White House scenario unfolds to rescue deflated US dollar
Washington — President Reagan and his shiny-new administration apparently put little trust in what forecasters, pumping away at their computers and calculators, say is going to happen to the US economy this year.
"Statistics," says Treasury Secretary Donald T. Regan, "are terribly inaccurate. It is unwise to rely on forecasters. They are too widely spread."
So, according to the new Treasury chief, Mr. Reagan and his economic advisers will "construct a scenario, not forecasts" of the economic future, including inflation.
That scenario will include deep tax cuts, stringent budget trims, progressive deregulation of the economy, and pressure on the Federal Reserve Board to reduce the growth rate of the nation's money supply.
Diverse as the forecasters may be about the future, they are agreed about the past. Last year was dismal, so far as inflation is concerned.
The consumer price index (CPI) rose 12.4 percent in 1980, just under the 13.3 percent of 1979 and the second highest jump since the 18.2 percent of 1946.
By a broader government measurement, which takes in the price movements across the entire economy, inflation rose 9.4 percent last year, compared with 9 .2 percent in 1979.
The fires that feed inflation, in short, are burning brightly, fed in part by the scramble of American workers to get wage boosts to compensate for the shrinking value of their paychecks.
"In 1980," says Lyle E. Gramley, a governor of the Federal Reserve Board, "if you include all the real costs of wages to an employer, [wage increases] ran 10. 5 to 11 percent. Excluding fringe benefits, the figure was about 9.5 percent."
Even at that high level, union leaders stress, their members lag behind inflation and real disposable income continues to fall. So the pressure for wage hikes is unlikely to ease in 1981.
Labor leaders, claiming they respond to inflation rather than create it, put major blame for the upward price spiral on soaring interest rates, engineered by the Fed.
Whatever word one uses -- scenario or forecast -- the Reagan administration faces a monumental task in whittling down an inflation that Reagan calls "horrendous."
To begin with, the President abolished the only direct governmental leverage -- weak as it was -- on the wage negotiation process, when he eliminated the wage-and-price guideline program of the Council on Wage and Price Stability (COWPS).
Officials of the outgoing Carter administration, while acknowledging that the guidelines had outlived their usefulness, contend that the program shaved perhaps half a point off what the CPI otherwise would have been.
President Reagan, as plans now stand, will keep hands off wage negotiations, leaving them to employers and employees to work out.
Instead, the President puts primacy on his tax-cutting program. That will be linked with efforts to cut deficit government spending and bring the budget into balance by fiscal 1983.
A third anti-inflation tool in the Reagan arsenal is reduction and reform of those government regulations which, in the White House view, suffocate business and stifle growth.
Finally, Reagan leans hard on Paul A. Volcker, chairman of the Federal Reserve Board, to produce "predictable" growth of the nation's money supply, within target ranges that both the White House and Fed can accept.
The Fed's 1981 targets, ranging from 3 to 6 percent growth in key measurements of money supply, are slightly lower than last year's targets.
Following a year of wild fluctuations, the Fed -- by screwing down hard on credit in December 1980 -- stayed generally within the 1980 target range. But White House officials claim this achievement was undercut by uncertainty caused by the money supply's erratic swings.
Controversy arises over Reagan's tax policy, featuring a proposed 10 percent cut in personal income taxes this year, followed by similar cuts the next two years -- 30 percent in all.
Distinguished economists -- including Mr. Volcker and former Fed chairman Arthur F. Burns -- worry such cuts could add to inflation, unless accompanied by compensatory reductions in government spending.
To unleash billions of dollars worth of fresh consumer spending generates extra goods and before the economy generates extra goods and services to absorb them, could boost the upward price spiral, increasing the demand for higher wage settlements, critics say.
But will most of the tax savings be spent? Or will most of it go into savings and investment -- thereby increasing the nation's output? A major purpose of the Reagan tax cuts, says Richard W. Rahn, chief economist of the US Chamber of Commerce and a participant in shaping the new administration's tax policy, "is to make it attractive for people to save and invest."
Dr. Rahn and other Reagan advisers concede that lower-income Americans are likely to spend whatever tax savings they acquire. "Reductions at the top of the income scale, however," says Rahn, "will be saved, not spent."
These savings, in his view, will provide capital for investment, which in turn should spur higher productivity and stimulate business. "Stimulation of this kind," says Treasury Secretary Regan, "is not synonymous with inflation."
The 30 percent income tax cuts by themselves, says Rahn, might add slightly more to demand than to supply, thus stimulating inflation. But, he says, President Reagan plans to couple the income tax cuts with generous tax incentives for business, targeted to spur investment.
Putting all this together, Reagan advisers believe the final effect will be deflationary -- especially if the government's deficits are steadily reduced.