INFLATION is fed by political uncertainty. The first great surge of price increases in the past decade culminated at the point at which Richard Nixon was being forced out of office. The second surge began to gather momentum several years ago as it dawned on people that the Carter administration was having trouble making up its mind. The present transition period again encourages a sense that inflation can only rise. That view of the future is currently helping to push interest rates to unprecedented levels.
Mr. Reagan, on taking office next month, will not have a great deal of time for debate and study of economic policy. That is the first point of the memorandum given to him by David Stockman, the Michigan congressman who is to become his budget director. It is impossible to foresee the state of the economy in late January. The likeliest prospect seems to be a decidedly gloomy one of rates fluctuating but remaining in a very high range, while the economic growth rate falls to zero and inflation, pushed by food prices, begins to accelerate again. Welcome, President Reagan.
The first step? That's easy -- a bill to cut taxes. A great deal depends on exactly whose taxes are to be cut, and how much. But in principle, a tax cut is right. Mr. Stockman argues that it is essential to induce economic growth, without which the social programs in the budget will spin upward higher than ever. The budget cuts are the hard part. As he notes, Mr. Reagan will have to fight this battle on two fronts. Some Democrats will doubtless defend established programs. But, more dangerous to Mr. Reagan, he will also have to deal with those of his own enthusiastic supporters who believe that a whopping big tax cut will do it all -- create tremendous growth, bring in enormous new revenues and balance the budget. If the new administration succumbs to that kind of wishful thinking, prices and interest rates will promptly start upward again in what would be known, as Mr. Stockman aptly warns, as the Reagan inflation.
Over the past decade, mainly because of higher oil prices, this country has suffered a certain loss of real wealth. Because its economy has not grown as fast as people expected in the 1960s, the social commitments of those years have outrun the anticipated funding. The shortfalls are not large in relation to the size and productivity of the whole American economy. But because Americans have never decided how to absorb those losses, or at whose expense, the kited checks keep circling through the country, cumulatively creating higher inflation. The inflation will continue until the hard decisions are made. Everything else is rhetoric. What counts is the next administration's ability to keep its budget reductions in at least rough balance with the reductions in taxes.