President Reagan and his top White House aides, encouraged by a burgeoning economic recovery, have turned deaf ears to warnings from some of the president's economic advisers that the recovery's prospects are not necessarily as rosy as they seem.
The advisers agree that everything is going well for the moment. Their concern is over what will happen late this year or in 1984 if the recovery continues at its current or a faster pace, and if, at the same time, little is done to reduce huge federal budget deficits and to slow double-digit growth of the money supply.
The combination of a fast recovery, big deficits and speedy money growth, the advisers caution, could leave Reagan with an election-year dilemma of accepting renewed inflation or taking steps that could choke off the recovery.
Reagan and his aides have rejected the arguments from the advisers, who include Treasury Secretary Donald T. Regan, Office of Management and Budget Director David A. Stockman, Council of Economic Advisers Chairman Martin S. Feldstein, and occasionally Secretary of State George P. Shultz.
Reagan and the White House group say they believe the economic advisers are wrong, both economically and politically. They seem convinced that the recovery will take care of any problems that arise, including the budget deficits and money growth. The aides specifically reject the idea that rapid economic growth will produce an increase in inflation requiring future action.
"A strong, unbridled economic recovery is good from every standpoint," said a senior White House official. "It's good for America's position abroad and our foreign policy. It's good for poor people. It's good for unemployed people. It's hard to identify who it isn't good for."
Comments by several Reagan aides make it clear that the president's approach to the 1984 election will be based on the economy's performance. None of them wants to send signals indicating any trouble whatsoever on the economic front.
The economic advisers, however, have stressed to the White House that some precautionary actions now could make for smoother sailing in 1984. They say they believe the issue is whether the recovery can be sustained.
Again, they have met a stonewall.
"Most of this economics business is psychological," one senior White House official said. "If we start turning tail inside the White House you can imagine what the Wall Street reaction will be. That can put the whole economy in a slump by itself . . . .
"This is not the season to let the economists run the shop. They wouldn't have been in position to get tax cuts, to do the things that have brought on the recovery if we hadn't been elected. And we want to get reelected."
Added another Reagan aide, "I don't see that much disagreement publicly on the issue. The economists are in retreat. I think there was more of an argument on the tax issue, but they lost that one and they are not coming back. It's a mute argument.
"The economists want to fiddle and fine tune until election day. No one is complaining about the economy, so what the hell is the problem."
Part of the problem is the realities behind Reagan's words in his Economic Report of last February.
If the money supply is "allowed to expand too rapidly, an increase in inflation and a short-lived recovery will result . . . . I expect that in 1983 the Federal Reserve will expand the money supply at a moderate rate consistent with both a sustained recovery and continued progress against inflation," Reagan said.
Certainly agreeing with those sentiments, Federal Reserve officials--who, like the economic advisers, don't foresee meaningful action to reduce budget deficits this year--are expected this week to begin tightening credit conditions to slow money growth, which has been running far above the 4 to 8 percent target range. Any steps in that direction likely would mean higher interest rates.
When reports were published about the pending Fed action, senior White House officials speaking for the president said there is no need for interest rates to rise.
"The economists are arguing to raise the discount rate and cool off the economy because if we don't, we'll see a resurgence of inflation and likely have interest rates go up further and choke off the recovery," said one of the White House aides. "If we believed this had to be done for the best of the economy, we would do it, because what's best for the economy is best for the long-term political intersts of Ronald Reagan.
"This is not an economic or political argument. The economy is going great. Let it happen."
Both Treasury Secretary Regan and CEA Chairman Feldstein have said publicly that the Fed should slow down money supply growth to prevent a revival of inflation in the future.
"No one likes to see interest rates rise," Feldstein said last week. "The substantial increase in market interest rates over the past two months has been a source of concern. But although the Fed could temporarily lower some interest rates by explicitly adopting a policy of rapid expansion of the money stock, this would subsequently lead to higher rates of inflation and higher market interest rates."
That is not how Reagan is thinking these days. In the current issue of Forbes Magazine, editor in chief Malcolm S. Forbes recounts part of a June 24 interview with Reagan in the Oval Office that highlights the president's disagreement with Feldstein, Regan and the other advisers. Said Forbes:
"We read in the papers that some of the people who give you economic advice are talking about the necessity of slowing down the money growth rate and increasing interest rates so that the recovery doesn't get out of hand. I hope they're not saying the same things to you."
"It's just come to my attention that that's going on," replied Reagan. "No, that's not my view at all."
"I don't think we need to worry about the rate of recovery, about snuffing it out because it's getting out of hand," continued Forbes.
"No. Not at all," said Reagan.
"But it's alarming to read that these people around you think the recovery's out of hand already," Forbes observed.
"Well, those are the usual unnamed sources, White House sources," Reagan responded. "I don't know whether they even exist. I certainly don't know who they are, or they wouldn't be White House sources anymore."
There is a similar split over taxes and budget strategy between the White House and the economic advisers.
Last week the president rejected a plea from Senate Finance Committee Chairman Robert J. Dole (R-Kan.) that he become involvedin trying to end the federal budget stalemate that otherwise probably will prevent significant reduction in prospective deficits, which range from $150 billion to $200 billion.
Dole and his House counterpart, Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), both have told administration officials that no tax legislation is possible this year without Reagan's backing. That is fine with the president, since he remains opposed to any tax increases this year.
"There's no need for a summit ," said a Reagan aide. "The administration was available last January for an economic summit. Congress decided to do something not compatible with the president's view of the way the budget problem ought to be solved.
"Now they are saying the president is not involved because he doesn't support higher spending and higher taxes. Because he differs doesn't mean that he is removed from the budget process . . . . He said he will veto any legislation calling for higher domestic spending."
But Reagan's refusal to get involved, as he did in 1981 and 1982, means there will be no sweeping budget reconciliation bill this year. Without such a package approach to the budget, the advisers have told Reagan he has forfeited any chance to achieve many of the domestic spending cuts he proposed.
Vetoes cannot substitute for changes in laws providing many types of benefits; affirmative legislation is required, the advisers have pointed out.
The advisers' efforts to try for a repeat of the previous two years foundered on the rock of defense spending. Defense Secretary Caspar W. Weinberger urged Reagan not to move toward a compromise that would reduce planned increases in defense spending. After lengthy debate, Reagan went along with Weinberger.
The economic advisers apparently would be willing to see taxes raised as part of a compromise with Congress that would include some of the controls on domestic spending the administration wants. When they began drafting a compromise and word of it leaked out, White House officials quickly denounced the idea.
Asked about this, a Reagan aide replied, "Are you asking me if there are people in this administration who want to raise taxes? The answer is yes. They are a distinct minority, and they are a minority that lacks one key member--the president."
Not all private economists agree that the Federal Reserve should tighten credit conditions at this point. For instance, Jerry Jasinowski, chief economist of the National Association of Manufacturers, said last week, "Tightening monetary policy at this time would be a mistake because it risks undermining the recovery, aggravating the problem of the overvalued dollar and worsening the international financial situation."
But a large majority of economists seem to favor reducing the prospective budget deficits even if it means higher taxes.
In a sense, the president and his aides have gone back to the scenarios of supply-side economics that dominated the forecasts during the first few months of his administration. In other words, economic growth will take care of everything.
That first burst of optimism disappeared into the maw of a severe recession. Among the inner circle at the White House it has returned undiminished, whatever the economic Cassandras say.