LESS THAN three months after the triumphant
enactment of President Reagan's gigantic money bills, his economic strategy seems to have lost its way. There's no longer a clear sense of the next step. The White House is anxiously negotiating with the congressional Republicans whom it commanded with great flair and confidence in the spring and summer. Republican senators are talking heretically about a tax increase. What's gone wrong?
From its beginning last winter, the Reagan program was based on excessively optimistic forecasts. The day of reckoning arrived in August, in a way that illustrates the differences of perspective between Washington's political world and New York's financial markets. To people in Washington, including the president's adversaries, the passage of the budget reconciliation and tax bills demonstrated the strength of a secure president, very much in control. But in New York, the financial houses' economists saw immediately that the tax cuts were very much larger than the budget cuts. To them, that meant future deficits beyond any president's control. Interest rates, already high, went higher. It was the interest rates that forced political Washington to acknowledge that the economy was not responding as the strategy had prescribed.
When Congress reconvened in September, the administration was preparing to make further budget cuts--but there was no agreement within the administration on those cuts. The arithmetic pointed toward extraordinary cuts in programs that most people of both parties in Congress had no intention of cutting deeply. At that point, the nature of the president's opposition began to change. It was no longer centered on the disheveled Democrats, who had lost the 1980 election and been beaten again in the crucial House votes on the summer's legislation. The serious opposition, polite but firm, began to come from senior Republicans in the Senate.
The original theory behind the Reagan policy held that tight money would bring down inflation, while a big tax cut would stimulate growth. Now, in the tenth month of the Reagan administration, the first part of that theory is working--but not the second. Tight money has meant high interest rates that are indeed bringing down the inflation rate, despite the jump last month in the erratic consumer price index. But it's happening in the most conventional, sad old way, with the high interest pushing the economy into a recession. There's no sign of any supply-side magic, to give the country lower inflation and higher economic growth simultaneously.
To regain the initiative, the administration will have to provide Congress and the country with a plausible map of the future into which it wants to lead them. That word--plausible-- means no economic mysticism this time, and no rope tricks. It means forecasts that are consistent with present experience, and it means a few more details about those unspecified budget cuts.
The president still has time. At a guess, he has three months--until January, when he must publish the next budget and deliver his beginning-of- the-year messages. January will be his chance to recast and re-establish his program on a realistic basis. But it will probably be his last chance