Mr. Regan's Fearless Forecast
DOING A BIT of cheerleading, the secretary of the Treasury bravely predicted the other day that the prime interest rate will fall by the year's end. As monetary analysis, Mr. Regan's logic is not compelling. But his view of the future draws attention to the gamble that the administration is now taking with its economic strategy.
The White House has evidently concluded that the recovery is running sufficiently strongly to see President Reagan through the 1984 election. The administration strategy seems to assume that it can get along with nothing more than the most routine legislation-- which is to say, no tax increases. The revival of economic growth--according to the strategy--will bring unemployment and the deficit down a little. As everybody keeps saying, its the direction that counts.
There's an instructive contrast between the atmosphere just a year ago and today. Early in the spring of last year there were forecasts that the recession was ending. The White House consequently felt no great incentive to work with Congress to pass a tax bill. But as the weeks passed those cheery forecasts faded, and by June Washington was getting a barrage of urgent warnings from the business world that, without a change in policy to pull down interest costs, very serious trouble lay ahead. That was the point at which the Federal Reserve began shoveling reserves rapidly into the banking system, and the president swung into active and vigorous support of the tax bill moving through Congress. Those two things--the Federal Reserve's relaxation and the passage of the tax bill--brought interest rates down sharply over the summer.
Early this year the signs of genuine recovery began to appear, and now the administration has reverted to its earlier intransigence. If the economy is growing again, why change course?
The answer is that, to finance the federal deficit, Mr. Regan's Treasury competes with the financing requirements of private business. The more Mr. Regan needs to borrow, the higher he involuntarily pushes interest rates. In anticipation of this collision, rates are already starting to move up a little. If this rise continues, it will distort and perhaps choke off the recovery that is generating them. The national economy has been operating for the past four years like a machine with an automatic speed control, each acceleration shortly producing a slowdown.
But the administration is gambling that nothing like that will happen--at least before November 1984. That's why it now looks as though there won't be much change in the present economic policies until 1985.