Confused by a "Slight" Recession

By GEORGE J. CHURCH

Policy fights within the Administration and on the Hill

The figures poured out in a flood that swept away all doubt: when Ronald Reagan early last week conceded that the U.S. economy is once again in a recession, he was only recognizing reality. Statistics promptly showed sizable declines in industrial production and consumer spending, a September rate of housing starts that was the third lowest on record, a .6% third-quarter drop in total national output of goods and services and even an unexpectedly large $468 million third-quarter loss reported by that onetime paragon of profit, General Motors.

The President characterized the recession as "slight and, I hope, short." Murray Weidenbaum, his chief economic adviser, predicted that recovery would begin early in 1982. Some private forecasters, however, foresee a serious slump dragging on until the middle of next year. Nor is there any indication yet how much the recession might bring down inflation, if at all. In fact, consumer prices in September leaped up at a shocking annual rate of 15.4%.

Still, the economic outlook is clarity itself compared with the confusion swirling through Washington about policy to deal with recession and inflation. Fissures have opened within the Administration, between the White House and Republican leaders on Capitol Hill, between Senate and House G.O.P. leaders. And there is strong sentiment in Congress to adjourn for the year shortly before Thanksgiving without doing much of anything.

The problem is that a recession would shrink tax revenues and increase Government spending for measures like unemployment compensation. Thus the slump now under way seems sure to worsen federal deficits that already are spiraling out of control. Senate Budget Committee Chairman Pete Domenici estimated last week that the deficit in fiscal 1982 could total $60 billion, vs. an Administration forecast of $43 billion, and could be $70 billion in fiscal 1984, the year in which Reagan has pledged to balance the budget. Red ink on anything like that scale could both delay recovery from recession, because Government borrowing to cover the deficits would keep interest rates high, and contribute to still more inflation.

So a confused search is on for ways to trim the deficits. Within the Administration, policymakers are urging on Reagan four different sets of proposed economic forecasts for next year, each reflecting a somewhat different theory of how the business system works. Those theories diverge in large part over just how much the huge deficits should be feared. The view that seems to be winning is that the Administration should concentrate on holding down deficits by plugging for what are euphemistically called "revenue-enhancement measures" or, in plain English, tax increases. Reagan has ruled out any reduction or delay in the 25%, three-year cut in income tax rates that he bulled through Congress last summer. Thus his aides are floating ideas for raising other taxes: excise (sales) taxes on liquor, tobacco and gasoline, and taxes on some specific types of business transactions.

Inside the Administration, that talk dismays both supply-side economists, who hate any kind of tax increase, and political strategists, who view a shift from cutting taxes to raising them as all too reminiscent of Jimmy Carter's abrupt switches in economic policy. But if it is to hold down the deficit, the Administration has next to no choice politically. At an unusual Sunday meeting in the office of White House Chief of Staff James Baker, Senate Majority Leader Howard Baker warned that even G.O.P committee chairmen would not go along with Reagan's request to slash another $11 billion out of nonmilitary spending in fiscal 1982. Congress is likely to cut Pentagon spending deeper than the $2 billion that the President proposes. But having already cut the civilian side of the budget by $35 billion, the legislators see little left to trim.

Majority Leader Baker struggled all the rest of last week to find some combination of spending cuts and tax boosts that might pass the Senate. House Republicans were brought into the consultations after they loudly complained that they were being ignored. Baker achieved little: a vague agreement to try to reduce federal spending by $5 billion to $6 billion, with no notion of just what is to be cut and no consensus at all on taxes. Legislators of both parties are exceedingly reluctant to raise some taxes so soon after slashing others. Moreover, notes Representative Jack Kemp of New York, chairman of the House Republican Conference: "You don't start advocating new taxes in a recession."

In the Democratic-controlled House, Speaker Tip O'Neill and Republican Leader Robert Michel have agreed to adjourn for the year on Nov. 20, after passing appropriation bills, and defer consideration of tax boosts until early 1982.

The White House may not concur. Budget Boss David Stockman last week drafted a memo to Reagan urging the President to demand that Congress stay in session past Thanksgiving and vote on some sort of tax boosts. Stockman is so eager to hold down deficits that he is proposing coupling decontrol of natural gas prices with a "windfall profits" tax on producers, a measure he finds philosophically repugnant. His rationale: in the first year alone, the tax could raise up to $23 billion. Besides his genuine fear of the economic havoc that more red ink might wreak, Stockman is worried that a combination of recession, inflation and gargantuan deficits might lead to a Republican disaster in the 1982 congressional elections. The same thought has occurred to the House's Democratic leaders, and it will complicate efforts to trim the deficit. The Democrats have two worries. One is that the President will welcome any efforts they make to cooperate with his program and then double-cross them, the way he did during the first round of budget cuts. The other is that Reagan will maneuver them into opposing any program the Republicans may eventually come up with, and this time let them win. They then would have to share in the blame for economic woes that otherwise could be pinned solely on the Republicans. Such cold political calculation further tangles a difficult policymaking snarl, while the economy sinks and inflation soars.

-By George J. Church.

Reported by David Beckwith and Neil MacNeil/Washington

With reporting by David Beckwith, Neil MacNeil

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