Inflation or depression -- which is it that economic policymakers should be trying to combat?

One of the peculiarities of the current recession is that, despite its severity, people still give different answers to that question. Despite the length and depth of the downturn, despite the rise in unemployment to post-World War II record levels, despite growing fears about the strains put on the world trading and financial system by the worldwide recession, and despite the dramatic slowdown in inflation that has in fact occurred over the past two years, there are those who believe that inflation remains the nation's major policy problem.

It is partly because of this that there is such confusion in Washington policy making today. Congress and the White House appear torn between wanting to raise taxes and reduce spending, which would be the right thing to do if their main aim was to ward off future inflation, and wanting to stimulate recovery, which would imply lower taxes and higher spending -- at least in the near-term -- along with easier monetary policy.

Some administration officials are urging policies aimed at restraining recovery and guarding against a renewed surge of inflation. They warn that the Federal Reserve should stop allowing such rapid money growth and that fiscal policy must be tightened with major new measures to reduce the deficit. The economy may be in recession, but it can find its own way out, they argue, warning that Washington should not return to its old inflationary ways.

Others -- such as Treasury Secretary Donald T. Regan -- apparently want recovery and lower interest rates, but don't seem quite sure how to get them. Regan has switched in the last few weeks from advocating bigger tax cuts for 1983 (by moving forward the scheduled July income tax cut) to saying it may be necessary to increase taxes in the coming budget to reduce the deficit.

A main reason for Regan's change of heart is the fear that financial markets will give the thumbs down to any budget that fails to make significant inroads into the huge projected federal deficits. This is a return to the view that high interest rates are due at least in part to the deficit projections, so that the way to get interest rates down is to reduce the deficit. But why should the deficit projections be holding rates up? The most common argument is that they make financiers fear higher inflation in the future. That means that if fiscal policy is concentrated on cutting the deficit, it is aimed at fighting inflation, and the fear of future inflation, not at spurring recovery.

While there is good reason for concern over the high federal deficits projected for the mid and late 1980s, cutting the deficits in the near-term will do nothing to help the economy to grow. And if Regan really does want to boost the economy, then he should return to advocating lower taxes next year, rather than higher.

Federal Reserve Board Chairman Paul A. Volcker is known to have felt earlier this year that the existence of two extreme views about the economy--one that it is in imminent danger of collapse into a severe depression and the other that there is a threat of a resurgence of inflation -- seriously complicated the job of carrying out monetary policy.

Volcker and others feared that moves to ease monetary policy, in an attempt to help economic recovery, were in danger of upsetting those who feared inflation and therefore could undermine the hard-won credibility of the Fed. On the other hand, Volcker was known to think that the Fed should not stick with such a tight monetary policy that the economy could not recover.

Since then, of course, the Fed's Open Market Committee has shifted its own view of the prospects for the economy from the middle of the two extremes toward those who think that recovery and expansion are top priority. Minutes of the November meeting, released last Friday, show that only one member of the FOMC felt that further slight monetary easing threatened to reignite inflation. Several members were described as concerned about the fragility of the world financial system and the dangers posed by the debt problems of developing countries. They worried also that the recent signs of slight improvement at home could easily disappear if interest rates were to climb again.

The Federal Reserve's shift of emphasis -- which is still only quite modest -- came later than that of the voters. According to the polls, unemployment has been seen for some time as a bigger problem than inflation. Many businessmen and business economists also stopped worrying so much about inflation as about survival, according to Charles B. Reeder, chief economist for E.I. du Pont de Nemours, although they are often unhappy about speaking out against the administration or the Fed. More recent, many on Wall Street have begun to suggest that the tight monetary policy designed to fight inflation should be replaced by one to encourage lower interest rates and growth.

It is important for those in Washington to decide which is the nation's major problem, and to get on with the fight.