Reagan economic plan faces possible credibility gap
Washington — Still shy of 50 days in office and still riding a wave of public approval, Ronald Reagan finds himself in need of avoiding a credibility gap in his bold economic recovery program.
The new President dominates this capital --likes his program of cutting federal spending to fight inflation, although Americans are uneasy about a personal tax cut which they think inflationary.
Yet Mr. Reagan somehow must translate generalized approval of his performance into "expectations" of another kind -- the self-fulfilling marketplace confidence that inflation will indeed slow, the economy grow, and federal deficits shrink.
It took more than two years for the Kennedy-Johnson administration to convince the public that its tax cut (1) could be passed by Congress, and (2) would spur growth. Reagan is trying to gain the needed credibility to make his program work in two months.
This week he attacked "selfish interest groups" as if they were the obstacle to his program's success. But economic experts see his more serious trouble arising not on the spending front, tough a fight as that might be, but elsewhere:
* The public at the moment thinks inflation will run unabated at 10 percent this year, their real after-inflation income will drop, and the economy will slip into recession. These expenditures work against what the President is trying to do.
"The crucial expectations we measure are all quite pessimistic today," says George Katona, University of Michigan economic opinion analyst.
* Economic pros, just getting a fix on the program's details, see dangers on the inflation and deficit sides. The Congressional Budget Office is expected shortly to issue a report suggesting a deficit for next year deeper by more than
* The backward-looking nature of wage negotiations -- basing wage deals more on catching up with up inflation than on the prospect of lower price rises in the future --also is a major hurdle to the success of the Reagan proposals.
"You cannot slow down an underlying inflation without slowing down wage rates ," says Harvard University economist Francis Bator. "The critical question is what happens to costs -- particularly wage costs, labor costs, wage rates."
The Reagan economists argue that if the Federal Reserve Board announces it will hold a tight choke-collar or money growth to keep inflation in check, then this promise can be used in wage negotiations to win smaller wage increases. The implied threat is that future unemployment will require from big wage demands.
Harvard's Bator and others see no reason to think possible future unemployment should press workers more than current unemployment to temper wage demands.
Labor-pact experts say the pastm governs wage talks, as the best indicator of the immediate future. For the past 12 months, hourly wage rates have been rising at a 10 percent clip. They are expected to carry this momentum into the future.
The wage situation is "currently deteriorating rapidly," says Otto Eckstein, president of Data Resources Inc. "Apparently workers are cranking worsening price expectations into their decisions."
Mr. Eckstein and other economists outside government, while liking the spending-cut thrust of the Reagan package, think its tax approach will worsen inflation and deficits.
"On a net basis, one cannot escape the conclusion . . . that the net effect of the President's program on the President's schedule is to make the inflation rate worse," Eckstein says. He and others recommended stretching out the personal tax reductions at least 18 months beyond Reagan's three-year schedule. Otherwise, federal deficits "would remain over $50 billion as far as the trained eye can see."
The debate over how fast the public can shift its expectations will likely determine the outcome of the President's tilt with Congress over his tax cuts.
"The public forms its price expectations by a gradual learning process from actual experience," Eckstein concludes. "The learning process is gradual, and . . . the public finds it particularly difficult to learn from a highly volatile inflation experience such as was experienced in the last seven years."
The rate of change in public expectations can be greatly speeded up, argues Yale economist William Fellner, if the government authorities hold to a consistent pattern of restraint.
"It takes more than a few weeks to establish that credibility," says Fellner, who is friendly to the Reagan approach. However, the Yale economist cannot say how fast his "credibility hypothesis" can show results, beyond predicting "it will not take many years."