In 200 days the Reagan administration has accomplished a historic and necessary change in the direction of long-term national economic policy. As a result, for the rest of the decade and beyond, government will govern less. It will spend less, tax less, borrow less and regulate less.
So much has been done, but so much remains to be done. We have come too far now to have our resolve shaken by recent skeptics who want instant gratification at the expense of sound, long-term goals.
It will take time for these changes to produce the tangible results our country desperately needs. The third and fourth quarters of 1981 will not see them; real GNP will be relatively flat. The fourth-quarter results will probably show that we have virtually the same level of output as we did in the first quarter of 1980 -- two years with no progress. Whaths more, the economy has been jerked around like a yo-yo during that two-year period. Quarterly GNP variations have ranged from minus 10 percent, after imposition of credit controls, to plus 9 percent, after inflationary stimulation. On that kind of roller-coaster ride, individuals can't plan and follow through successfully. Neither can business nor the government.
We have to remember that much of the president's economic program does not even go into effect until October. The multitude of private-sector decisions affecting the whole cycle of capital spending, job creation and consumer confidence is only beginning now. Nowhere is there a magic economic wand in hiding for working short-term miracles. But there is a better remedy -- the present economic policy, backed by a resolute will to follow it consistently as a permanent course by the administration. Certainty is the key consideration. We are going through some classic withdrawal symptoms now, but difficult adjustments are made easier if there is certainty of policy.
When the president's program goes fully into effect, growth in federal spending will be cut to about one-third of the rate of the last three years, and personal and business income taxes will drop significantly as a share of the GNP. Meanwhile, the Federal Reserve will be gradually reducing the expansion of money and credit.
Some of the results will begin to be recognized soon. First, this administration inherited 13 percent inflation; but during 1982 as a whole, inflation should not exceed the 8 to 9 percent range. If this prediction is accurate, it will mean a 30 percent drop in inflation -- and this drop is just beginning to be understood by the public. (Imagine the publicity if the inflation rate had increased by a quarter.) As this trend continues, it will have important implications for wage increases, which have been outracing productivity gains.
Second, productivity itself will improve, which should further help competitiveness.
Third, after years of shifting policy and increasing inflation, the withdrawal symptoms, while tough, are not going to be serious enough to push the economy into a prolonged downturn.
As a matter of fact, high interest rates are the last remaining obstacle to economic recovery. If the president's latest budget cuts, announced in his address last Thursday, are enacted by Congress, the deficit will come down and interest rates will decline. The credit-sensitive areas will be hurting until interest rates do decrease; but decrease they will when the financial markets understand the fact that the Reagan administration will win its battle to hold down government spending and over-expansionary money growth.
Fiscal and monetary policy must be managed together in a consistent manner. We intend to do just that. The financial markets are currently underestimating our resolve; they will correct this judgment as we act. The instant euphoria after the passage of the tax and budget bills should have been and is being tempered with the realization that there was much left to do. The instant skepticism before the program has been tried should be tempered with the understanding of how much has been done.
Businessmen, the job-creators, definitely believe the president's policy will work. The effects of their confidence will be apparent next year.
This is not time to weaken, as past administrations, did t the first sign of trouble. We need resolve and consistency of policy, not the instant gratification that leads to future trouble. This area of resolve is perhaps where the administration is most underrated by the financial markets. It can't be measured; it is there or it isn't. It is there -- this president has a cast-iron backbone.
We have the resolve and, if we keep it as a nation, we will look back on the present as a period of base-building for growth in the next three years.