When President Reagan took office last January, he and his advisers warned that the nation faced an economic "Dunkirk," the worst crisis since the Depression.
Six months later, the cries of Dunkirk have faded away and the economy has taken a turn for the better, but the administration's economists cannot claim credit for the improvement.
The policies being pursued six months into the new administration are, in fact, a far cry from candidate Reagan's economic prescriptions last year. they have even been significantly altered since Inauguration Day.
"The president may not have realized how far he has moved," observed Herbert Stein, chief of the Nixon administration's Council of Economic Advisers, "but he has moved."
The fledgling administration said as it prepared to take office that only the economic policies it was proposing -- a tight money supply and simultaneous cuts in taxes, non-defense spending and federal regulation -- could save the national economy. With these policies in place, the new team predicted, the country would escape the economic dilemmas of the recent past and would enjoy robust economic growth and rapidly declining inflation.
But while the president is still convincing Congress to put the final pieces of his program into place, the early specter of the Great Depression has disappeared. Though still troubled, the economy has performed better than expected, and inflation has fallen significantly.
So although the administration's economic program has won extraordinary political acceptance in Washington, it can't yet be credited with any substantial impact on the national economy. So far the new administration has been both conventional and lucky, and Reagan's "supply-side" economic policies remain untested.
Reagan inherited from the Carter administration and the Federal Reserve Board a fairly conventional set of anti-inflationary policies based on tight money and restrictive budgetary policies. These have ben further tightened during 1981.
The result, as in the past, has been a brake on economic activity and moderated inflationary pressures. This time the squeeze has been assisted significantly by wholly unexpected good luck on oil and food prices.
The grandest hopes for the Reagan program cannot be realized any time soon. In the shorter term, sluggish growth, high interest rates and high unemployment will continue, according to the leading economic forecasters. These experts (who, it must be said, have not been all that clairvoyant recently) are skeptical that Reagan's promises will ever be fulfilled, as are many financiers on Wall Street.
Many economists and Wall Street money men are worried that the full Reagan program will create new economic difficulties. The administration has at least $37 billion worth of budget cuts well in hand for fiscal 1982 and probably another $10 billion on tap. But further cuts for 1983 and 1984 remain problematical, while a tax cut is certain to take effect by next January or sooner. Skeptical economists and financiers fear the combination of the tax cuts and the cost of the enormous Reagan defense buildup could overwhelm the non-defense budget cuts.
The Reagan administration, in its revised econimic predictions to be issued Wednesday, will stick to its overall optimism about the next four years. The new forecast will acknowledge a bigger-than-anticipated deficit for this year, however, because of high interest rates.
A consensus seems to be emerging among both liberal and conservative economists outside the administration that instead of a balanced budget in 1984, as the White House now predicts, a deficit of $50 to $80 billion could easily occur in that election year. Only an extraordinary combination of favorable developments or much deeper budget cuts could head off that result, according to a number of economists interviewed for this report.
A deficit that big would virtually guarantee continued high interest rates and competition between the government and private sectors for capital that would preclude the kind of economic boom Reagan wants.
The economy has already resisted the quick change the administration had hoped for last winter, a change in the "expectations" of businessmen and financiers that would by itself moderate inflationary pressures, bring down interest rates and stimulate new investment. Those new expectations were supposed to follow the first unveiling of the Reagan economic program, but they never materialized.
Moreover, the unexpected jump in interest rates in May, pushing the prime rate back above 20 percent, has ensured a continued depression in the housing industry and helped hold down already-low auto sales. These and other industries vulnerable to high interest rates, especially the savings and loan industry, now face many more nervous months instead of the better times they had hoped for from a Reagan administration.
The new administration has been able to make such a strong public impression with its economic approach that "Reaganomics" is already a familiar term. But while the term remains, the program it describes has changed.
During the primaries of 1980 the Reagan economic program consisted of one specific recommendation -- a tax cut of 10 percent a year for each of three years, to go into effect immediately -- and a lot of generalizations. Reagan spoke out for a balanced budget, but the only budget cuts he discussed publicly were to eliminate "fraud and abuse."
In September Reagan made his only major, detailed speech on economic policy, spelling out a program of budget reductions based on the elimination of waste and streamlining the federal government. He stuck by the Kemp-Roth tax cut, but seemed to indicate a desire to balance his objectives more carefully than earlier rhetoric had suggested.
Only after Election Day did the ideal of sweeping cuts of existing federal programs come out in the open, and then only in the form of the "Dunkirk" memorandum by David A. Stockman, director of the Office of Management and Budget, warning of a crisis to come if stern action were not taken at once. Reagan adopted Stockman's message for his own early statements on economic policy, moving swiftly behind the idea of cuts that went far beyond waste and fraud.
Since Inauguration Day the talk of a supply-side bonanza to the economy, which would result from the Kemp-Roth tax cut, has simply disappeared, and the administration's tax plan has been radically altered. Now the White House seems willing to accept cuts that won't take effect until next year and will have a relatively gentle impact on the economy, largely because most taxpayers, even with the cuts, will just about stay even with inflation.
Altered though its program may have been, the administration has made amazing progress in persuading Congress to adopt its basic policy prescriptions. In addition to the spending and tax cuts, the administration has pressed ahead with efforts to cut back federal regulations affecting business in order to reduce business costs and ultimately inflation.
The fourth element of Reaganomics is slower money growth, which the Federal Reserve has thus far delivered.
Stingy money growth has sent interest rates soaring, delivering a body blow to home buyers and builders, the auto industry and many other businesses. The number of bankruptcies among small business has soared. At the same time, however, higher rates have helped against inflation by strengthening the dollar on foreign exchange markets, thus making imports less expensive by depressing a wide range of sensitive commodity prices and by all but halting the formerly steep rise in home prices.
But unless long-term interest rates come down, the economy will not begin expanding again at healthy rates, most economists believe. For instance, Alan Greenspan, who was President Gerald Ford's chief economic adviser, says an economic recovery likely will begin in the fourth quarter of the year but only if long-term rates drop. Greenspan puts the odds only at 60-40 that long-term rates will fall significantly that soon.
Greenspan has nothing but praise for what Reagan, Stockman and other officials have accomplished so far in cutting non-defense spending. The administration "has done a job that any of us with experience in Washington would have said had only one chance in 100 of succeeding."
"But you have to evaluate it in the context of what they need to do," Greenspan cautions. "Have they resolved it? No. Have they made progress? Unquestionably. Have they more to go? Yes, sir."
It's that "more to go" that seems to preoccupy New York's financial markets. "On Wall Street," said one trader, "we're all from Missouri now. We've been burned too often to take anything for granted."
This financier invests millions of dollars every week for regional banks. He observed that "if the economy can operate in halfway decent fashion with 20 percent interest rates, why should they come down to 10 percent?" He's assuming they won't.
Washington consultant Charls E. Walker, who is close to big business and Wall Street, noted that investors just aren't interested in long-term bonds (for which the market has all but totally collapsed) when they can earn up to 20 percent on short-term investments.
Albert Wojnilower, chief economist of the First Boston Corp., said in an interview that the total Reagan economic program "will make it harder to control inflation," and he predicted that long-term interest rates will be higher at the end of the year than they are now. But he also said that was a good thing for the anti-inflation aspect of the program. Inflation would be gravely aggravated if interest rates fell quickly, Wojnilower said.
Just because interest rates have not come down, of course, does not mean that there has not been a significant improvement in the near-term inflation picture. Charles L. Schultze, who was chairman of President Carter's Council of Economic Advisers, noted that the last Carter forecast predicted consumer prices would rise 12.6 percent during 1981. "Now it looks like 10 percent," he said.
Schultze, now a senior fellow at the Brookings Institution and a professor at the University of Maryland, readily acknowledged that Reagan has managed to cut the budget far more than anyone would have forecast. Like Greenspan, however, he pointed out how many of the administration's cuts remain to be made to reach their goal.
Schultze said the administration was taking too big a risk by committing itself to a three-year tax cut without knowing how the economy may develop. The administration should have left some room for contingencies, he said. If the remaining budget cuts are not made, or economic growth is less than Reagan predicts, or interest rates stay high, then the budget deficit in 1984 could be "$60 billion to $70 billion or more," Schultze said.
A deficit of that magnitude likely would ensure continued high interest rates and slow economic growth. The problem is simply one of competition for available funds. With the Federal Reserve and the administration seeking ever-slower money growth, there would not be enough money to finance both a large deficit and a swiftly expanding economy.
That rates have been so high this year "is surprising people, and it should not have," Schultze said. It is the result of an economy trying to grow at an 11 percent or 12 percent annual rate, in current dollar terms, while the Fed is holding growth of the money supply to about half that rate.
Federal Reserve officials have been as surprised as anyone else at what a mild restraining influence sky-high rates have been. This year they are determined not to repeat last summer's experience when the money supply and the economy took off together in August. As a result of its tight grip on money growth, the Fed expects only a modest recovery in 1982.
According to one Fed official, the idea that large budget deficits, rapid economic growth and steadily falling interest rates can coexist -- and this is the essence of Reaganomics -- is "just crazy." Real interest rates, or the difference between today's rates and the underlying rate of inflation, are at the highest level in American history. They will stay that way "until the private economy is suppressed," this official says.
That sounds more like a piece of Magaret Thatcher's Britain than the happy outcome Reaganomics was supposed to produce.