A Growing Mood of Dismay

By Alexander L. Taylor III

As Congress fails to dent the deficit, inflation and interest rates climb

When Congressmen meet their constituents at Fourth of July picnics and barbecues this weekend, one thing that they can count on is being confronted with the following angry question: What in the world has gone wrong with Reaganomics? From the moment that President Ronald Reagan first proposed his fiscal 1982 budget 148 days ago, the mesmerizing specter of gargantuan federal deficits has haunted an already skittish U.S. economy. As the red ink has swelled, growth has sagged further and further, interest rates have lurched about unpredictably, and ever lengthening lines of jobless workers have begun coiling out from unemployment offices around the country.

Last week Congress made a kind of final, flailing stab at reducing those deficits to a manageable level in an effort to return some stability to the economy. The legislators failed miserably in their effort, and in so doing they left the way open for yet another devastating run-up in interest rates, which have bedeviled the economy throughout the Reagan presidency and indeed during much of the Carter presidency that preceded it. The renewed upward pressure now threatens harm to businesses large and small alike, and indeed to everyday people by the millions. They can do little but stand by and watch as already fading hopes for a robust recovery this year fade even further.

The inability of the nation's elected officials to come to grips in an effective way with the country's economic woes is causing widespread dismay that could soon enough begin turning into outright cynicism. Both the House and the Senate last week passed a budget resolution purporting to hold down 1983 deficit spending to no more than $103.9 billion, but not even the legislators seemed to believe in what they were doing. Admitted New York's Democratic Congressman Theodore Weiss: "It's a package wrapped in deceit, based on phony figures, erroneous assumptions and questionable projections." For its part, the nonpartisan Congressional Budget Office predicted that the budget would be at least $116.4 billion in the red next year, the highest in U.S. history.

Washington's bungled budgetmaking has both enraged and frightened Wall Street, which understandably enough holds the Administration and Congress equally accountable for the present mess. Indeed, when Budget Director David Stockman offered American Stock Exchange officials assurances of lower deficits by 1985, derisive financial leaders practically hooted him off the stage.

On Wall Street, the prospect of unchecked federal spending pushed short-term interest rates back up to early spring levels of 13% to 14%. This week the Treasury is slated to bring another $17 billion worth of bills, notes and bonds to market, and many finance men expect the sale to push interest rates toward record highs.

Meanwhile, the Administration tried to shift blame for the deficit-driven interest rates to the Federal Reserve. Speaking to Washington editors, Treasury Secretary Donald Regan renewed longstanding assertions that Federal Reserve Chairman Paul Volcker was failing to hold the growth of money and credit to a slow and stable course. Shortly thereafter, Beryl Sprinkel, the Treasury's Under Secretary for Monetary Affairs, let it be known that his department was studying ways to make the Fed more responsive to Administration wishes.

The growth in the nation's money supply this year has indeed tended to overshoot the targets set by the Fed. But only a small, though growing, group of critics outside the Administration believes the problem is caused by the Fed alone. Within 48 hours the White House was all but disowning Sprinkel's anti-Volcker sniping, and even Regan wound up admitting that the Fed's formally independent status "is a good thing." In actuality, the Federal Reserve Board has traditionally followed the lead of the Administration in power (see box).

Other strains have begun to show within the Administration's policymaking apparatus. Last week Treasury Under Secretary Norman Ture, a leading proponent of supply-side economics as well as a principal architect of Reagan's 25% three-year tax cut, resigned for personal financial reasons. He follows Paul Craig Roberts, former Assistant Secretary of the Treasury for Economic Policy, as the second top supply-sider to leave the Administration this year. Said Ture of his resignation, in an ironic reference to the problems of the U.S. economy as a whole: "My outgoings are greater than my income."

Some dark clouds have begun to shadow even one of the few consistently bright spots in the economy: the steady wind-down in inflation. The inflation rate fell from 12% a year on the day that Reagan took office to outright deflation during March, when the purchasing power of the dollar actually inched fractionally upward. But last week consumer prices, which rose at an average annual rate of less than 2% in the first four months of the year, suddenly shot back up in May to a compound annual rate of 12.7%, pushed by increases in housing, food and energy costs. The unexpected rise far overshadowed a Commerce Department preliminary report that the gross national product might actually have gone up .6% during the April-to-June quarter, signaling at least a pause in the recession.

More and more economists now fear that renewed economic growth will simply send interest rates even higher as businesses and individuals alike try to borrow, helping to choke off the recovery before it ever takes hold. The biggest danger is the pressure that is already being placed on the economy by federal borrowing. In the July-September quarter alone, the Treasury will need to raise about $46 billion in new money, double the amount borrowed during the same period a year ago.

Like a freezing man who tries to heat his house by feeding the walls and roof to the fireplace, Government borrowing now threatens to devour virtually every penny that Americans had been expected to save and invest under Reaganomics. Bank Economist Irwin Kellner of New York's Manufacturers Hanover Trust calculates that federal loans could consume no less than 92.1% of net national saving this year. Worse, Kellner predicts that in 1983 Government borrowing might take fully 113% of the year's net saving, siphoning money out of virtually every sector of the economy to help keep the Government's finances afloat.

Even for Congress to hold the 1983 deficit to $103.9 billion, legislators must raise $21 billion in new taxes to help close the spending gap. Yet the White House has repeatedly asserted that the President will veto any attempt to delete the third year of his tax-cut package, and business lobbyists are fiercely fighting off attempts to raise taxes on energy, alcohol and corporations.

Nor is it likely that Congress will be able to reduce entitlement programs by the $6.5 billion or so that it has now pledged to do under last week's budget resolution. Unlike 1981, when all the cuts were rolled into a single up-or-down vote, politically sensitive programs like Medicare and food stamps will this time have to be voted on one by one. In the House, Democratic committee chairmen are expected to reject cuts in their own budgetary areas, and even Republicans are reluctant to risk election-year charges of being insensitive to the poor.

How will Congress then deliver on its pledge to help trim the budget deficit? "Beats me," shrugs Colorado Republican William Armstrong, a member of the Senate Finance Committee. "It's painful work. It's kind of like walking over coals barefoot." Adds Texas Democrat Kent Hance of the House Ways and Means Committee: "No way. Coming in on target is just not going to happen."

To former Treasury Secretary William Simon, who served from 1974 to 1977, budget resolutions are not worth the paper they are written on. Says he: "These resolutions are simply the first and easiest step of the budget process and have never--I repeat, never--been lived up to." That sounds cynical, but Congress proved the point last week. Even as it was struggling to curb spending, Congress decided to appropriate an additional $3 billion that was intended to help bail out the housing industry. The measure was promptly vetoed by Ronald Reagan.

Fearful of sharp voter reaction because of their failure to dent the deficit, growing numbers of Congressmen, as well as Reagan himself, have begun lining up behind the idea of a constitutional balanced-budget amendment that would presumably force fiscal responsibility upon them. Bills have already been introduced in both houses, and the Senate takes up debate on its version this week.

Many economists are skeptical about the idea because they fear that such an amendment would cripple the Government's ability to manage the economy.

For the near term at least, the Administration is sounding distinctly less optimistic. Though he repeatedly insisted last February and March that the economy "would come roaring back in the spring," the Treasury Secretary now sounds more subdued. Said he last week: "We'll have a recovery this summer of sorts, but unless interest rates drop substantially, it will be an anemic one."

Despite the persistent bad news, President Reagan remained firm last week.

Said a senior White House official:

"There's not going to be any major change in our economic policy." Yet events may be starting to run away from the President. Having promised too much for Reaganomics at the start, the President must now deal with a growing conviction that, at least so far, he has delivered all too little.

--By Alexander L. Taylor III. Reported by Bernard Baumohl/New York and David Beckwith/Washington

With reporting by Bernard Baumohl, David Beckwith

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