This is the year of recovery. Administration officials and private analysts agree that the economy is now picking itself up from the longest recession since World War II.
This is obviously welcome news, and it is cheering to see the administration and the Federal Reserve apparently in agreement over the need for expansion. But the rationale for going all out for recovery in 1983 deserves examining.
Several Reagan officials have said recently that the economy can afford to grow now because the battle against inflation has been won. The recession of the past eighteen months has, in other words, done its job of squashing inflation and left policymakers free to concentrate on lowering interest rates and boosting employment.
Few would argue that there have been large and real gains against inflation during the recession and that there is room for substantial growth without danger of pushing inflation back up to the double digit range that it reached at the end of the Carter administration. However, prices are still increasing--albeit at a slower rate than they used to--and some economists believe that it makes no more sense to accept or hope for inflation to remain steady at 5 percent a year than at 10 percent.
The only proper goal, they say, is price stability, which means an inflation rate at zero, or as close to zero as makes no difference. An inflation rate above this is inherently unstable, they say, and likely to accelerate.
Moreover, the contention that the economy can afford to grow now, that inflation has been beaten down has an old-fashioned ring to it. Reagan and his supporters criticized previous administrations for switching from anti-inflation policies to anti-recession policies and back again in an attempt to "fine-tune" the economy. What distinguishes the present policy switch from those of the past?
One difference is that it is being made with less enthusiasm than previously. While fiscal policy is set on a very expansionary path, the administration is trying to cut the budget deficit and take away some of that stimulus from 1984 onward. And monetary policy is still being made with an eye on the dangers of reaccelerating inflation.
However, the administration's caution about pushing hard for growth and jobs is, in one sense, an indication of how similar the rationale behind their policy switch is to those of the past. The implication is that rapid growth and falling unemployment are likely to exacerbate inflation just as recession and rising unemploment helped to bring inflation under control.
Reagan officials do not like to pose the issue this way. The president's budget refers to the recession as the "process of economic adjustment to non-inflationary growth," suggesting that, with the recession behind us, growth need not be hindered by worries about inflation. Reagan initially said that inflation and unemployment could be reduced at the same time. He is still reluctant to say that the rise in unemployment actually helped to produce lower inflation. Instead, officials typically talk about the two things as merely linked in the same process.
It is clear that Reagan has not discovered a magic key to combating inflation. But he may be much luckier than his predecessors in keeping it down--and not just because of the length and depth of the recession. Inflation was reduced substantially after the recession of 1974-'75. But in addition to the boost to price and wage increases that came with recovery, rising energy and food prices in the late 1970s gave a further twist to the inflationary spiral.
This process has been in reverse during Reagan's term, and with the present oil glut will continue to help for some time. Lower oil prices, and moderating food price increases, help hold down inflation in two ways. In addition to their direct effect on overall prices, they can set off a virtuous circle of slower wage increases that is the opposite of the vicious circle of the 1970s.
This should help the trade-off between jobs and inflation. But it does not take it away. There are already some people who believe that policymakers are in danger of overexpanding the economy and reaccelerating inflation. As recovery proceeds, prices are bound to be firmer than they would be if recession continued. It is a price worth paying for growth and jobs, most people believe. But many also believe that there will come a time when people begin to worry more about inflation than jobs, and the policy cycle will start again.