More than the Reagan administration is likely to admit publicly, prospects for dealing effectively with the budget deficit are slipping away. The situation is not yet irretrievable, but some of the momentum the administration had going for a deficit reduction immediately after the election has evaporated.
In part, this may reflect the uncertainty of the new Republican leadership in the Senate under Robert Dole of Kansas. In part, political attention drifted away from the deficit to a divisive issue -- the need to deal with an immediate crisis in the farm community. In part, the problem is that influential congressional Republicans as well as Democrats demand more cuts in defense spending -- and less in domestic programs -- than President Reagan prefers.
"What we get now will have to be a bipartisan product, and the question is whether they (Congress) can agree on anything the president can agree to," a key policy maker confides.
A surprise vote by Sen. Pete Domenici's Budget Committee to hold defense budget increases to the level of inflation, or less than 4 percent, by itself means very little. Domenici himself says that he doesn't believe the committee can write a complete budget reduction proposal that will pass the Senate.
The way administration strategists now see it, the battle of the budget will eventually be fought out on the floor, piece by piece, where almost anything can happen. For the moment, therefore, the administration seems immobilized, unable to bring off a neat $50 billion reduction package that would nevertheless include about a 10 percent jump in defense.
Ironically, the ebullient performance of the economy, on an overall basis, has also proved a distraction: It's hard to get politicians to focus on the dangers of a $200 billion deficit while economic growth accelerates and the Dow-Jones index flirts with new daily highs.
Yet, the urgency of deficit reduction is underscored by the extraordinary performance of the American dollar. This in turn is causing massive problems for major American exporting and import- competing industries.
The trade deficit, in short, is stimulating the kind of protectionist sentiment that even a free- trade oriented administration such as Reagan's will find difficult to resist completely. And the trade deficit -- likely to continue for a long time -- will be exacerbated so long as the budget deficit promotes high interest rates and a high dollar.
The trade-deficit-interest-rate-dollar-exchange- rate nexus is more generally accepted as a fact of life among top Reagan administration officials now than it was before the job switch that brought Jim Baker to Treasury and Donald Regan to the job of White House chief of staff. But the intellectual acceptance of the connection hasn't brought today's policy makers any closer to a solution.
"The danger," says an insider, "is that the adverse effect (of the overvalued dollar) on domestic producers is such that we will be pressured into some nonmarket reaction."
One quick fix that some American companies have been touting is an import surcharge -- say, 20 percent -- on imports. The administration, although opposed to such a tax, hasn't been above using it as a threat in negotiations with Japan and others. Most trade experts agree that it is hard to find a worse idea: a surcharge, which doesn't deal with the underlying problems of relative efficiencies and exchange-rate problems, would invite retaliation. Some contend it probably would boost the dollar rate even higher by a quick improvement of the trade balance.
Yet, the surcharge has a certain appeal. Timothy W. Stanley, president of the International Economic Policy Association, puts it this way: "Something can and must be done about the trade deficit -- in addition to, not in lieu of, cuts in the domestic deficit -- in the short term, even if in some instances that involves thinking about the heretofore unthinkable."
The administration is bracing to resist such pressures, and thinks it will be able to hold them off. It stuck to its guns -- and deserves great credit for doing so -- in its decision to abandon "voluntary" quota limits on Japanese cars.
Despite reports to the contrary, there has been no change in its basic opposition to massive U.S. intervention in exchange markets to bring the dollar down. Ultimately, Reagan administration officials expect the dollar to ease away from its peaks. But that will require "a change in the fundamentals": that elusive $50 billion reduction in this year's budget deficit -- not so much for the $50 billion, but for what it promises in future years; and a resurgence of European economic growth.