President Reagan's top economic advisers yesterday abandoned the traditional Republican stance that government deficits are the main cause of inflation, warning that it would be a "disaster" if any basic change were made in the president's economic policy.
William A. Niskanen, a member of the Council of Economic Advisers, stunned a conference sponsored by the American Enterprise Institute by arguing that "in general, concern about the federal deficit has been misplaced.
"There is no direct or indirect connection between deficits and inflation," he said.
This new administration pitch was received by the AEI's conservative establishment with only a slightly camouflaged sense of shock.
Herbert Stein, President Nixon's chief economic adviser and chairman of yesterday's session, retorted: "It seems to me that President Reagan is the only member of the administration who believes that deficits are inflationary."
Niskanen's remarks came as the administration is being buffeted by controversy over leaked budget estimates showing $100 billion-plus deficits annually for the next three years.
Calling for "a new perspective" on the budget, Niskanen suggested that instead of a goal of a balanced budget, the nation "should be prepared to accept a deficit of $60 billion-plus . . . for the current policy horizon" to prevent a contraction in "the net worth of the federal government."
He added that, in an inflationary environment, one of the side effects is that the value of the government's financial and physical assets increases.
Thus, he said, the nation would do better "to look at the net worth of the federal government," which has increased from $20 billion to $250 billion, despite deficits in 14 of the last 15 years.
Ironically, the new GOP stance defends and explains budget deficits in much the same way the Democrats did in years when they were in office and trying unsuccessfully to balance the budget.
Out of office, the GOP stressed the concept of "fiscal integrity," meaning an effort to align expenditures with receipts. Now, Democrats are using the same ploy, to Reagan's discomfiture.
Stein urged Council of Economic Advisers Chairman Murray Weidenbaum, who was present for the discussion, to come up "with some relevant [deficit] number that serves as an inhibition on the political process."
But Weidenbaum declined, inferentially supporting Niskanen's thesis by saying the real "underlying concern" is to slow the growth of government spending, leading to a gradual reduction in the size of deficits.
In a prepared statement, Weidenbaum said that more important than the absolute size of the deficit is the expectation that between now and 1984 the red ink will decline as a percentage of the gross national product.
Weidenbaum said that some loopholes or "tax expenditures" may be changed to bring in more revenue, but "at the present time, and for some considerable time in the future, the basic tax decisions appear to be behind us."
Jerry Jordan, the third member of the Council of Economic Advisers present at yesterday's unique public session, predicted that interest rates and inflation will continue their downward course.
Jordan also said that the raw budget deficits numbers that had been leaked to the press "are not in any way a forecast of what is going to happen."
The AEI's William J. Fellner, a former member of the White House economic council, told Weidenbaum and Niskanen that he was not too concerned about the fiscal 1982 deficit. "But I think that something like $160 billion for fiscal 1984 is worrisome . . . and something should be done about it."
Niskanen, however, said, "It is preferable to tolerate deficits of these magnitudes either to reinflating the economy or to raise taxes. Other things being equal, I would like to see lower deficits, too, but other things are not equal."
He said that in looking back at Reagan campaign documents, elimination of the deficit "was not billed as an important feature of the program."
Niskanen urged the assembled economists to think about federal budgets as if they were business or family budgets, with due attention to "the uses" to which the monies are put. He presented a series of charts showing relationships between deficits and inflation, deficits and money growth, and deficits and interest rates over the last 15 years, all of which challenged conventional wisdom.
For example, he said that the relationship between deficits and inflation is "about as empty as can be perceived" because inflation had varied widely with roughly the same deficits.
He rejected the widely held belief that budget deficits "crowd out" private borrowers from access to funds in financial markets by boosting interest rates.
This theory has an air of plausibility, he said, but "is just not supported by the evidence." He said his finding has been confirmed by a number of economists, and "it has surprised us and others."
What actually happens, he postulated, is that in a world where real international interest rates are similar, there may be a worldwide crowding out if total deficits get too big.
But there is not necessarily a relationship between the deficit in one country and crowding out in that country, he said.
Niskanen admitted that his message represented relatively new views for him, but said that they had been developed before coming to the Council of Economic Advisers this year, and were not a cover-up for the bulging deficits being anticipated by the Reagan administration.