Looking The Other Way

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At first the strategy was purely a matter of debate and speculation. It was the question of the decade. What would the Government do to prevent Black Monday from turning into Bleak '88? Now, less than a month after the stock- market crash, the Reagan Administration's plan has emerged in sharp relief. The main objective: avoid a 1988 recession at almost any cost. That means encouraging the Federal Reserve to pour money into the economy and reduce interest rates. But in doing so, the Administration has had to make a sacrifice, the U.S. dollar. Treasury Secretary James Baker, the chief architect of the plan, maintains that any additional attempt to prop up the dollar with relatively high interest rates could choke the economy and further devastate the stock market.

Yet to allow an already weak dollar to fall still further, even though most economists agree it is inevitable, is a dangerous move that will carry a whole new set of economic risks. In the short run, a dollar lacking firm U.S. support could spin out of control; over the longer haul, its eroded purchasing power could reignite inflation. In an interview last week with the Wall Street Journal in which he acknowledged the new policy and sent the dollar plunging to new lows, Baker said, "I don't think we're out of the woods yet. I think markets are still fragile."

To shore up the markets and keep the dollar from diving too far, the Administration must achieve two other goals of its complex strategy -- a major budget-deficit reduction and better economic-policy coordination with West Germany and Japan. On those two fronts came small but potentially significant victories last week. Congressional leaders and Administration officials reached an apparent breakthrough in their special deficit-cutting summit, in which they have been struggling for two weeks to compromise on a minimum of $23 billion in reductions. For the first time, Republican leaders came up with a proposal containing tax increases that President Reagan gave hints he might accept. It was, declared Republican Congressman Trent Lott of Mississippi, a "bold stroke. Fair, simple, direct."

Meanwhile, the Administration won at least a symbolic victory in its efforts to persuade West Germany to spur its economy. The standoff between Baker and his West German counterpart, Finance Minister Gerhard Stoltenberg, eased slightly, aided by an announcement from the German central bank that it would cut two of its less important interest rates. If Bonn were to follow up * on that step and reduce its prime interest rates, there would be less pressure on the dollar. Reason: the greenback has been declining because U.S. interest rates have lately been falling in comparison with those of West Germany and other countries. Moreover, lower interest rates could stimulate Germany's appetite for American products and thus help reduce the troublesome U.S. trade deficit.