THE GOVERNMENT has put Wall Street on notice that it has been selected as the fall guy for the economy's current predicament. Having painted the economy into a very tight corner, neither the administration nor Congress, it seems, can be counted on to help find a way out.
Senate Majority Leader Howard Baker, speaking last Sunday on "Face the Nation," said that he doubts that Congress will be willing to make substantial cuts in either defense or domestic programs. President Reagan, speaking the next day to the National League of Cities, pretty much conceded that was so. Since neither the administration nor Congress wants to raise taxes to pay for these programs -- the president is even pushing for more tax cuts -- the government will have to borrow money to finance yearly deficits that might exceed $200 billion.
The only way out of this bind that the president or Sen. Baker sees is long-term economic growth. In other words, the government will continue to buy now and pay later in the hope that sometime in the future it will get a hefty boost in its allowance from its rich relative, the private economy. The trick is to get the rich relative -- now pinched by high unemployment, failing companies and falling export markets -- back on its feet. This is to be the job of the financial community, which must see to it that there is plenty of inexpensive money to finance business expansion and consumer debt. It would be "unconscionable," Mr. Baker said, "for interest rates to start back up."
Interest rates, however, are notoriously unmoved by this sort of appeal to their moral sense. They are, after all, simply the price of money. If the federal government is out borrowing large sums, there will be less money for private borrowers. Other things being equal, when demand for money goes up, so does its price -- the interest rate.
Of course, the Federal Reserve could, as Sen. Baker suggests, try to keep interest rates down by increasing the supply of money to accommodate the federal borrowing. This, however, is the functional equivalent of running the printing presses. If it goes very far, it will rekindle inflation. If lenders -- who haven't forgotten what the last inflationary spiral cost them -- get the idea that inflation is heading back up, they will start demanding a higher rate of return on long-term loans to protect themselves. And that, in turn, will discourage the business expansion needed for economic growth.
This predicament is a replay, in modified form, of the Carter administration's 1980 dilemma. In the spring, faced with a deficit that now seems modest in retrospect, President Carter persuaded the Federal Reserve to crack down on private credit. That led to a rise in unemployment, also modest by current standards but enough to be worrisome in an election year. When the Fed eased up on money in the fall, however, interest rates shot up, not down.
Of course, inflation was considerably higher then, which made the financial markets very nervous. Now, inflation is down--though still high by historical standards--but the federal deficit is soaring out of sight. If Congress wants to pacify the interest rates, it will take more than pious exhortations.