EVERY ADMINISTRATION succumbs occasionally to the temptation to revise history. But the current attempts by the Treasury Department are, by any standard, remarkable. On the opposite page today you will find its current version of the recent recession and its cause, as described by the assistant secretary for economic policy, Manuel H. Johnson. Everything was going splendidly, as Mr. Johnson remembers it, until there was a sharp slowdown in the money supply in early 1981. You probably noticed that sentence: "It is not clear why growth of the money supply was allowed to decline as it did. . . ." In other words, it isn't the supply-side theory that's to blame; it's the Federal Reserve Board.
Mr. Johnson is incorrect about that alleged sharp slowdown in monetary growth. There is more than one way to measure the money supply and, true enough, by the narrowest of definitions it hardly increased at all in the period to which he refers. But the broader measure, known as M2, rose smartly at or above the top of the target range that the Federal Reserve Board had set. There is no mystery about that disparity in the behavior of the various indicators. It was a time of extremely high interest rates, and people were moving money out of checking deposits into the money market funds. The money market funds are not included in the narrow definition of money, but they are included in M2. According to M2, surely the more reliable measure in this period, the growth of the money supply did not slow down in 1981 but, to the contrary, speeded up slightly.
Here's another explanation--our own--of the recession. The original Reagan supply-side theory held that the president's program would have an immediate psychological impact on the economy. People would instantly understand that the inflation was over and stop raising their prices and wages. At the same time, a gigantic tax cut would give them plenty of incentive to save and invest their money, sending the country on a great upward swing of noninflationary growth. Unfortunately, but predictably, the awaited psychological impact turned out to be nil. The inflation rate, in the melancholy pattern of the past, didn't begin to come down until unemployment and bankruptcies were soaring.
It was probably impossible to end the inflation without a recession. But the recession turned out to be deeper and longer than it might otherwise have been because the administration overdid the 1981 tax cut. It created gigantic budget deficits that kept interest rates up at unprecedented levels right through the trough of the business cycle.
Mr. Johnson also believes that "there is nothing about the current business cycle that requires a change in policy." Does that include a $200 billion budget deficit and a prime rate that is already rising? His declaration will strengthen the widespread apprehension that the administration intends to do nothing for or about the economy but stand back and hope earnestly that the recovery holds up at least until November 1984.