White House Chief of Staff Donald T. Regan talked in his White House office last week with Washington Post staff writer Hobart Rowen.

Q What's all of this stuff I read about -- you're saying the economy is in trouble -- and new thoughts about the relationship of deficits to interest rates? What are we talking about?

A I'm still the same person. I haven't changed, but what is going on, quite obviously, is that this first quarter of 1985 has been a downer -- only plus 1.3 percent growth on the first official estimate. That indicates there has been this temporary slowdown in the economy.

We do not want that to be prolonged. We want to see a recovery in the second quarter and in the third quarter this year because the third and fourth quarters of '84 were not that great. I mean, they were good, but they weren't great, and now a bad first quarter here indicates that, if anything were to go wrong, we wouldn't be able to keep up with employing everyone who wants to go into the work force -- that is what we're doing right now.

And we wouldn't be able to keep . . . our own businesses as competitive as possible with foreign businesses. There are too many people dependent upon the United States' economy throughout the world . . . Developed as well as developing countries all depend on us, we're importing so much of their products now. If we even slow down, it's going to hurt them unless the other industrialized countries speed up, and they don't show signs of that yet.

Q Presumably that's going to be one of the big pitches in Bonn, isn't it?

A Right, [but] the big pitch on that is gonna be made this week, right now, on the budget deficit. You asked about the interest rates . . . and the big pitch there is that we don't want this economy to falter. We've got to cut this deficit so we don't have to borrow as much over the next few years and take that amount of capital out of either the domestic supply or the international supply of funds. [We'd rather] leave it in the pool for the private sector.

Q How do you do it? Until now, you haven't talked tax increase. Are you changing your pitch?

A No, but we have . . . a compromise plan which we've arrived at with the Republican [Senate] leadership. We think that it will benefit the country overall to have this. Granted, individual groups might be hurt, but all we're doing in most cases is shaving. Now there are some programs that we're phasing out, but we've been very careful as to which ones we phase out.

Q But I still don't get the essential difference. You've said all along that you have to reduce the deficit. Are you saying now that you can't cut enough on the spending side, and you have to do some thinking on the tax side?

A Absolutely not. Absolutely not. What we're saying is [that] to raise taxes at this particular juncture of the economy would exacerbate the slowdown. What we're saying is: Cut back the federal spending and let the private sector spend more, 'cause that's where you'll keep the economy going.

Q What do you want out of the Federal Reserve at this point?

A A continuation of what they're doing. They have been supplying quite a bit of funds -- what is it, close to 9 percent over the last three months on M1, 8 1/2 percent over the last six months -- good figures.

Q The market seems to be reading Fed Chairman Paul Volcker and member Martha Seger as suggesting in the last couple of days that -- with the inflation rate going up the way it did in the first quarter -- the Fed may be thinking of tightening.

A No, I don't think so. I think that the overriding consideration, when you examine the deflator and what caused that, that was the one-month jump in gasoline and oil products. Apart from that, it was not that high . . . Now, we are not that worried about inflation. We think inflation will remain modest, and we base that [assessment] upon commodity prices, we base it upon the producer price index, we base it on restraint in wages.

Q I guess, Mr. Secretary -- can I still call you Mr. Secretary?

A Call me Chief, call me Don, call me anything you want.

Q I don't know what to call you.

A Eminence.

Q Okay, Eminence, I guess what I really don't understand is, if you're worried about a slowdown in the economy . . . the normal corrective for that would be some kind of a stimulative program. Now, what you're talking about is further tightening on the deficit.

A Well, now, there we get almost into metaphysics, but that is the only Keynesian antidote that worked for years. Q Well, it worked for you for the last two years.

A I think -- well, we seem to think -- it was the tax cut. We think at this point in time that . . . we're building up too much of a deficit. Now, too much fiscal stimulus has to produce monetary tightness. We would rather have more fiscal discipline and therefore make it easier on the monetary authorities to provide funds to get interest rates down.

Q Well, is that then the rationale for this approach -- that you want to avert the Fed's pursuing a tighter policy?

A Exactly. We see that that has to happen. The main reason, of course -- let's face it, it's dogma with us, you know it -- [is that] we think that the size of the federal government should be reduced, we don't think the federal government should be spending 25 percent of GNP [gross national product]. That's dogma. But we also see that having this enormous fiscal deficit makes monetary policy much harder to control.

Q And how about this relationship of deficits with interest rates?

A Well, you just heard what I said, there's the linkage. If fiscal policy is restrained, monetary policy can be eased, and an easing of monetary policy brings interest rates down. We're still on that same kick.

Think through this: A year ago, the prime [bank lending rate] was at 12 1/2 percent. What's happened to the deficit between a year ago and now? It's increased, right? Interest rates have come down with an increasing deficit.

That's why we still maintain there is no one-on-one relationship -- reduce the deficit, you automatically get interest rates down. What happens is, if you make it easier on monetary policy, then you can get the interest rates down.

Q How much of your time are you still spending on economic policy?

A I keep a very sharp eye on it, very sharp.

Q What is the relationship between yourself and Secretary Baker?

A Excellent one. Well, just look at what I did -- what the president did with Jim Baker. I came up with the idea for the two cabinet councils instead of the . . . seven or eight that we had. One is economic, one is domestic. Noneconomic security [affairs are] handled by the National Security [Council], so we have the three. The economic one, [which the] secretary of Treasury heads, gives him pre-eminence in the economic field -- which is where I think the Treasury Secretary should be. . . . And I didn't put my own man, Beryl Sprinkel, in charge of it, notice that!

Q Now, when you all go to Bonn next week, is it going to be different for you compared with London, when you and [Secretary of State George] Shultz were sitting side-by-side with the president?

A I will not be in the room.

Q Any nostalgic reactions to that?

A Some. I won't be out in front as much, but I'll certainly be doing the same thing Jim Baker was, keeping an eye on who's minding the store back in Washington.

Q As Treasury secretary, you were engaged in a very substantive role on policy. Here you're managing the White House as an enterprise, but not necessarily so involved . . . on the substantive issues. Is that a difference for you?

A No, that's not a difference. I'm right up to my eyebrows in policy. There is no policy, economic or domestic, that somehow or other doesn't pass through the West Wing before it gets to the president. So we're all engaged in the policy discussions. So while I act as a manager, I also act as well in the role of helping to shape policy.

Q Tax reform. In a peculiar way, that was your baby, and now it's being handled by Baker. How do you see that evolving? What sort of changes?

A There quite obviously in the Treasury-one proposal . . . were a lot of contentious things. What we did was to try to set up an ideal, knowing full well that to get it passed legislatively, compromises would have to be made . . .

Q Are you involved in the specific changes?

A What we're going over is the specific recommendations of the current Treasury management as to what the president's positions should be on Treasury-one: modifications here, keep this, change that, throw out something else. On all of this, I sit in with the president and several others on the White House staff along with the Treasury staff, and we go over this. The president's making no decisions. He'll make a final decision when we review the whole thing, when we get back from Bonn . . .

Q One of the issues that was mentioned, but not pushed, when you were over in the other building was the idea of international monetary reform. As you know, Baker last week made a proposal for a monetary conference [to the OECD] Organization for Economic Cooperation and Development . How do you see that going?

A It's a logical outcome. The studies are going to be ready in June. A small group of ministers will study what the deputies have done. They then go to the [International Monetary Fund's] Interim Committee in Seoul [in October] and discuss them. Let's see what happens then on what the studies are and what the suggestions are after they come out of the IMF meeting.

Q But what sort of priority does the administration give a monetary conference? Or was Baker's just a tactical move to accelerate a new trade round?

A We were anxious to do anything that helps world trade, world economic recovery. To the extent that monetary reform will help that . . . we will be in favor of it.

But we can't tell you in advance, because we don't know what the [monetary reform] suggestion is going to be.

Q I thought maybe . . . that there might be sort of a new sense of urgency that you have to get monetary reform.

A Not worldwide. Domestically, yes, but we have to get the domestic house in order. Our domestic house is not in order yet.