How can President Reagan regain control over economic policy and break the stalemate that is keeping the economy in a purgatory of recession, uncertain recovery and limited growth prospects? Surely not by stonewalling on defense boosts and tax cuts that guarantee gargantuan deficits and high interest rates. And just as surely, not by backing into grudging concessions or compromises on taxes and spending.
As Reagan enters the Ides of March, something has to give. In the face of a rebellious Congress, an adamant Federal Reserve, a disenchanted financial community and an increasingly skeptical public, he cannot simply follow the dictum, "don't do something, just stand there."
But why be driven, dragged, or pushed into an economic policy compromise? That's a sure-fire formula for getting the least out of the process. Why not get the most out of it by a take-charge bold stroke, an act of leadership that can galvanize the economy? Given the forces that are driving the economy into the ground, components of that presidential bold stroke almost suggest themselves.
First, convene a summit conference of the three "coordinate branches" of economic government, namely, the Congress, the White House and the Federal Reserve to negotiate a program that can revive the economy.
Second, announce that while he is sticking to his long-term goals for tax cuts and defense strengthening, he is (a) willing to adjust the tax cut and defense schedules to make possible a sharp cut in the 1983-86 budget deficits provided that (b) the Federal Reserve will pledge prompt action to ease its tight monetary grip and lower real interest rates. It is hard to imagine that congressional leaders would not quickly join in such a tripartite agreement for economic revitalization.
Deferring the July 1983 cuts and the indexing scheduled for 1985 would boost revenues by roughly $50 billion in 1985, $75 billion in 1986 and $100 billion in 1987. Added to other judicious budget cuts and tax adjustments, this would cut deficits to a size that would meet Federal Reserve Chairman Paul Volcker's sternest tests.
Third, with the basic impediments to recovery and sound growth out of the way, persuade Congress to speed the end of recession by moving the $35 billion July 1 income tax cut up to April 1. This would cost an added $7 billion in fiscal 1982 but would pay off nicely in faster expansion that would reduce future deficits.
An accord embracing these three basic steps would by itself change the economic atmosphere overnight:
The weak consumer markets and sky-high interest rates that have shackled business investment even in the face of the juicy tax incentives in the 1981 act would be replaced by expanding markets and shrinking interest rates.
The specters of bankruptcies and illiquidity that have haunted the thrift industry, small business, and the farming community in particular would vanish.
Pent-up demand for housing and autos, frustrated by three years of stagnation, recession, and high interest rates, would begin to express itself in the marketplace.
The new regimen of sharply curtailed deficits and interest rates would be just what the doctor ordered for Wall Street.
The favorable economic and revenue effects of the White House initiative would be a godsend to suffering state and local governments. Easing their financial pinch would also facilitate progress toward a more balanced federalism.
4 Internationally, the accord and its consequences would not only relieve the pressures of our interest rates on foreign economies but would strengthen their U.S. export markets.
But in getting the economy moving again, wouldn't the new accord get inflation moving again? Here, the prospects are reassuring. It is becoming ever clearer that the current dip in inflation is no ordinary cyclical lull that will be gone with the winds of recovery. Price and wage moderation in such industries as autos, construction, airlines, trucking, and petroleum products are symptoms not just of three years of economic softness and recession but of structural changes and problems that will outlive the next turn of the business cycle:
The trucking and airline industries are feeling not just the chill winds of recession but the cold blasts of competition generated by deregulation.
The recovery that boosts auto and steel sales will not overcome the inroads of foreign competition.
Barring Mideast eruptions, oil supplies will not tighten enough to offset the cutbacks in usage that have been triggered by zooming oil prices.
4 Public employee unions are being weakened by moves to cut the size of government and by demographic developments that, for example, shrink the demand for teachers.
These and similar developments suggest an end to the ominous upward ratcheting of the hard-core inflation rate from 1 percent in the early '60s to 3 percent in the early '70s to 7 percent in the early 80s. The prospect is that it will level off at 6 or 7 percent in the next several years.
These prospects--indeed, the possibility of a continued de-escalation in the basic inflation rate--would be greatly reinforced if the president called another summit conference, this one with leaders of business and labor, especially of the flagship unions and business organizations. The point would be, as part of his thrust for voluntarism in the private economy, to ask for their cooperation in restraining wage and price increases as the economy expands.
In particular, the president could appeal to his constituency in the business community--in light of the huge tax benefits bestowed on business and the significant slowdown in wage increases--to practice meaningful price moderation. Out of such stuff are social compacts made. If the White House needed any persuasion on this point, Germany and Japan--whose inflation records it admires--provide excellent examples. Even though their traditions and institutions differ, and authoritative national spokesmen for labor and business are easier to identify and negotiate with, they have set an impressive example of successful interplay of government, business and labor in curbing price and wage appetites.
All this would not be a panacea. It would leave basic problems of unduly tough treatment of the poor and lush benefits to the wealthy largely unresolved. It would not correct the bad distribution of tax benefits, with consequent misallocation of resources, under 15-10-5-3 depreciation; and so on. But it could put us on the path of solid economic expansion that would provide a framework within which it would be far easier to tackle our structural and distributional problems.