Behind bland official forecasts of a gentle economic dip ahead, economists newly brought into the administration privately predict a deep recession by summer that will balloon the budget deficit and confront President Reagan with a decision-making crisis.
A deep recession would trigger new automatic spending and depress revenue so that the present $54.5 billion target deficit for the current fiscal year could go to $70 billion or even $75 billion; overall new federal financing needs would rise from about $75 billion to as high as $110 billion. Since existing federal credit needs already have sopped up nearly all savings, new and bigger deficits would be calamitous.
The predictable prescription by Democratic congressmen will be easier money by the Federal Reserve Board to Finance the huge deficit, while supposedly shrinking the deficit by giving Reagan less tax reduction than he wants. The only two real options facing the president: try to weather the storm on his present policy or, instead, expand his tax program.
The latter course is favored by both the Treasury and the Office of Management and Budget -- specifically, lowered top tax rates on "unearned" income (interest and dividends). But this was successfully blocked by Reagan's Political advisers from inclusion in the Feb. 18 economic package. If it is to make it on the second try, the cautious politicans around Reagan will have to be either convinced or rolled.
Nobody can accurately predict today's economy, but civil servants and private forecasters who see only that gentle dip ahead were wrong consistently in the 1970s. New economists brought into the Reagan administration, both supply-siders and monetarists who disagree on many questions, believe severe recession immediately ahead is just about inevitable. q
Inevitability stems from the tight-money policy followed by the Fed, the nation's central bank, after pumping money into the economy last spring -- another of the fluctuations so depressingly typical of recent Fed policy. That this would bring recession was confirmed, in the opinion of supply-siders, when Reagan succumbed to caution and delayed the effective date and reduced the scope of tax reductions.
Democrats in Congress show no interest whatever in the anti-recession device they would have reached for reflexively a few years ago: more countercyclical government spending to stimulate demand, as prescribed 50 years ago by John Maynard Keynes. Liberal Keynesianism truly has died, without eulogy or burial.
Instead, even before a recession, Democrats are pressing Fed Chairman Paul Volcker to speed up the printing press for new money to finance a widened budget difict, thereby risking escalation of inflation into hyperinflation. But the Reagan administration is firm against agreeing to this, and believes Volcker will not turn the money machine loose on his own.
While demanding looser money, congressional Democrats -- and a good many Republicans, too -- would try to cut back drastically on Reagan's tax reductions. That evokes memories of Herbert Hoover's fatal effort to fight depression through higher taxes. It would satisfy orthodox Republicans who long have dreamed of painful austerity to exercise the economy of its inflationary demons.
Reagan's alternative to suffering Hoover's fate would be political leadership to quickly induce savings to accommodate the massive new federal borrowing. Out of many radical solutions, only one seems in the realm of the possible: dropping the top marginal tax rate on "unearned" income from 70 percent to 50 percent, ending the 12-year-old distinction between it and "earned" income (wages and salaries).
No other step would generate so much new savings at so little cost. Since nobody rich enough to pay the 70 percent tax is dumb enough not to use tax shelters to avoid it, the new economists at Treasury and OMB believe the step would cost the government nothing in revenue.
But political opposition in the White House killed this once and could kill it again. What the Treasury is up against was reflected last week when James Baker, Reagan's powerful chief of staff, told newmen it would take nine months for the lowered rate on "unearned" income to affect the economy, during which time the rich would have an advantage over the not-so-rich.
On the contrary, no serious economist thinks the proposal's impact would be anything other than instant. More seriously, Baker's comments about unfair advantage for the rich sound echoes of Carter administration preoccupation with redistribution of income.
"I can sell it to the American people," Reagan first said of lowering the tax on "unearned" income before political advisers and orthodox economists talked him out of it. He may be faced with that selling job yet, if he wants to prevent a recession from smashing the shiny dreams of Jan. 20.