EVENTS have forced to center stage the two critical issues by which the Reagan second term will be judged a success or failure: the managing of the economy and of security, including arms control. The handling of both issues suffers from the way the President appears to make policy decisions. He starts from strong convictions that seem to be based more on instinct or ideology than on analysis. Hence, they may or may not be compatible with the real situation or with each other. Usually he seems unaware of such incompatibility. And a change in position results more often from the imminent risk of political defeat than from better understanding of the facts.
Consider the economic and trade issue. A $150 billion trade deficit has generated a protectionist stampede in Congress. The President has staunchly resisted most protectionist measures. His recent response is two-pronged. One has been to initiate measures against unfair trade and foreign subsidies, and to demand easier access to the markets of other countries, like Japan. Most experts agree, however, that these factors account for perhaps 10 percent of the huge trade deficit, with 15 percent due to US r ecovery ahead of others.
The second prong focuses on the overvalued dollar, which probably accounts for three-quarters of the trade deficit and most of its damaging effects. Last Sunday the Treasury finally acknowledged this in the meeting with the four other major industrial states. These five, besides laying out their programs of domestic economic measures, agreed on concerted intervention in the exchange markets to try to lower the value of the dollar.
While the goal is valid, this remedy attacks the symptoms rather than the cause. That is mainly the enormous budget defict, which is keeping up real interest rates, sucking in capital, and driving the dollar up. Until the $200 billion budget deficit is brought under control, intervention is unlikely to keep the dollar down, unless confidence collapses; if intervention should succeed, the drop in capital inflows would push interest rates up, curtail funds for investment, and perhaps induce recession.
Any adequate package for reducing the budget deficit will have to combine domestic cuts, including entitlement benefits, and defense, with greater tax revenues. Yet the President undercut such efforts by Congress last summer and adamantly rejects any tax increases. Thus we face continuing budget and trade deficits and their uncertain consequences, as long as the President refuses to recognize the links between these factors.
He displays a similar shortsightedness as to the relation of ``star wars'' to stability and arms control. In the last year or so, his desire to contribute to a more stable peace has apparently taken a high priority. Unfortunately, he has identified this with his vision of a leakproof Strategic Defense Initiative which will eventually make nuclear weapons obsolete. He seems to disregard the possible impact of its pursuit on stability during the decade or two of research, and to be unaware that the more immediate aim of SDI is to bolster nuclear deterrence by protecting silos.
Inevitably these attitudes confuse his approach to arms control. Mikhail Gorbachev has hinted at an agreement based on cutting offensive nuclear warheads and weapons up to 40 percent, together with restrictions on developing SDI. No one can know whether he would actually follow through, or whether he would accept a more realistic definition of permissible SDI research than he has offered thus far. Those questions can only be answered by negotiation. Yet two weeks ago, the President seemed to rule out an y negotiation regarding SDI.
That seems baffling. Such an agreement could allow SDI research to continue, while the major cuts in offensive weapons could contribute to current stability. Such an agreement is the only contribution Mr. Reagan could make to reducing risks of war in his term. What eventually happens to SDI will be for a successor to decide. As long as the right to research is preserved, he would not have prejudged the future. Conversely, the absence of an understanding with the Soviets about the relationship of offensi ve and defensive systems could both heat up the arms competition and make deterrence more unstable. But that does not pose an immediate crisis that might jolt Mr. Reagan into revising his position.
Getting Mr. Reagan to base decisions on the analysis of facts and future consequences that run counter to his preconceptions should be the task of his advisors. On the evidence thus far, they have not yet succeeded. One can only hope they do better before it is too late.
Robert R. Bowie has been concerned with foreign affairs for nearly 40 years on the Harvard faculty, in government posts, and as a consultant.