TREASURY Secretary Donald Regan, the administration's chief economic spokesman, found himself on "Face the Nation" yesterday explaining what the administration's midterm self-appraisal implied for future economic policy. The secretary's responses suggest the conceptual and practical bind that the Reagan presidency is still in.
Since things are now so bad, how can the administration claim it averted a "calamity in the making"? Inflation, Mr. Regan noted, could have been much worse. True, but inflation was reduced only by the time-honored method of pushing up unemployment --this time to record levels. What kind of an accomplishment is that? Well, unemployment should start to come down soon. Won't inflation go back up? Not right away, anyway.
The secretary is right that the current set of economic policies is very stimulative. The big defense spending is starting to push up factory orders. The money supply has increased substantially in recent months, and when people and businesses start spending again, this could give quite a jolt to the economy. There is still another tax cut scheduled for July, and, as Mr. Regan noted, despite tax cut rollbacks and new gas and Social Security taxes, the tax burden has been lightened by hundreds of billions of dollars for the next several years. With so much slack in the economy--except for the defense sector--inflationary pressures aren't an immediate threat.
But what about those huge deficits? When the economy gets going, won't those deficits either spur inflation or choke off private credit needed to sustain economic growth? Well, said Mr. Regan, no one can predict the future, but let's hope that economic growth will be strong enough to erase those deficits. If it's not, there will be a "standby" tax increase. In other words, if the economy is still relatively poor after the next election, the administration will prescribe what it is not ready to prescribe now: a tax increase.
That's not a good answer. It is true that economic models aren't good enough to predict what combination of unemployment, inflation and growth will exist in future years. But they can give a good picture of what the deficit will be under a reasonable definition of what constitutes good economic conditions. What economic policy-makers must do is to agree on a level of employment that, taking into consideration changes in the structure of the economy and the composition of the labor force, seems possible under reasonably favorable economic conditions. Then they must calculate the true costs of the domestic programs that the public has now indicated it wants and the military expenditures that are likely.
If that leaves a big deficit, the tax structure should be changed now so that revenues will cover spending when unemployment recedes. And if that means putting into law the tax reforms that Mr. Regan says he supports, so much the better.