The underlying budget deficit would be $150 billion a year by the end of 1988 even if the economy recovers between now and then and unemployment drops to about 6 percent, Office of Management and Budget economist Lawrence Kudlow said yesterday.
Kudlow called such deficits "absolutely unacceptable," and he warned that large deficits may lead to overexpansionary monetary policy.
Earlier yesterday, a group of four conservative economists called for the Federal Reserve to resist easing monetary policy and "promptly resume the announcement of annual numerical money supply targets," and for the administration and Congress to take further measures to cut the deficit, including raising taxes.
The economists -- Herbert Stein, Phillip Cagan, Rudolph Penner and William Fellner of the American Enterprise Institute -- said policy should still be aimed at fighting inflation and not at quick relief for unemployment.
Recently, President Reagan and some members of Congress have suggested that the only way to deal with the huge projected budget deficits is to get the economy growing again. Kudlow rejected this argument yesterday at a conference sponsored by AEI, saying that the bulk of the deficit was structural and therefore would remain, even if the economy recovers, unless there are policy changes to raise taxes or cut spending.
Administration officials are now grappling with the 1984 budget, due to be presented to Congress next month. Kudlow said the major decisions should be taken within the next couple of weeks. He described large federal borrowing as the major fiscal problem facing the nation, as they reduce funds available for private investment.
The OMB economist said that success in reducing inflation was a major factor swelling the underlying deficits. Many experts believe that Reagan's large tax cuts and projected defense buildup, the costs of which are not matched by cuts in domestic spending, are mainly responsible for the underlying structural deficit.
Large deficits make it impossible for the Federal Reserve Board to sustain a "stable, moderate, noninflationary" monetary policy, Kudlow told reporters. This in turn threatens to halt progress on inflation, and without such progress there cannot be a lasting reduction in unemployment, he said.
Several other economists at the conference expressed concern that the Federal Reserve is now allowing the money supply to grow too rapidly. The Fed recently has abandoned -- at least temporarily -- its targets for the narrow M1 measure of the money supply, including currency in circulation and checking accounts, citing technical distortions to the figures that made them an unreliable guide to policy.
Some economists believe that the Fed should continue to encourage interest rates to fall, and not worry about bringing money supply back to within its targets. However, Cagan and other AEI economists said present rates of monetary growth were far too high to continue.
Most of the economists urged new measures to cut the deficit, which they said tended to raise interest rates and crowd out private investment. However, Stein, who believes the deficit should be cut, said there was no a priori reason why large deficits are worse than cutting spending programs.