Federal Reserve Chairman Paul Volcker yesterday told Congress he would rather have higher taxes in 1983 than accept the $91.5 billion deficit proposed in President Reagan's budget.
In his first congressional appearance since a meeting with Reagan last week, Volcker spoke out even more strongly against large budget deficits than before.
Volcker has blamed present high interest rates on the huge budget deficits projected for 1983 and beyond, while administration officials previously argued that volatile money policy had kept rates up. Volcker yesterday said "short-term fluctuations in the money supply should have no important implication for economic activity or inflation."
The president reaffirmed his support for the Fed's tight money policy at a press conference last week, after several weeks of administration sniping at the Federal Reserve.
But Volcker warned Congress yesterday that large budget deficits now threaten economic recovery, and called on legislators to go beyond President Reagan's proposed budget savings to bring down the projected deficits.
He dismissed the argument advanced by some administration officials, particularly Treasury Secretary Donald Regan, that U.S. savings are going to rise so much under the impact of the new tax laws that large deficits will be financed easily. "To count on a dramatically large increase in savings to bail us out of the budgetary problem would be to miss the point, at best," he told the House Ways and Means Committee.
Even assuming an increase in savings in the future and some further deep budget cuts, the federal government will be absorbing a disproportionate amount of available credit in 1983 and beyond to finance its budget deficit, the Fed chairman said.
"If you get it the deficit under $100 billion, but close" in 1983 and later years, then the proportion of credit taken by the government would be "exceptionally high for a period of recovery, which raises indeed the question of whether the recovery can proceed with the government taking that big share," Volcker said.
He said that further spending cuts would be better than tax increases, but that if Congress could not find enough spending cuts to bring down the deficits, then taxes should be raised. Volcker told the panel he favored excise or consumption taxes, particularly on energy, rather than increased income taxes.
The future deficits work to hold back the economy now, Volcker argued, by keeping interest rates higher than they would otherwise be. Some economists believe that tight money policy is also a factor holding rates up. Rep. James Shannon (D-Mass.) asked Volcker at what level of unemployment he would advocate a change in policy. The Fed chairman responded, "I think it would be a great mistake to change course, in the broadest sense of changing" the anti-inflationary thrust of policy.
While he welcomed this week's drop in interest rates and last Friday's report of a fall in the money supply, the Fed chairman cautioned yesterday that people should not read too much into one week's movements. However, some market participants hope that the somewhat puzzling rise in money supply since the end of last year has now begun to reverse itself.
The Fed's money targets for 1982 will be consistent with "recovery in business activity over the second half of the year," Volcker said.
He also said that it was "not probable" that the administration's growth forecasts for 1983 and later years can be fulfilled given current monetary policies.