Reagan to Tell Allies U.S. Economy Will Snap Back

President Reagan will assure Western allies at the economic summit today that the American economy is poised to snap back from the last quarter’s slowdown, and he will argue that European countries could achieve stronger economies by following his economic policies, including cutting taxes and altering welfare programs.

The sharp drop in the first quarter growth rate of the U.S. economy, to only 1.3%, together with the overvalued dollar and the huge U.S. budget deficit, has caused apprehension among European leaders and persuaded them to resist pleas that they stimulate their economies by following Reagan’s policies.

But a senior Administration official said Reagan will argue, in essence, “that the recent slowdown or this slower rate of rise--and almost a stall--is temporary and that we expect over the balance of this year a snap-back in economic activity.”

The Administration has set a target growth rate of 4% this year. But a senior official who briefed reporters here said that “no one knows for certain what the future holds” and that the growth rate for the rest of the year may average 5%, which would mean an annual rate of 4%, or it might be “a little less.”

“But we’re very confident that there will be a resurgence in economic activity,” said the official, who added that the economy will “resume expansion very shortly.”

The leaders of the seven nations at the summit--Britain, Canada, France, Italy, Japan, the United tates and West Germany--met as a group for the first time at a reception and dinner Thursday night and will open their economic talks today.

Reagan, according to Administration officials, is convinced that European economies are not performing up to their capacity partly because of rigidities built into their systems.

‘Take a Hard Look’

“We are urging that they take a hard look at those imposed rigidities with the prospect of reversing them and thereby permitting the markets to work, to reduce the unemployment, to encourage investment,” one senior American official, who declined to be identified, said.

The official cited several such rigidities which, he said, apply to most of the European countries:

--High tax rates, “which of course encourage some people to opt for leisure instead of work.”

--High minimum wage levels, which make it “difficult for the unskilled to find jobs.”

--Price controls, which “keep profitability down and therefore discourage investment.”

“Many of them have rules that were imposed for good social reasons to help people keep their jobs once they had obtained it,” the official said, “but these rules vary somewhat by country. But in essence, they say that if you want to lay someone off because the demand for your product has gone down, for whatever reason, you can’t just do that. You’ve got to go to that man to get an approval and you may even have to go to the federal government to get approval.”

‘The Cheaper Thing’

The net effect, the official said, is that unemployment rises because capitalists “prefer to do the cheaper thing, that is, substitute capital for labor. And, hence, they (the unemployed) don’t get the job.”

Asked what the reaction might be to a call for following Reagan’s economic policies in Europe, which has a strong tradition of welfare societies, the official said he has detected a greater interest among some of the European countries in “making their economies more flexible and doing those things that will permit them to create jobs as we have created jobs.”

“Now, in some cases,” he said, “that means changing the nature of some of the welfare programs, (it) doesn’t necessarily mean abandoning them. But, yes, it’s not just in the developed world, but I also note the same trend in the developing world. And the reason is not because of our articulate arguments. The reason is that our economy has performed and theirs hasn’t very well.”

New Round of Talks

Reagan also is prepared to argue at today’s summit session that the allies need to get a new round of trade talks started under the General Agreement on Tariffs and Trade, a U.N.-related agency, to help ward off growing pressures for protectionist measures in the United States.

Since the mid-1950s there have been three rounds of GATT talks, each requiring several years, which have resulted in drastically lower tariffs and removal of trade barriers.

The President has been pressing for a start of GATT talks by early 1986, and he won strong endorsements for that position in bilateral talks Thursday with Japanese Prime Minister Yasuhiro Nakasone and West German Chancellor Helmut Kohl.

In fact, Administration officials say that only French President Francois Mitterrand among the summit leaders is resisting the beginning of a new round of GATT talks. Mitterrand has argued that trade talks should be started only if parallel talks are begun on reforming the international monetary system of floating exchange rates.

The French president expressed his views on the issue in an 80-minute bilateral session with Reagan on Thursday, but the two leaders reached no agreement, according to Secretary of State George P. Shultz.

Shultz reiterated that the United States intends to proceed with trade negotiations both on a multilateral basis and on a bilateral basis regardless of whether the French ultimately agree to the talks or insist on linking them to monetary reform talks.