WOULD YOU SAY that the size and growth of the federal deficit matter a) tremendously, b) only moderately, or c) not much at all? That's the poll of the week -- and probably will be, week after week, all winter. Mr. Reagan started off bravely at point a), but, as he writes his second budget, he seems to have migrated toward c). He is following in the tracks of his predecessor, Jimmy Carter.
It's being left to Paul Volcker, the chairman of the Federal Reserve Board, to remind Washington from time to time that deficits matter very much. It isn't doing much for Mr. Volcker's popularity, particularly at the White House. But, unfortunately, he's right.
People who lend money look at those deficits and see only inflation ahead. That's why interest rates stay unnaturally high in the midst of a deep recession. People who write loans and buy bonds are worrying about what comes next.
One proposal you frequently hear is that the Federal Reserve should act more vigorously and push the rates down by main force, stuffing money into the banking system. That exhortation, oddly, turns up both on the Republican right and the Democratic left. It's popular among the tattered remnant of supply-siders, as well as among those economists and congressmen who believe that all rates -- including growth rates and unemployment rates -- are set by the exercise of political willpower.
Mr. Volcker increased his unpopularity last week by carrying his unwelcome message to the Joint Economic Committee. Attempts by the Federal Reserve to force rates down might have an effect, for awhile, on short-term interest. But the fear of inflation would soon be reflected in the long-term rates, he said, and those are the rates crucial for sustained expansion.
That's why the White House is profoundly ill-advised to push that idea of moving the July tax cut up to January. The increase in the deficit would be small, but it's symbolic. As the White House tacticians see it, proposing the earlier tax cut would be totally free of risk, since it would please the low-tax lobby and the supply-siders while running absolutely no chance of being enacted. But for Mr. Volcker and the Federal Reserve, it's just the opposite. This kind of talk increases suspicions in the money markets that the president is abandoning any sense of restraint on the deficits. It raises the risks of lending, with absolutely no benefit to the economy.
It's now a choice between lower taxes and lower interest rates. The country isn't going to get both. Mr. Volcker is saying -- and, again, he's right -- that, in the present circumstances, lower interest rates are far more important.