Surprise, surprise, the economy is in a recession! For weeks analysts outside the Reagan administration have been warning that nothing else could develop from the inherent conflicts in Reaganomics, which pits a highly restrictive policy of monetarism against an excessively stimulative fiscal policy.
But last weekend, for the first time, after receiving a memorandum from Economic Council Chairman Murray L. Weidenbaum outlining the pervasive decline in the economy (every industrial sector except defense showed a fall-off in September), President Reagan was willing to label the current situation a recession, albeit a slight one. Weidenbaum followed up with a public statement saying that "we have anticipated for some time that this situation could arise."
Back in March, Weidenbaum was beginning to admit that 1981 would be a disappointing year. But at the beginning, the Reagan program, as announced and defined, pretended there would be no recession. The economic assumptions published at the beginning of the year--relying on supply- side magic--called for an increase of 1.1 percent in real economic activity in the current calendar year, soaring to a 4.2 percent gain in 1982, followed by a 5 percent gain in 1983.
Such rose-colored expectations have not yet officially been discarded, but they can be junked. Yet Weidenbaum is still insisting that "the forces are already in motion to reverse current downward tendencies, even though several more months of poor economic statistics are a likely probability." Those "forces" are the first stage of the individual and business tax cuts, and a decline (from high peaks) in short- and long-term interest rates.
But don't make any bets that this prediction is any better than others the administration has made so far. The individual tax cut on Oct. 1 is of piddling dimension, and the business cuts --even though retroactive to Jan. 1, 1981--won't help the economy until next year. More significant, perhaps, is the new uncertainty over next year's tax cuts.
And as for interest rates, the administration originally far underestimated how high they would go--and hence the dampening of real economic growth as well as the drain on the budget to service the national debt. Now, there has been a modest reduction from the peaks, but nothing yet to reduce the crunch on business expansion, or to ease the real depression in housing and cars.
Treasury Secretary Donald T. Regan, in a moment of candor last Friday, admitted that in the case of the administration's efforts to prevent disaster in the savings and loan industry "we actually don't know what's going on."
One wonders whether that can't be said of the administration's approach to other problems in the nation's economy. For example, President Reagan did not oppose the "All Savers" Certificate proposed by the savings industry as a bail-out for their sickness--although he had plenty of warning that it was bad legislation of dubious value to the S&Ls, and a positive additional bonanza for upper-bracket earners.
Now the administration is discovering that the Treasury will take a terrible bath through the tax-free status of the All Savers. Moreover, according to some private analysts, so much money has been shoveled into the All Savers that the economy has suffered directly: economists report that money that might have gone into down payments for cars was tucked instead into All-Savers.
It would be hard to exaggerate the extent to which the crucial error of Reagan's approach to economic problems lies in the horrible 1981 tax legislation. Nobel economics laureate James Tobin put it exactly the right way the other day when he said that the "disgraceful" bill "really made a shambles of the American tax system."
Congress and the president together, yielding to almost everyartridge, greedy pressure, "gave up all pretense that this country (should) make any attempt to check the accumulation of dynastic wealth, or try to render things more equal in the next generation," Tobin said.
There is a certain immorality to the tax bill, as Tobin suggests. But let's put that question aside and deal for the moment only with the macro-economic effect: with a recession a certainty, the economic growth prospects that might have generated extra tax revenue are not in view. Therefore, it is time for reality to replace the supply- siders' mumbo-jumbo (call it voodoo economics, if you will), and aim policy toward a partial withdrawal of the tax cut. This in turn can encourage the Federal Reserve to ease up on its drastic monetary policy.