Economic Malaise Over, President Says : He Points Out That Inflation Is Down and Tax Rates Are Slashed

President Reagan declared victory Wednesday night over the economic malaise of the 1970s, and reaffirmed his faith in the curative power of less government: “Every dollar the federal government does not take from us, every decision it does not make for us, will make our economy stronger, our lives more abundant, our future more free.”

Buoyed by the economic boom of the last two years, Reagan pointed out that inflation is down, income tax rates have been slashed and the growth of federal spending on domestic programs has been slowed to a crawl.

“Four years ago, we said we would invigorate our economy by giving people greater freedom and incentives to take risks, and letting them keep more of what they earned,” Reagan said. “We did what we promised, and a great industrial giant is reborn.”

And, while keeping his options open on the all-important specifics, he endorsed in principle the Treasury Department’s sweeping blueprint for tax reform, saying: “Tax simplification will be a giant step toward unleashing the tremendous pent-up power of our economy.”

Yet the unanswered question--the one on which Reagan’s whole prescription for a brighter future depends--is whether the economy can maintain the momentum of the last two years.

“Reagan has so many battles to fight to keep the economy growing--the budget, taxes and the dollar,” said Lawrence Kudlow, a Washington economic consultant and former chief economist at Reagan’s Office of Management and Budget. “If he loses even one of them, he could be in real trouble.”

Above all, Reagan needs to avoid a recession, a task vastly complicated by the growing budget and trade deficits his policies have fostered.

Budget Director David A. Stockman wants to move the deficit out of the “danger zone”--above $200 billion a year--into a “manageable zone” of less than $100 billion.

Administration officials also worry about a trade deficit that reached a record $123 billion last year. They are convinced that as long as the dollar remains exceptionally strong against other currencies, the White House will be besieged with demands for bail-outs by farmers, steel companies and others whose goods are overpriced on world markets.

“Budgetary and trade deficits of the magnitude we are running at a time of growing prosperity are simply unsustainable indefinitely,” Paul A. Volcker, chairman of the Federal Reserve Board, told Congress this week. “In that real sense we are living beyond our means.”

To avoid bogging down in an economic quagmire, analysts say, Reagan will need to move his budget cuts through Congress quickly, while the memories of his overwhelming election victory are still vivid. He must, they say, aggressively pursue a tax reform package that would relieve the tax burden on the mass of middle-class voters even if, by abolishing some tax breaks, he also hurts some traditionally Republican groups.

But the President already has fallen $44 billion short of his own goal--sufficient spending cuts to reach a $100-billion deficit in 1988. He dismissed this failure in his State of the Union speech, arguing: “The best way to reduce deficits is through economic growth.”

Bipartisan Package Sought

And, instead of issuing a vigorous endorsement of the Treasury’s tax reform proposal or spelling out details of his own position as aides had indicated earlier he planned to do, Reagan Wednesday assigned Treasury Secretary James A. Baker III to work with Congress to produce a bipartisan package. The President reiterated his support for the mortgage interest deduction and said he would propose a top tax rate of no more than 35%, but otherwise retained his freedom to maneuver on a politically sensitive issue.

All this could leave his ambitious economic agenda vulnerable to sniping from all sides by such entrenched interest groups as veterans and doctors, who are among the targets of his proposed budget cuts, and the real estate industry and Wall Street, which stand to lose from tax reform.

“The problem is that there is no sense of crisis,” said a recently departed Administration official. “How do you demand short-term sacrifices in terms of budget cuts and closing tax loopholes from the same constituencies who just voted for letting the good times roll?”

But that crisis may not come during Reagan’s watch. Some of his staunchest critics are no longer convinced that this Administration will be forced to contend with the adverse consequences against which many have been warning for several years.

‘Luck of the Irish’

“The problem with the deficit is that it’s actually a long-term problem. There are no immediate consequences that Reagan needs to worry about,” said John Palmer, an economist at the Urban Institute who has been critical of many White House policies. “And, if falling oil prices continue to add to real economic growth and help keep inflation down, there’s a reasonable chance the luck of the Irish will hold for four more years.”

“Recession before the end of Reagan’s term is still more likely than not,” said Michael Barker, editor of “Politics and Markets,” a Washington-based economic newsletter. “But everything hinges on the deficit, interest rates and the dollar. Nobody knows when those things will turn.”

And with so many economic indicators currently going his way, Reagan is convinced that his second term can be even more successful than his first. “Our economy is not getting older and weaker, it’s getting younger and stronger,” he said Wednesday. “It doesn’t need rest and supervision, it needs new challenge and greater freedom.”

Some of Reagan’s own top officials, however, seem to have reined in their once-lofty ambitions to reshape the federal government from top to bottom and usher in what Reagan called “a second American Revolution” of low tax rates and limited government intervention in the economy.

Stockman Explains Shift

At a briefing for reporters last month, for instance, Stockman was asked why his own goals for holding down spending and slashing budget deficits had become more modest over the years.

‘Reality More Intractable’

“Well, each year reality gets a little more intractable,” Stockman said. And Stockman recalled the alarmist memo he wrote at the beginning of Reagan’s first term, warning that the new Administration was on the brink of an “economic Dunkirk” that could overwhelm Reagan’s grand economic strategy. In fact, one reporter noted, the recession Stockman had accurately predicted did nothing to prevent Reagan’s triumphant reelection.

“I’ve since been reminded,” Stockman noted with a broad smile, “that Dunkirk was actually a great victory.”