The Reagan administration will soon publish a highly optimistic economic forecast predicting recession for the middle of this year but rapid recovery and a declining rate of inflation in 1982.
In the forecast, inflation falls to a 6 1/2 percent rate next year from its current double-digit pace, on down to about a 4 1/2 percent rate in 1983 and perhaps as low as 3 percent in 1984, administration sources said.
The forecast puts in concrete terms for the first time the most important, and critics say, least certain element in President Reagan's forthcoming economic program of large cuts in both federal taxes and spending. That is the assumption by Reagan economists that their government-shrinking policies will almost of themselves produce a near-180-degree turnabout in the economic expectations and behavior of consumers and businessmen. Beyond that, the predicted economic expansion and falling inflation rates are keys to balancing the budget in fiscal 1983.
But the crucial Reagan forecast has already been described by one critic as "completely implausible," and will set off a major debate among economists and on Capitol Hill over whether the administration's new policies, to be unveiled Feb. 18, can produce such dramatic results.
While the final numbers are still being debated by administration economists, this rosy forecast will include a 7 percent increase in real gross national product next year -- that is, after adjustment for inflation. That would be double the growth predicted last month by the Carter administration in its last forecast.
The fast growth would continue in 1983, with real output going up another 4 1/2 percent or 5 percent. No details were available about how high the administration expects unemployment to rise during the expected mild mid-year recession of how fast it would come down in 1982 or 1983. Last month the rate was 7.4 percent, unchanged from December, and Labor Department said yesterday.
The enormous reduction in inflation included in the Reagan forecast is sharply at odds with virtually all predictions made by other economists recently. The Carter administration, for instance, foresaw a 9.6 percent increase in consumer prices in 1982, down from a 12.6 percent rate this year, and an 8.2 percent rate in 1983.
Even some strong backers of Reagan's tax and spending cut approach, such as Michael Evans, a Washington economic consultant, believe it could take several years to get inflation below 8 percent.
A forecast of such rapid growth in real output hand-in-hand with plummeting inflation rates "can only reduce the credibility of what they are doing," said Rudy Penner of the American Enterprise Institute, former chief economist for the Office of Management and Budget in the Ford administration. "It is sad," he said.
But Alan Greenspan, former chairman of the Council of Economic Advisers, disagreed. Greenspan, who has helped shape the Reagan policy package as an outside adviser, said, "Remember what the nature of these numbers is. It is what you would expect to occur if all the president's program is initiated as recommended.
"There is a tendency when one looks at the numbers to say they are out of the ballpark," he acknowledged. "They are not."
The driving force behind the forecast is the rapid drop in inflation which is supposed to flow directly from a reduction in the public's expectations about future inflation rates, according to one administration economist familiar with its details. Those inflationary expections, in turn, are expected to fall as a result of the large cuts in federal spending -- perhaps as much as $50 billion in fiscal 1982 -- and evidence of a continued slowing of the growth of the money supply, another integral part of the Reagan proposals which it would be up to the Federal Reserve to deliver.
While Greenspan has been part of the planning process, the forecast apparently is primarily the work of Lawrence Kudlow, the new chief economist at OBM who formerly was with Bear, Stearns & Co., New York investment bankers, and John Rutledge of the Claremont Economics Institute of Claremont, Calif.
The two men are not relying on the usual set of mathematical equations most forecasters use to describe how various forces in the economy relate to one another -- a so-called econometric model -- for their forecast. Instead, they have described a "scenario" with the centerpiece the assumed change in expectations.
The Reagan forecast likely will be hard for Congress to swallow since it represents such a departure from the more conventional economic analysis on which the House and Senate Budget committees have based their budget resolutions in the past. Yet its optimism may be very attractive to members who will be faced with voting for large personal and business tax cuts in the face of what, with a conventional forecast, would still be substantial budget deficits in 1983 and probably beyond.
Instead, the combination of rapid growth and falling inflation automatically reduces estimates of federal spending. Since many benefit programs are directly tied to inflation, lower inflation means lower outlays. Similarly, faster growth mean less unemployment, and therefore less spending for unemployment benefits, food stamps, welfare payments and other programs that are sensitive to the level of joblessness.
Using figures calculated by OMB for the sensitivity of budget outlays to changes in real growth and in inflation, the new Reagan forecast, compared to that of the Carter administration, leads to about a $10 billion reduction in spending in fiscal 1982 and a $45 billion reduction in fiscal 1983. To the extent growth is lower or inflation higher than forecast, spending would be higher.
On the other hand, the forecast of rapid growth and lower inflation means only a small reduction in estimates for revenues for the two fiscal years. Of course, the tax cuts being planned receipts by at least $40 billion in fiscal 1982 and much more than that the following year.