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Reagan rates a 'C,' Volcker an 'A' for US upturn

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Again in October, when Volcker and the Federal Reserve signaled that they were determined to make credit easier in order to promote home construction and auto sales, American and European investors took this to be a good thing and bid up further the prices of securities. This behavior was in direct contrast to what the Chicago School monetarists had predicted to be the effects of letting the money supply grow faster: The monetarists had said that investors in the markets would regard any increase in money as portending a reacceleration of inflation, and would in consequence dump bonds and raise interest rates.

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The significant drop in nominal interest rates engineered by the Fed led, in the standard textbook way, to a strong snapback of the housing industry. Then, early this year, it led also to a snapback in auto sales. Although Reaganomics had been pushing tax programs designed, it was said, to stimulate saving and reduce consuming, it is an ironical truth that so far the recovery has been sparked by strong consumer spending and by cessation of inventory reduction. As yet, there has been no measurable increase in spending on machinery and plant, which true supply-side economics teaches us is the way that long-term productivity of labor gets increased.

I want to avoid all partisanship and lean over forward to be more than fair. Let me state that the tax cuts that Reagan pushed through to improve the incentives of us affluent investors in all probability did keep plant and equipment spending from falling as much as usually happens in a recession as severe as that experienced in 1982. Later, when recession is a memory, we may discern favorable effects on capital formation. And let the record also show that the gigantic Reagan deficits - attributable to his making the US an undertaxing nation relative to its governmental expenditures (a shortfall that will ''crowd out'' investment after 1985) - have helped to give consumers the income to spend on cars and other durable goods.

Therefore, although an economist cannot give Ronald Reagan an A or B for economic performance, the President does merit a C grade rather than an outright failing score.

Our troubles are not all over. Since May interest rates have begun to rise. I fear that the strength of the recovery will motivate Volcker's Federal Reserve to clamp down on the strong growth in the various money aggregates.

The stock market did well what it is supposed to do. It anticipated correctly the recession's end. It may even have overdone its job - overdiscounting the strength of the recovery ahead. (On the other hand, common stocks were in the judgment of many economists basically undervalued in 1980-82, failing to recognize in share prices the higher reproduction costs of corporations' tangible assets. If this process of correcting undervaluation is not yet over, Wall Street might be able to avoid the near-term correction which pessimists have been expecting recently.) At a terrible price America has succeeded in reducing its rate of inflation from more than 10 percent a year to about 5 percent. We have had, and have, a window of opportunity to get the real economy moving again. I am glad that we have taken advantage of this opportunity.

I must warn, however, that inflation is only sleeping: It has not been killed permanently. No one promised us a rose garden in the modern mixed economy.