AS THE REAGAN administration begins to design its economic policy, it knows what President Carter learned only gradually and at great cost. The conventional methods of creating jobs, through tax cuts, still work. But, as the Carter administration discovered, they now have intolerable side effects that, so far, no government has been able to control.
When Mr. Carter took office nearly four years ago, he shared the prevailing optimistic view of the economy. The country had suffered a series of shocks in the early 1970s -- an oil crisis, a world grain shortage, the depreciation of the dollar -- but the economy was recovering. Most people, in early 1977, believed that those shocks had been unique events.The job for government policy, it seemed, was only to help the economy absorb them and get back onto the path of high growth.
Mr. Reagan and his economists know how that turned out. They know that those supposedly unique shocks of the early 1970s were all repeated in the Carter years. There were dollar crises in 1978 and 1979. There was another oil crisis in 1979. Bad harvests this year are creating another world grain shortage, and food prices are moving up again. Each of these misfortunes is inflationary, and the inflation has been cumulative. Far from being unique, the shocks of the 1970s now appear to have fallen into a cyclical pattern that promises to keep repeating itself until the cycle is somehow broken.
Mr. Reagan's economic policy will be largely set by the coming tax cut -- whether it's enacted by the next Congress or, as now seems possibly, by the lame duck session that begins next week. A large cut in tax rates will certainly accelerate economic growth -- and, as in the case of the Carter tax cut, it will also accelerate the inflation.If oil consumption should begin to rise rapidly again, as it did under the pressure of the Carter stimulus policy, there will probably be another oil crisis and still higher oil prices. Thoughout the fall, interest rates have been moving steadily upward in anticipation of rising inflation in the months ahead. The prime rate -- the big bank's basic rate for big borrowers -- went up a full percentage point yesterday.
Theoretically at least, a strongly interventionist public policy could mitigate the dilemma here. A successful imcomes policy, persuading working people to restrain their wage gains, would permit faster economic growth at less cost in inflation. Government regulation to push industry and the ultilities away from oil would permit faster growth without driving up oil imports. But, if we read the election returns correctly, further experimentation with incomes policies and fuel regulations were not among the winners.
To control inflation, Mr. Reagan puts his faith in reduced government spending and a balanced budget. But currently the inflation, and interest costs, are pushing the budget up faster than he is likely to be able to cut it. The deficit in the year ending last September was, including the off-budget spending $73 billion. Next year's deficit is probably going to be in the same range.
Mr. Carter was nearly halfway through his term before he fully perceived the dangers of rising inflation and the self-perpetuating cycles of shocks and crises. By that time, it was too late. Mr. Reagan and his economic strategists begin with the advantage, at least, of knowing what happened to Mr. Carter.