WHAT THIS COUNTRY needs, according to the secretary of the Treasury, is a little more money. It's fine for the Federal Reserve Board to keep a firm hold on the money supply, Secretary Donald Regan says--but in his view it would be better not to keep squeezing quite so tightly. You are not to leap to the conclusion that he has any fundamental change of policy in mind, Mr. Regan cautions; he's only talking about a matter of degree. "The end result," he says, "would be a sufficiency of money to enable the economy to recover nicely from its current flat period."
With those words, the administration begins to acknowledge that its defective supply-side strategy shows no signs of working, and the political risks are rising. Mr. Regan gives the appearance of a man who has caught a faint whiff of smoke and is beginning to wonder, for future reference, where the fire escape might be.
It has been clear from the beginning last winter that the administration's economic plan was an inconsistent attempt to pull in two directions simultaneously. Very tight restraint on the money supply was to bring down inflation, while a huge tax cut was to stimulate economic growth, create jobs and raise incomes. Public policy can make either of these things happen, but not both of them together. So far the anti-inflationary part is working quite effectively. The inflation rate is sharply lower than a year ago. But it is not working through any special new magic. It is working through the familiar and costly mechanisms of orthodox economics--growth at zero, or perhaps in a slight recession, and unemployment rising.
Among other ironies, this administration has been telling the world ever since January that the only real question in its strategy was whether the Federal Reserve would actually have the nerve and stamina to stick with drastic restraint. Now there's a congressional election year ahead, and you will notice that it's not the Federal Reserve that's backing off. To make its case for easing up on the money supply, the administration points out that one measure of money, known as M1-B, is running below its target range. But all the measures of money are being distorted by the rapid changes in the ways people hold and use their money. They are currently taking it out of conventional checking and savings accounts, which are counted in M1-B, and flinging it into the money market funds, which are not. The money market funds are reflected in something called M2, which, not to anyone's surprise, is growing faster than its target range. It's a fair conclusion that the Federal Reserve is approximately on target.
For the administration, the choices are just as they have always been. The country can continue to hold tight on the money supply, work the inflation down and pay a cost in business failures and lost jobs. Or it can ease up on the money supply, throw the economy into recovery and growth and begin another wave of inflation.
Unfortunately, the right course is to stick with monetary restraint at least into early 1982. A very large tax cut is just now taking effect, and its impact is not entirely predictable. There are real risks in either choice, but the greater ones are still in the possibility of renewed inflation. From the beginning, the question has been the administration's reaction when time eventually demonstrated the internal contradiction in its strategy and the real costs that either half of it threatens to impose. That time has now apparently arrived.