With the predictable failure of the "supply-side miracle" to materialize following the passage of the Reagan tax and spending cuts, the administration has focused its vision resolutely on the distant future. Its spokesmen ready huge new budget cuts for fiscal 1983, which doesn't begin for nine more months. For 1984, the president will permit no tax increases, though perhaps a little "revenue enhancement." And the recovery promised by the Reagan "Economic Recovery Program" recedes every day like a desert mirge.
Meanwhile no one seems concerned about our immediate problems: today's recession and 8.9 percent Unemployment. Almost everyone seems to have taken on faith the word of the consensus forecasters that by mid-1982 natural forces-- lower interest rates, pent-up demand for autos and housing, lower inventories--will combine inexorably with the July 1982 tax cuts and with the arms buildup to end the recession and generate economic recovery. Unfortunately, these are the self-same soothsayers who a year ago were predicting that natural forces would forestall a deep recession in the second half of 1981.
Before concluding that we shall be out of the woods by July, we should take note of what administration economic policy is currently up to. Perversely, in the face of recession macroeconomic policy--taxes, spending and money--is being tightened by fine-tuning the wrong way:
Taxes. Social Security payroll taxes rose again on Jan. 1. This was on top of a rise in the Social Security tax rate on Jan. 1, 1981, that more than offset the Oct. 1, 1981, reduction in personal income tax rates for most low-and moderate-income taxpayers. Further, while we wait for the 10 percent tax cut scheduled for July 1, 1982, inflation continues to push workers into higher withholding brackets and so erode real disposable incomes. At the same time, state and local taxes are going up everywhere as these governments struggle to cope with cuts in federal aid that strike at the heart of their ability to deliver vital services.
Spending. Last year vast social spending cuts were proposed and adopted on the economic assumption that the economy would shortly boom. Instead of a boom, we now have a brutal recession. Yet, drastic new spending cuts are now proposed.
Money. Monetary policy in 1981 was plenty tight. The growth rate of M1B, the most commonly used monetary aggregate (cash plus checking accounts) has been held tightly to the bottom of its target. Yet the administration is sticking to its February 1981 instruction that the Federal Reserve cut the targets for 1982 even further, and the Federal Reserve seems predisposed to comply The result could be a floor rate of growth for new money in 1982 of only 2.5 percent. This is consistent with no economic recovery in 1982 or, if a recovery occurs, with a rapid raturn to excruciatingly high interest rates.
Thus the administration's fiscal and monetary policies are combining in the short run to work against any natural forces for recovery. Before next July, when fiscal policy will become more stimulative, a bad situation could become intractable. There is simply no guarantee that this recession won't end up in long-term stagnation, or even in a depression.
What is the solution? Clearly, we don't need a return to fiscal folly or monetary madness, like Richard Nixon's go-for-broke reelection boom of 1971-72. But we equally clearly don't need to compound our recession into depression by restrictive policies as in 1929-33 or 1937. To avoid repeating these fiascos, we should promptly and moderately change course:
Taxes. We should advance the effective date of the July 1, 1982, personal tax reduction to Jan. 1, 1982, and so get the demand stimulus that we need when we need it: right now. At the same time, we should foster a more rapid return to budget balance later by deferring indefinitely the tax cut scheduled for July 1, 1983. Under present law, this cut will occur, by the administration's own forecasts, at exactly the moment when recession will have been replaced by growth and further stimulus could be most dangerously inflationary.
Spending. We should hold the line on spending at the real levels of fiscal 1982 just enacted by Congress. Further cuts at this time would mean a deeper recession, aggravated unemployment and personal suffering and social strife. Maintaining spending, furthermore, by promoting economic growth, would ultimately shrink the deficit. Revenues would increase, and unemployment- related expenditures decline. A few weeks ago the administration manipulated upward its forecasts of economic growth so as to bring its forecasted deficits down from politically catastrophic levels. If reducing deficits by increasing growth is worth doing on paper, why not do it for real? Money.The Federal Reserve should be told by the president not to tighten money any further this year. A hold-the-line order on the 1982 monetary target ranges, coupled with an injunction to hit the upper half instead of the bottom of the target ranges, could help guarantee liveable levels of interest rates and so permit economic recovery to begin.
But if we now change fiscal and monetary policy from restrictive to neutral, what about inflation? Clearly, if we rejrect the notion of beating inflation through recession as a costly and ineffective chimera, then we must come up with a better solution. There is one: growth plus a social contract between labor and government, based on negotiation and compromise rather than confrontation and struggle, in which labor trades wage moderation for social and political gains. Other countries, like little Austria, have proved that a social contrct can achieve close to full employment with close to no inflation.