Ready for a Real Downer

By GEORGE J. CHURCH

As Reagan and Congress ponder their moves, the gloom grows

The uproar over Budget Boss David Stockman's indiscreet remarks could scarcely have come at a worse moment for the Reagan Administration. Time has just about run out for Congress and the White House to make tough economic choices. The legislators have until the end of this week, Nov. 20, to appropriate money to keep the Government running, and the President will have to decide whether to veto bills that pierce his budget ceilings. Worse, the decisions will be made in an atmosphere of confusion, worry and even gloom created by the deepening recession that had called the Administration's policy into question even before Stockman sowed further doubts.

The slide does seem to be bringing down inflation and interest rates. But whether the gains will be permanent or only temporary is subject to sharp dispute. In any case, they are coming at a price much higher than the Administration had expected the nation to pay. "None of us has predicted" an outright slump, Reagan confessed at his press conference last week. Now, however, Secretary of the Treasury Donald Regan says the current quarter "may be a real downer." Moreover, while some Administration forecasters had earlier predicted a recovery beginning shortly after New Year's Day,

Reagan now foresees a pickup "in spring or [at] the latest early summer of 1982."

That is only realistic: rarely have economists revised their predictions downward so far and so rapidly as in the past few months (see chart). The news in recent weeks has been a succession of shocks, most notably a stunning one-month jump in the unemployment rate, from 7.5% to 8% in October. The Administration and many private forecasters are expecting a further increase to 8.5% or 9%. The latter figure would equal the rate at the end of the 1973-75 recession; that was the worst jobless rate since 1941.

The current slump began in housing and autos, two sectors of the economy peculiarly sensitive to high interest rates. Those two industries are still in the doldrums. In Detroit, Depression-style soup kitchens have reappeared in recent weeks.

The slump, however, is spreading far beyond autos and housing. Retailers suffered a sharp 1.5% drop in sales last month; many are anticipating lackluster business in their all-important Christmas season. The electronics firms of northern California's "Silicon Valley," which make microchip components for computers, have for years been riding a heady boom, but now their profits are plummeting. Employment and spending by state and local governments kept a sturdy prop under the national economy during many previous recessions, but now they too are falling, in part because Reagan's budget cuts have reduced the flow of federal cash.

The prevailing view on how deep the recession may go is voiced by Allen Sinai, senior economist of Data Resources, Inc., a Lexington, Mass., forecasting firm. He predicts a drop of 2% to 3% in total national output, which would mean only a middling slump, "worse than some of the postwar recessions, but not as bad as others." Sinai, however, has some doubt about his forecast. The current downturn, he notes, began less than a year after the short but sharp recession of mid-1980. "A lot of corporations and financial institutions are in weak condition" because they never fully recovered from the first slump, says he, and "there is a good deal of danger that the mortality rate for some of these industries and firms could be higher than anything we ha ve seen in the post war period."

Only the harshest political partisans are pinning principal responsibility for these pains and risks on Reagan. Most economists view the recession as primarily the result of the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Reagan took office--though they note Reagan has supported that policy. Some also see the slump as a delayed effect of the vacillating economic strategy of Reagan's predecessor. "I call it a Reagan-Volcker-Carter recession," says Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s.

Businessmen sound almost perversely cheerful, even while reporting falling orders, production and profits. The reason: they can at last foresee a significant drop in inflation. The Consumer Price Index in September was still rising at a double-digit pace. But producer (wholesale) prices for "intermediate" goods such as textiles and steel showed no rise at all in October, the first time that had happened in six years. Prices for raw materials such as cotton and coal actually dropped a bit for the third straight month. Interest rates were sliding too: major banks last week cut the prime rate (on loans to their best business customers) by half a point, to 161%. That is five points below the peak last winter.

Businessmen hasten to point out that rates still have not come down anywhere near enough to promise a quick end to the recession. Generally, corporate chiefs view a continued slump as the bitter but unavoidable cost of defeating inflation.

But will any reduction of inflation be permanent? Broadly speaking, there are two views of what will happen when the recession ends. The President's belief is that the second stage of the Reagan tax cuts, taking effect next July 1, will spur savings, investment and productivity. That will both lift the economy and keep inflationary pressures down. The Federal Reserve will be able to relax a bit on the money supply, and interest rates will drop.

The opposing view is that federal deficits will swell alarmingly for two reasons: recession, which increases Government outlays for programs like welfare and reduces tax collections; and the deep tax cuts legislated last summer. Once the recession is no longer exerting pressure against price boosts, the deficits can cause them to speed up again. Reason: the Government pumps more money into consumers' pocketbooks than it takes out. The Federal Reserve Board will consequently continue its tight-money policy. That, and Government borrowing to cover the deficits, will kick interest rates back up again too.

The conflict between these views has split official Washington into two camps. The Republican leaders of the Senate and some Administration officials, notably Stockman, urge a drive to trim deficits by further spending cuts and some big tax increases--not, to be sure, in the just decreased income tax rates, but in excise (sales) taxes and some levies on business. House Republicans want no part of tax increases and are uncertain how far to push on additional budget cuts. Democrats and some moderate Republicans are even more reluctant to slash spending further.

Reagan at his press conference confirmed his decision: he will put off all consideration of tax boosts until January. Meanwhile, he will press for a further cut of 12%, or $13 billion, in fiscal 1982 spending on top of the $35 billion reduction already passed. Said the President: "This Government must stiffen its spine and not throw in the towel on our fight to get federal spending under control."

That sets the stage for a showdown with Congress this week. The Government has been operating under a "continuing resolution" authorizing spending using ceilings set by Congress last summer. The resolution expires on Friday, when it is supposed to be superseded by regular appropriations bills. But Reagan noted that most of the twelve appropriations bills pending in Congress specify spending considerably higher than he wants. The President said, "I stand ready to veto any bill" that costs too much.

In any case, there will be no time even to get all twelve appropriations bills to Reagan's desk by Friday. So this week's battle will center on a second continuing resolution. But the measure taking shape in Congress may not be acceptable to Reagan either: it would also authorize more spending than he wants.

Vetoing the continuing resolution would bring the Government to a virtual standstill. If Reagan does veto the resolution, it seems inconceivable that more than a few days would elapse before Congress passed some kind of money bill that the President would sign, however reluctantly. Whatever happens, the great tax-and-spending battle will be renewed in January. --By George J. Church. Reported by David Beckwith and Neil MacNeil/Washington

With reporting by David Beckwith, Neil MacNeil

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