The Reagan administration's economic forecast and projections underlying the new budget call for uninterrupted economic growth, slowly falling unemployment and, after a small rise to about 4 1/4 percent this year and next, a steady drop in inflation.
For the short run, many economists think that such a bright scenario is possible. For the longer run, however, they doubt that such steady growth and low inflation can be achieved given the formidable international economic problems facing the nation. A recession or at least much slower growth and more inflation are likely by 1986 or 1987, these critics believe.
For 1985, the predicted combination of a 4 percent rise in the gross national product, adjusted for inflation, and a 4.2 percent increase in consumer prices is only slightly more optimistic than conditions foreseen by many economists.
The unemployment rate, 7.3 percent last month, is projected to fall to 6.9 percent by the fourth quarter of this year and to 6.8 percent a year later. The long-term projections show unemployment eventually dropping to 5.7 percent in 1990, in company with a 3.2 percent inflation rate. Interest rates are projected to fall more sharply than inflation, with the Treasury able to borrow money for three months at 5 percent and for 10 years at 5.5 percent. Comparable rates today are about 7.8 percent and 11 percent.
With interest rates down in recent months and few signs of any acceleration in inflation, some private forecasters actually think 1985 could be better than administration predictions. George Perry of the Brookings Institution last week issued a new forecast showing real GNP up 4.3 percent from the fourth quarter of 1984 to the fourth quarter of this year, and consumer prices up less than 3.5 percent.
But further in the future, there is substantial divergence between the administration's expectation of growth and falling inflation and interest rates, and the less sanguine views of many private economists. In particular, many forecasters doubt that expansion could continue through 1990 without a recession along the way. Even for 1985 and 1986, not many economists share the administration's view that short-term and long-term interest rates will decline if economic growth remains close to the 4 percent Reagan forecast.
If the spending cuts proposed in the budget were passed, and the federal government therefore borrowed less to finance the budget deficits, there could well be less pressure on interest rates.
However, the Congressional Budget Office, in a calculation to be released later this week, assumes interest rates will not fall nearly as much as does the administration. As a result, CBO's current services spending baseline shows that net interest payments on the national debt would be $67 billion higher in 1990 than shown in the administration's current services estimates. That $67 billion difference is almost as large as the $82 billion deficit estimated for that year if all the proposed cuts were made.
In an unusually candid discussion of recent economic history, the budget notes, "It isthe combined demands of government and business that have helped keep real interest rates high. The decline in the deficit that would result from enacting this budget should remove some of the strain on interest rates . . . . "
The budget says that the Federal Reserve Board, despite earlier doubts by many people, has pursued "a disciplined policy of moderate growth of the money supply" and thus helped moderate inflation.
At the same time, the administration's short-term forecast and its long-term projections apparently make no allowance for a possibly substantial decline in the value of the U.S. dollar on foreign exchange markets -- a decline that would tend to boost both inflation and interest rates, as the budget acknowledges.
The administration estimates that an increasing value of the dollar, while hurting the nation's trade balance, has "reduced the inflation rate by roughly 1 to 2 percentage points annually for the past four years. Since the full adjustment process takes up to three years, the dollar's 12 percent appreciation in 1984 will continue to put downward pressure on prices in 1985 and 1986 if the dollar remains near its current level."
But what if it doesn't? The budget lays out the possibility this way:
Unusually high U.S. interest rates relative to inflation have attracted large capital inflows from abroad, the counterpart of the growing trade deficit. So much capital is flowing in, the budget says, that "sometime this year, recorded foreign assets in the United States will exceed our assets abroad, making us a net debtor nation."
This erosion of U.S. net foreign investment means that instead of having a surplus of about $30 billion in foreign earnings each year, the budget says, "the United States will soon be making a net transfer of investment income to foreigners . . . In the future, we will not be able to pay for imported goods with the proceeds from our foreign investments . . . ."
The budget goes on to warn that "should foreigners attempt to reduce their purchases of dollar assets while we are still running a large current account deficit . . . the inflation rate might temporarily rise as the dollar's exchange rate falls. In addition, there could be a rise in interest rates and slower overall economic growth."
The important point, according to Federal Reserve Gov. Henry Wallich and other economists, is that ultimately the only way to find a market for more U.S. exports is for the dollar to decline. In other words, the budget acknowledges a serious economic imbalance but assumes, in the official economic forecast, that events will not force its correction in the next six years. dollar, while