress last summer, and argued that the deficits now projected for 1983 and 1984 are so high as to threaten a serious conflict with tight-money policy.
However, Schultze said he believes that "we've got outselves into a fairly serious mess, but not a disaster." He suggested ways of narrowing the 1984 deficit by about $65 billion to $75 billion by raising additional taxes through "loophole closing," delaying the last part of the personal income tax cut legislated last summer and due in mid-1983, imposing a new tax on gas to accompany decontrol of natural gas prices, cutting the growth in defense spending and cutting the so-called entitlements part of the budget as well as the rest.
Looming federal deficits, and the prospect of a collision between these and the tight-money policy of the Federal Reserve have been a major theme of this week's annual meetings of the AEA. Another has been how best to reduce inflation without costs being too high in terms of lost employment and output.
Alice Rivlin, director of the Congressional Budget Office, warned that without "drastic" action to bring down the deficit, any economic recovery will be stalled by a runup in interest rates as a result of conflicting money and fiscal policy. However, she acknowledged that the political obstacles to such drastic action in an election year will be great.
Weidenbaum repeated the administration view that although "several more months of poor economic statistics are in front of us," there will be a vigorous recovery next year. Most forecasters predict a slower-than-usual upturn from the present recession because of the Federal Reserve's commitment to keep money tight.
Both Schultze and Weidenbaum said that the housing and auto industries could recover strongly next year, and Schultze predicted that with only a small budget deficit, there would be growth in years after 1982 of between 4 percent to 5 percent in real terms.
He said that the economy faces two serious problems--persistent inflation and steady growth in the government's share of the economy and in marginal tax rates--but that these had "only a little bit to do with each other." By confusing the two problems the adminstration has worsened the economy by enacting tax cuts that are too large and swelling the deficit, Schultze claimed.
Sluggish growth, high unemployment and relatively high interest rates are the price being paid for bringing down inflation, he said.