If proof were needed that the president's economic policy is a failure, despite the fact that he got everything he wanted on tax, spending, and interest rate policies, it came last weekend when Treasury Secretary Donald Regan said in an interview that if the Fed stays with its present policies too long, the nation could be in a deep recession.
"We are coming to a time where a change has to be made (in the Fed's restrictive policy)," he told John M. Berry and Caroline Atkinson of The Post. What Regan says he now fears is that excessively high interest rates will turn the presently sluggish economy into a prolonged recession.
This is a distinct change in the administration's tune. Its first set of economic projections has already been proved wrong. Two weeks ago, the president went back to Congress for a $16 billion fix in his fiscal policy, a confession that his original proposals wouldn't hold the budget deficit to the level forecast.
Back on Feb. 22, Regan explained on "Meet the Press:" "You see, up to this point, (the Fed has) had the only game in town. There has been no fiscal discipline on the part of the federal government. We intend to put that discipline into the federal budget. When we do that, that will make the job of the Fed much easier. That will get inflation down, and along with inflation, interest rates."
But the Reagan administration not only has not inspired fiscal discipline, but by proposing an excessively generous tax cut, and then accepting congressional amendments (like the All-Savers certificate) that made it even worse, assured that federal deficits will widen.
Secretary Regan (who should have known better), OMB Director David Stockman (who knew little about financial markets), and others allowed themselves to be deluded by fast-talking ideologues into believing that Wall Street and the business community would ignore reality and instead reach for the pot of gold at the end of a promised rainbow.
The persistence of high interest rates--and the potential that now exists for bankruptcies among savings institutions and corporations--has succeeded inflation as the No. 1 worry among Reagan's top tier of economists. Some second-tier ideologues in the White House and Treasury, nonetheless, would still be happy if the Fed undershoots its money growth targets, even if a bad recession is the result.
In essence, the inconsistency of unrelieved and Draconian monetarism, with the Reagan-congressional fiscal stimulus, has finally percolated to the top of the administration, which is attempting to put some distance between itself and the Fed. Perhaps Volcker feels he's been double-crossed. But you can't give away $732 billion in tax revenue and at the same time choke off growth of the money supply and expect interest rates to do anything but what they've been doing.
But what now? Is the horse out of the barn? As economist Henry Kaufman-- the seer of Wall Street--told this reporter in an interview, "it is difficult to re-gear after pursuing the wrong strategy." In Kaufman's view, President Reagan made the tragic mistake of giving up flexibility on both the fiscal and monetary side--fiscal by locking himself into a three-year tax-cut, followed by tax indexation, and monetary, by chaining himself to rigid theory that makes any adjustment of policy look like a capitulation or reversal.
There appear to be few ways in which--given political realities--the mess created by Reaganomics can easily be fixed. It would be nice if the excessive $1.5 trillion for defense were to be cut back. It would be nice if some of the worst of the older "tax expenditure" loopholes could be plugged.
It would be nice to strip the tax law of some of its most egregious new handouts. But the president is not so quickly going to admit his "supply- side" mistakes.
Yet down the road, some undoing of the crazy, unfair tax-cut act is necessary, not excluding the tax indexation that comes into effect in 1985. Equally urgent, the fanatic attraction of monetarism has to be diluted: financial markets would not panic if they knew the inflationary impact of the tax bill were to be reduced.