Nation: Eight for the Cabinet

(3 of 3)

The Congressmen urged Reagan to devote "exclusive" attention in his first 100 days to an economic package that would be shaped in "fevered consultation" with Congress. Its main elements: deep tax cuts to revive business expansion and consumer spending; "stern" reductions in federal spending to contain deficits; immediate deferment or cancellation of federal environmental and safety regulations thought to hinder business expansion and raise costs; "cold turkey" elimination of all remaining oil price controls on Feb. 1 (that would magnify the inflationary impact of rises in imported crude prices, but enable the Government to scrap the cumbersome allocation system that has worsened the bite of past shortages).

Reagan, said the Congressmen, would have only a short period during which to establish himself as a forceful and effective economic manager. If he does not, the financial markets will fall apart in expectation of a continuing "Reagan inflation" and "Washington will quickly become engulfed in political disorder commensurate with the surrounding economic disarray."

Hardly anyone else in either Washington or Wall Street would use such pyrotechnic language, but the Stockman-Kemp analysis of economic trends is close enough to the facts to be worrisome. Indeed, in one respect their memo had not even caught up with the latest bad news. The Congressmen predicted that "by year-end, bank [interest] rates are likely to hit the 15%-17% range." Actually, the bank prime rate on business loans jumped a point last week, to 20%. That matches the historic high of last April, when strangling interest rates touched off a sharp though short recession.

Even those rates have been insufficient to restrain an inflationary expansion in the U.S. money supply, so Wall Streeters expect the prime to go higher still, perhaps to 22% or 23%. The possible consequences might include a wave of bankruptcies among businesses unable to pay such towering interest costs, and a new recession that is now almost universally expected by economists in both the capital and the financial community.

Meanwhile, inflation hit a 12.6% annual rate in October, and there is no sign of any slowdown. Predictions of continued double-digit rates throughout 1981 are now common. Indeed, Alan Greenspan, a Reagan economic adviser, disapprovingly reported to a business audience last week a widespread view that double-digit inflation would continue through the entire decade. The gloom has shattered the euphoria with which the stock market initially greeted Reagan's election. The Dow-Jones industrial average plummeted 62 points in five trading days through last Thursday. A Friday rally brought it up to 917.15, but that is still 83 points below its high of 1000.17 on Nov. 20.

Internationally, the skies are darkening too. The outgoing Carter Administration beat the publicity drums hard last week to warn of an impending Soviet invasion of Poland, in the somewhat frail hope that simply sounding alarms might help stay the Soviets' hand (see WORLD). If that policy of verbal deterrence fails, Reagan and his new Cabinet will not even get their feet under their desks before they are severely tested abroad as well as at home.

—By George J. Church.

Reported by Laurence I. Barrett with Reagan