PRESIDENT Reagan appears set to go directly to the public for support on spending reductions and tax reform. He was uniquely successful in selling his original tax-reduction package in 1981 this way. Whether he can put the same kind of pressure on Congress this time remains to be seen. Mr. Reagan is in as good a position as he will ever be to tell the public to follow his lead. The economy has just finished a banner year. Economic growth of more than 6 percent is well above normal expectations, particularly in the second year of a business cycle. (Growth is often higher early in the cycle, as unused resources are put back to work after a recession.) The nation has not had a year of better growth since 1955, when the GNP was up 6.7 percent.
Moreover, the year ended on a positive note. After slow -- 1.6 percent growth -- in the third quarter, which made some analysts suspect the economy was slipping into recession, growth picked up in the final quarter to a 3.8 percent annual rate. And this in the face of very slow inventory accumulation. That is, final demand from consumers, from business capital investment and from government, ran at a rate higher than 3.8 percent. At the very least, this probably means the recovery is safe for 1985 -- at least as long as interest rates do not have a major rise. And at the moment, long- and short-term rates are dropping.
One reason rates are dropping on longer-term instruments is investor psychology that perhaps inflation is ended. The other major economic news last week was the release of the December consumer price index. Climbing only 0.2 percent for the month, the index finished the year just 4 percent higher than in December 1983. Earlier in the year, most economists had predicted a higher rate, at least 5 percent. Even the administration had estimated a pickup in the rate. But what was most impressive to the public was the fact that for three years now the inflation rate has been 4 percent or less.
That fact certainly does not prove inflation need never be thought about again. But it perhaps underscores how long it takes to alter perceptions. Many investors did not take signs of inflation seriously enough until it became the major problem of the 1970s. Now, it's all right to say that one is not going to be fooled twice; but it is also dangerous to ignore the evidence that something has really changed. And with three years of good numbers, clearly some people are beginning to take this evidence of a shift more seriously. Moreover, such elements as the near-collapse of OPEC and weakness in world commodity prices do not indicate that new inflation is imminent.
So, with good economic news and good price news to talk about, it may be no wonder that the President thinks he can capitalize on this in selling his budget-reduction and tax-reform program. His main problem, though, may lie with his fellow Republicans, especially in the Senate. They appear to know the numbers better than he does. They think it impossible to get a $50 billion spending reduction package through Congress without greater restraints on the Pentagon. They also feel the nation is already at the limit as to what it will accept in social program cuts.
Then there is the question of tax reform. Sen. Bob Dole indicated again last week that the deficit-reduction work must come ahead of discussion about tax reform. The President, on the other hand, apparently wants to push on both fronts at once. In this, he has the support of the tax reformers in Congress, who already have their eyes on the 1988 election.
Along with arms talks, economics looks like a top attention-getter for the next six months.