Reagan's economic promises tangled in web of high interest rates

"All presidents verbalize their goals," says a longtime presidential adviser, "but Ronald Reagan more than most." Thus a Washington veteran summarizes the dilemma in which President Reagan finds himself, as circumstances force him to sort out and choose among cherished priorities.

Mr. Reagan explicitly set out -- indeed trumpeted throughout the land -- several cardinal goals of his administration. Among them:

* To raise defense spending by 7 percent yearly in real terms.

* To balance the federal budget in fiscal 1984. As a step toward that goal, the President set $42.5 billion as the maximum deficit he would tolerate in 1982 .

* To keep intact a social "safety net" of programs, centering on social security, to insulate the elderly and the "truly needy" from harm.

Those goals no longer appear compatible, given the performance of the US economy, with emphasis on interest rates and inflation.

Because inflation and interest rates are inextricably linked, the latest government figures -- measuring consumer prices in August -- offer little hope that interest rates might drop soon. The US Labor Department reports the consumer price index (CPI) climbed 10.6 percent at a compounded annual pace last month -- the second month in a row that the yearly CPI rate has been in double digits.

Lumping together the CPI from January through August, consumer prices have risen at a 9.6 percent annual rate so far -- slightly below the White House projection of 9.9 percent for the year, but the inflationary pace has quickened in the past two months.

This is distinctly better than the inflation rates of the past two years, but probably not good enough to persuade the Federal Reserve Board to loosen the credit reins.

Tight money results in high interest rates, and Fed chairman Paul A. Volcker and his fellow governors say they want to see further progress against inflation before easing up.

When Fed policy is combined with widening doubts about the Reagan program among financial managers, the outlook for significantly lower interest rates appears to be dim for some months.

More than anything else, soaring interest rates threaten to crumble the foundations of the economic edifice Mr. Reagan is trying to construct. Interest rates as high as they are now add billions of dollars to government outlays, in the form of interest payments on Treasury borrowings.

Because interest rates depress business activity, the economy fails to grow as expected. Many experts -- including some administration officials -- now foresee a real economic pickup coming only sometime next year.

This means declining tax revenues, at a time when the President had counted on brisk economic growth generating enough new taxes to offset the huge Treasury losses resulting from the 1981 tax cut bill.

The apparent prospect, then, is for growing budget deficits, rather than an orderly progression toward balancing the government's books in the final year of the Reagan term.

To brighten this picture, President Reagan would appear to have two alternatives -- either raise taxes or cut government spending. White House officials are adamant that "this President did not come into office to raise taxes." This litany, however, does not necessarily exclude certain measures whose effect would be to raise revenues and reduce deficits.

Mr. Reagan may revive his proposal, buried in Congress earlier this year, for "user" fees to be levied on boat and private aircraft owners and on barges operating on US rivers and canals. Also, if the President hastens the decontrol of natural gas as he did with oil, a windfall profit tax might be slapped on natural gas producers. In fiscal 1981 an equivalent tax on decontrolled oil brought more than $23 billion into US Treasury coffers.

Whatever Mr. Reagan does on taxes, however, would be only a supplement to a new round of budget cuts, amounting to an estimated $16 billion in a 1982 budget already trimmed by more than $35 billion below spending levels foreseen by the outgoing Carter administration.

Assuming that the 1982 deficit can be held close to $42.5 billion, the White House faces prospective additional spending cuts worth $75 billion over fiscal 1983 and 1984, if the budget is to stand a chance of being balanced.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.