Luck beats design every time, and Ronald Reagan proves it.
His economic policis weakened the stock market and forced interest rates to record highs. But inflation is coming down for a lot of reasons not connected with economic policy. So the result is a boost for Reagan that is apt to carry the strength he showed in Congress last week all the way through to the 1982 elections.
Energy costs are the first item on the agenda of luck. Huge increases in the price of imported oil initiated the double-digit inflation that developed in 1974 and again 1979. But gasoline stocks are at record highs now. There has been a downturn in consumption because of recession in Europe and a trend toward more fuel-efficient cars in this country. So energy costs are likely to come down in 1981 and 1982.
Food prices come next. In 1979, they rose by 20 percent and contributed importantly to the inflationary burst that followed. A dip last year was supposed to be followed by a rise of about 11 percent this year. But hog and cattle production numbers suggest that meat prices, the front end on foods, are not going up as much as predicted. So at present the outlook is for a rise of less than 10 percent.
Housing costs are third. Surging demands for homes and the rising price of materials have been driving up construction costs by more than 15 percent annually. But high interest rates have diminished demand, and the price of materials is holding even. So a break in home construction costs is certain -- probably this year.
Then there is the robust state of the dollar. Foreigners have been moving assests into dollars in part because of the lure of high interest rates, and in part because political instability elsewhere makes the U.S. especially attractive. There has followed a rise of the dollar as against other currencies. That cuts the cost of imported goods.
Finally, there are labor costs. Accelerating wage bargains work to spread through the economy the inflationary impact of cost rises in other items. But in 1981 no big labor contracts come due. The first one up in 1982 is autos -- where trouble at Chrysler and Ford may foster restraint by the union.
The net impact of all these developments is likely to be a major dent in the Consumer Price Index. The CPI rose by about 13.5 percent in 1980. It could easily fall below 10 percent in 1981 and 1982.
A dramatic drop of that magnitude would, of course, overstate what actually happened. The big change would be more in the measuring rod than in inflation itself. The underlying rate -- the rate at which business has to raise prices in order to kep profits constant -- will hang high at around 9 percent. That can change only when government policy starts to foster wage and price restraint.
So far, at least, government policy has been largely irrelevant to what has been happening. The budget cuts proposed by the administration, for example, have had zero impact on the trends now working against inflation. Some relief from inflation may come from changes that have been made by the president in the original Kemp-Roth proposals for a cut of 30 percent in personal taxes over the next three years. The incidence of the tax cut has been postponed by six months, and other features have been diluted. As a result, the budget will be less stimulative than originally supposed. But, to some extent, the delay and the dilution were forced on the administration by the Democrats.
High interest rates do reflect the impact of policy. Treasury and budget officials in the administration have been sharply ciritical of the Federal Reserve Board for not holding the monetary reins more tightly and more steadily. There has even been talk of forcing out Paul Volcker as chairman in favor of a monetarist hard-liner such as Professor Milton Friedman or former Treasury secretary William Simon.
The Fed has responded, defensively, by raising rates sharply in response to insignificant changes in the money supply numbers. So the upshot of the one development truly traceable to administration policy is the nervousness that has recently inflicted financial markets.
But these ironies are foreign to politics. President Reagan is extremely popular now. There is widespread public enthusiasm for his effort to bring federal spending under control. Hence the 253 to 176 vote, with 63 Democrats crossing party lines, for the president's budget and against the leadership of the Democratic majority on the floor of the House of Representatives last Thursday.
If the Price Index shows a dramatic drop in inflation, the president's stock in the country is bound to rise further. The Democrats will thus be in an awkward position for the 1982 elections. They should develop a Democratic alternative in the event the president's economic policy fails. But if Reagan's luck holds, his program will succeed.