THE SUCCESSION of heavy concussions and groans that you may have heard yesterday was the stock market falling down several more stairs. As investors contemplated President Reagan's budget, their reaction was the opposite of the one on which the administration had been counting. That's hardly the last word on this budget, but it's an important warning.
The implication of the very large budget deficits ahead is that interest rates will continue indefinitely at very high levels. That implication is not yet inescapable, but it is getting steadily harder to see any alternative. The administration plaintively argues that after the 1973-75 recession the country ran a deficit that, in proportion to the size of the economy, was even larger than the one that Mr. Reagan now proposes for 1983. And yet in those days, the argument continues, interest rates were not unusually high.
How true. During most of the mid-1970s, interest rates were actually lower than inflation. People could make money simply by borrowing--and people lost money by saving. That had a lot to do with the revival of high inflation in 1978, and the Federal Reserve Board's decision in 1979 to swing to a much more rigorous policy. It is truly strange, not to say disquieting, that the Reagan administration should now cite that period to support its present plans. One effect of the mismanagement and misfortunes of those years was, after all, the election of Mr. Reagan.
The rising deficit means that the government has to borrow in competition with private business from a pool of capital--savings of various sorts--that has not been growing much in recent years. It's that competition that pushes the interest rates up. The administration's supply-side theory held that people would save much more money, enough to accommodate both the government and private borrowers without strain. So far, there is no sign of it. Nor does it seem likely. Historically, savings have risen rapidly only--as you would expect--in those times when people's incomes were rising rapidly. That's hardly the case this year.
The administration intended its tax cuts last summer to ignite a great boom in business investment. But for many kinds of business, the effects of high interest rates have more than offset the new tax benefits. It's beginning to look as though the result of the tax cuts, and the deficits, will be the reverse of a boom. The stock market is faithfully reflecting that anxiety.