The first look at the 1985 economy is positive: Economic data are encouraging; Congress is sounding reasonable on budget cutting; and a White House shuffle appears to introduce a more practical approach to tax policy. Two key statistical releases contained good news last week. Unemployment for December showed a slight increase, from 7.1 to 7.2 percent of the labor force. But this was after an increase in the labor force and the creation of 340,000 new jobs during the month. The producer price index for December climbed only 0.1 percent, making the rise in wholesale prices for 1984 only 1.8 percent.
Developments so far in Congress are also encouraging. One might have thought Congress would come back to months of quarreling over who is responsible for the large budget deficit, but do nothing about it. Senate Republicans, however, are already hard at work on a budget they think will be more realistic than the one the President is apt to send to Capitol Hill at the end of the month. Realistic, that is, in its ability to get through Congress.
The Republicans have been concerned that suggested cuts in domestic parts of the budget, with much smaller cuts in the Defense Department's requests, would not be salable in Congress. So, without directly challenging Mr. Reagan, they seem to be working up a compromise that will include some of the President's trims but also cut more deeply into defense. There is also a mood to cut into cost-of-living adjustments in social security, although there will be a lot of posturing about that before it gets done. But one concludes from the President's recent press conference that if a package containing all these things is presented to him, he will go along with it.
The budget is still far from being balanced. The Senate leadership, however, which would like to remain the leadership after the 1986 elections, needs to produce a package that can pass Congress and not cause the next recession -- a package that realistically cuts the deficit to the $100 billion area by fiscal 1988.
And what is so encouraging is that it seems more likely than just a month ago that Sen. Robert Dole of Kansas, the new majority leader, will succeed in shaping that package.
The shift of James A. Baker III to the Treasury (with Treasury's Donald A. Regan taking Mr. Baker's White House post) is also encouraging for those who think the Treasury's tax reform proposals are off the mark. These proposals would remove many business tax breaks and simplify the personal income tax code at the expense of most of the deductions to which individuals have grown accustomed. They have been generally interpreted by economists as leading to a lower rate of economic growth.
The tax proposals appear to be the work of pure theorists, with little understanding of the impact they would have on economic behavior. The ending of the deduction for state and local taxes, for instance, would impose financial pressure on units of government and might eventually force them to curtail services. This at the same time the federal government has been cutting back on its aid to those units.
Restricting the charitable deduction would affect giving to schools, churches, hospitals, and many of the organizations the Reagan administration has been encouraging as alternatives to more governmental intrusion into private activities.
The proposed tax code, in short, seems more like one that university economists might draw up as a model for a third-world country bearing no burdens from the past. There is at least some chance that the pragmatic Jim Baker will use his Texas common sense and well-known negotiating abilities at least to make big changes in the tax reform, if it gets debated at all this year.