IT IS QUITE true that the gigantic federal deficit is going to be essential in the months ahead to support the economy's recovery from the recession. But it is also true that the same gigantic federal deficit is going to make that recovery slow and uncertain. That is the paradox of the deficit. It is like a powerful medicine, important to the patient's recovery, but harmful in its side effects. It's necessary for the present, but the question is how to discontinue it. The president's budget for fiscal 1984 is about to appear, with a deficit unprecedented except in wartime. There's a fierce debate whether that's good or bad. The answer is: it's both.
All other things being equal, a rising deficit means increased spending and therefore more jobs. But, as usual, all other things aren't equal. A deficit, when it reaches the present scale, pushes up interest rates. That, as recent events have amply shown, is deeply harmful to business and employment, offsetting much of the good that the deficit can do. Conventional economics holds that the recession has created so much excess capacity in American industry that there is no grounds to fear inflation for at least a couple of years, regardless of the size of the deficit. But conventional economics overlooks the amounts of money that lenders lost in the late 1970s by underestimating inflation, and the extent to which that experience has changed reactions and reflexes throughout the economy. Because the Ford-Carter recovery of 1975-1979 was highly inflationary, the Reagan administration will not have nearly as much leeway with deficits and stimulative policy as presidents Ford and Carter did. If people see higher inflation several years in the future, they will begin to anticipate it in ways that make it happen sooner and more sharply.
The Reagan administration is now murmuring about strenuous efforts to reduce the deficit, not just now but several years from now. Lenders, and everyone else with a stake in interest and inflation rates, are likely to put little faith in commitments that one administration recommends for the next one. The financial markets' horizon is much closer than the economists', and the markets will discount heavily any commitment that falls due after the next presidential election.
So there you are. The Reagan administration can't cure the recession without continuing--temporarily--the deficit. But as long as the deficit persists, there will be no stable economic growth. And because of the excessively large tax cuts in 1981, the administration cannot expect a modest recovery to bring the budget back automatically toward balance as it used to do. That is the dilemma of Mr. Reagan's deficit.