Making It Work

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It will have to continue to battle inflation by keeping money tight, while fighting off critics who say that such a policy is plunging business into a recession. In the view of a number of economists, it would be unfortunate if the Federal Reserve Board were to change course now, just when its policies are beginning to help make a definite dent in inflation. Reagan told his Cabinet last week that he shares that view. "I want to see the Fed continue monetary restraint and be the fourth leg of our economic program."

Tough money management and high interest rates have also bolstered the value of the dollar abroad. Many Europeans and Japanese have converted their money into American currency to take advantage of attractive investments in the U.S. Since January the dollar has risen by as much as 36% against other major currencies. That in turn has helped hold down U.S. inflation by making imports cheaper, though American exporters are having a harder time selling their wares abroad.

European moneymen recognize that Reaganomics is a risky strategy. But they believe the President has turned the U.S. economy in the right direction and admire his boldness. Says Giorgio La Malfa, Italy's Budget Minister: "Supplyside theory is an important new departure, which deserves to be fully tried." Even in West Germany, where Chancellor Helmut Schmidt has been strongly complaining about high U.S. interest rates, there is much admiration for Reagan. Says a top official in the West German Economics Ministry: "Reaganomics has reminded the West that by strong decisive leadership, it is possible to change perceptions of economic policy among the public."

Perhaps the most promising sign that Reaganomics may be working is the slowdown in wage demands. Since wages make up a major portion of the cost of any product, a decline in the pace of salary increases should slow down the rate of price rises. Average hourly earnings were jumping at a pace of almost 11 % during the last quarter of 1980, but in the past three months the rate of increase was about 7%. If this trend continues, it could be the key to a reduction in inflation and interest levels.

Most immediately, though, the future of Reaganomics will be determined by how Congress reacts to the second round of Reagan budget cuts. Quick approval could go a long way toward convincing Wall Street skeptics that the Administration will stick with its policy and not retreat at the first sign of resistance.

This second congressional battle of the budget promises to be tough. It could, in fact, crack the solid Republican support that Reagan enjoyed this summer. Conservative hawks might balk at reductions in projected military spending. Other Republicans might flinch at deeper cuts in already lean social programs. Observes Democratic Congressman Morris Udall of Arizona: "There are 20 or 30 liberal Republicans in the House who are embarrassed with their constituencies. They can't go on [supporting Reagan] forever."

The Democrats last week were naturally blaming the Republicans and Reaganomics for all of the financial troubles. Said House Speaker Tip O'Neill: "They left here completely happy last month; they got exactly what they wanted. Now the onus is on them."

Rather than deciding where to trim the budget next, the Republican leadership last week first