Is Secretary of the Treasury Donald Regan quite serious when he says that high interest rates are caused by monetary policy and inflation - and not by federal budget deficits? That is what he argued at the economic summit in Williamsburg. Yet leaders of the other industrial countries are not persuaded. Their common concern is that, unless the United States gets its budget under control, it cannot achieve lower interest rates - and the needed spur to economic growth.
The West Europeans and Japanese are not alone in their assessment. Here is what Alan Greenspan, another conservative economist and an unofficial adviser to President Reagan, recently told U.S. News & World Report:
''If the deficit as now perceived were not in the 200-billion-dollar range, we probably would be undergoing a major expansion in economic activity, the likes of which we have not seen in a generation.'' He added that mortgage-interest rates would now be at 8 percent and the Dow Jones industrial average might be closer to 1,800 instead of 1,200.
These are heady words indeed, and they ought to be impressed on lawmakers as they work out the final compromise budget for fiscal l984. To be sure, the current budget deficit comes at a time of incipient recovery and therefore is tolerable. The US economy is picking up well in many respects. There are no signs that the borrowing needs created by the deficit will ''crowd out'' the private sector as it gathers steam, thereby resulting in higher interest rates. Business Week reports that there is still plenty of money about and corporations are managing to expand activity without competing with government borrowing. This is due to rising profits, better cash flow, a lively stock market, and accumulation of funds in Keogh plans and IRAs.
It is the longer-term problem which needs to be addressed, however. Economists differ on when a credit crunch might come - 1986, 1987, or later - but most believe that the risk will be present unless steps are taken to eliminate what have now become huge structural deficits. As these rise to $250 billion and more, the borrowing demands on the Treasury could either ignite inflation or push interest rates higher, thereby threatening economic expansion. According to Mr. Greenspan, because the financial community already anticipates huge deficits, it already is imposing inflation premiums on long-term interest rates, and that is affecting business activity even now.
Experience has shown, moreover, that budget projections are seldom accurate. Government spending for 1983, for instance, is already running $40 billion more than the ceiling adopted by Congress a year ago. This is largely because of increased outlays for farm subsidies, driven by large grain crops and weak prices. It is thus extremely hard to keep deficits within the legislated limits.
Given the political will and a spirit of bipartisanship, however, it is possible to reduce the budget deficits over the next few years. Holding military spending to a 5 or 6 percent rate of increase is one way - a move that would permit a steady military buildup without any loss of national security. (In this connection, the Pentagon reports that shoddy workmanship adds 10 to 30 percent to military costs - which shows how much could be saved just by controlling this source of waste.) Increasing revenue through reform of the tax system is another.
The President and Congress need to compromise in the interests of the nation's fiscal health. They should be guided by an awareness that, if the United States does not maintain its economic strength and vitality, guns alone will not preserve its security. Or its world leadership.