Reagan Adviser Doubtful About Interest Rate Drop

President Reagan’s chief economic adviser Tuesday questioned whether interest rates will fall as the Administration expects, acknowledging that rates may stay high, even if Congress goes along with the White House effort to slash the federal budget deficit next year by $50 billion.

The remarks by William A. Niskanen--who divorced himself from Administration projections that short-term interest rates will fall to 5% by the end of the decade--cast doubts on White House forecasts that the deficit will decline to $144 billion in 1988 if Congress accepts Reagan’s spending goals.

On Monday, Budget Director David A. Stockman acknowledged that the White House would fall short of its admittedly still-high deficit targets if interest rates do not fall as projected. “If interest rates stay up,” Stockman said, “then tens of billions of dollars will be added to the deficit in each year.”

Niskanen, who as the lone active member of the Council of Economic Advisers bears overall responsibility for White House economic projections, pointedly told reporters: “Those interest rate numbers are just an assumption for planning purposes. They are not a forecast.”

However, he dismissed fears that the record gap expected this year between the government’s spending and revenues poses any immediate danger to the economy. “The short-run effects of the deficit on the economy have been surprisingly difficult to estimate,” he noted.

In presenting a generally upbeat annual economic report, Niskanen predicted strong growth overall throughout the rest of the decade if Congress adopts Reagan’s budget policies and the Federal Reserve maintains steady control of the money supply.

In contrast to Niskanen’s rosy forecast, Federal Reserve Chairman Paul A. Volcker warned Tuesday that the deficit, although “relatively benign in the depths of recession or in the early stages of recovery,” could “turn destructive at a time of relative prosperity.”

Volcker, repeating a frequent theme of his, urged Congress to take prompt and significant action against the deficit. In speaking to the Joint Economic Committee immediately after Niskanen, he said: “Do as much as you can, as soon as you can. I don’t have any fear you will do too much.”

A $50-billion cut in the deficit--the target proclaimed by both the Administration and congressional leaders--”is just the first step,” Volcker said.

On the other hand, the Fed chairman was relatively optimistic about the outlook for inflation, noting that wages and prices have climbed slowly even during a period of robust economic expansion. “Success in containing inflation can help to breed further success,” he said.

But Volcker emphasized that “we cannot simply assume that inflation has been conquered or that we have in fact reached a new era of sustained growth.”

Sharp Contrast in Reports

This year’s report to the President by his economic advisory council, prepared by Niskanen and William Poole, who recently returned to a teaching post at Brown University, was in sharp contrast to last year’s report, which reflected the views of then-Chairman Martin S. Feldstein.

After Feldstein delivered that report, which argued that huge federal deficits were largely to blame for high interest rates, then-Treasury Secretary Donald T. Regan told a congressional committee: “As far as I’m concerned, you can throw (it) away.” Feldstein resigned as chairman of the council last summer, and President Reagan so far has named no replacement.

The report includes a chapter on the elderly, which contends that the economic status of older Americans has improved dramatically in recent years and that the average after-tax income of those older than 65 is considerably higher than the average for the rest of the population. But Niskanen, under questioning by reporters, rebuffed suggestions that the report challenged Reagan’s decision to exempt Social Security beneficiaries from any of his budget cutbacks.

Niskanen said also that the Administration was making several recommendations to the Federal Reserve, including a change in the way the money supply is controlled that would raise the target level for this year by $5 billion. Niskanen contended that, because the money supply is already close to the level recommended by the White House, the change would have no effect on future inflation.

And, by widening the range for the money supply in the early months of the year, he added, the White House proposal would “increase the flexibility of the Federal Reserve.”

Niskanen suggested that the White House may go beyond such proposals, however, and that ultimately the Administration might recommend changes in the “institutional arrangement” of the traditionally independent Fed. He hinted that some of the Administration’s proposals may be anathema to the Fed but said that at least one idea--to make the Fed chairman’s term run concurrently with the President’s--already has been endorsed by Volcker.