Critics of zigzag US economic policy taking heart
Is it actually possible that the Reagan administration will put an end to "stop-go" economic policies? Will it persuade the Federal Reserve System to follow a steadier, tighter monetary policy, thereby closing a period of roller-coaster interest rates and winding down inflation?
Monetarist economists -- those who put great stress on the need for a steady, slow growth in the money supply as a necessary background for taming the business cycle and reducing inflation -- are hoping that this is the case. But they have been disappointed so often in the past that they are now cautious.
What has encouraged these economists is four developments:
1. The Federal Reserve -- the nation's central bank -- has finally managed to trim the rate of growth in the nation's money supply after an extraordinarily fast run of the "printing presses" last summer and fall.
2. President Reagan, Treasury Secretary Donald T. Reagan, and Fed chairman Paul A. Volcker have all made public comments on monetary policy which please the monetarists.
3. One of their own, Beryl W. Sprinkel, has been named Treasury undersecretary for monetary affairs. Dr. Sprinkel, formerly chief economist with Harris Trust & Savings Bank in Chicago, was a member of the Shadow Open Market Committee, a group of prominent monetarist economists that meets twice a year to make judgments on Fed policy. He is on "unpaid leave of absence" from the committee, joked Dr. Karl Brunner, cochairman of the group and a professor of economics at the University of Rochester.
Also, Lawrence Kudlow, a Wall Street economist with some monetarist leanings, has joined the Office of Management and Budget. It is rumored that another monetarist will join the President's Council of Economic Advisers.
4. The administratio has indicated it wants to cooperate closely with the Fed. The Carter presidency, with its populist leanings, was sometimes at odds with the central bank.
When President Reagan spoke to the nation on economic policy Feb. 5, he explained inflation this way: "When the money supply is increased but the goods and services available for buying are not, we have too much money chasing too few goods."
New York's Citibank commented in its Economic Week: "That explanation may be a bit too brief and oversimplified, but it is, nevertheless, correct.Just as important, to link inflation with excess monetary expansion is a marked improvement from the laundry-list approach favored by prior occupants of the White House."
Mr. Reagan went on: "Government has only two ways of getting money other than raising taxes. It can go into the money markets and borrow . . . or it can print money." He added: "In the past, we have tried to fight inflation one year and then, when unemployment increased, turned the next year to fighting unemployment with deficit spending as a pump primer. So again, up goes inflation.
"It hasn't worked. We don't have to choose between inflation and unemployment -- they go hand in hand. It's time to try something different." President Reagan promised that one approach would be to trim the role of government in the economy; the other would be to launch a "stable monetary policy."
Comments Citibank: "What it all adds up to is a plan with a clear monetarist ring to it: slower and steadier money growth and a nonactivist approach to policy.m The monetary tacking back and forth over the business cycle so characteristic of the last decade and a half is being rather blatantly eschewed."
This so cheers up Citibank economists that they now find "grounds for optimism" for the longer-term economic outlook.
H. Erich Heinemann, another monetarist at Morgan Stanley, a Wall Street investment banking firm, is encouraged by what he terms "the important new partnership that is developing between the Reagan administration and the Federal Reserve System." He adds: "The President set the tone of the new relationship when he left the White House during his first week in office to have lunch with Paul Volcker."
Noting President Reagan's reference to a "stable monetary policy," Mr. Heinemann commented: "Plainly, the administration is putting the Federal Reserve on notice that (1) the Federal Reserve will get strong support from the White House in its effort to reduce monetary expansion and (2) that the wide swings in monetary policy last year were unacceptable."
Treasury Secretary Regan made even more forceful comments in his initial testimony before Congress, which Mr. Heinemann terms approvingly "a remarkable public-policy document."
Mr. Regan says the administration's anti-inflation and economic growth policy will require reduced federal spending and taxes plus -- again -- "a stable monetary policy."
"In fact," he says, "the President and the Congress will be unable to achieve their basic goals unless the Federal Reserve provides stable, moderate, and predictable money growth. . . ."
Amen, the monetarists say.
Mr. Regan added: "Inflation is primarily a monetary phenomenon. Stable prices are impossible if money growth rates out- strip the growth of goods and services year in and year out, as they have done, on average, for more than a decade. The major contribution of the Federal Reserve must be to bring down the growth rates of the monetary aggregates, reducing inflation, inflationary expectations, and interest rates. There is no alternative to this fundamental reform. The President's tax, spending, and regulatory program cannot succeed unless inflation is brought under control."
The monetarists figure they could hardly have said it better. But, notes the University of Rochester's Dr. Brunner: "The Fed has to shape up a nd change. . . ."