Recession prompting drastic switch in US economic policy

So swiftly that many still do not comprehend it, there has been a drastic, almost violent, reversal in US economic priorities in the past few months. It indicates that the primary national problem is unemployment, not inflation; that the situation may call for economic stimulation, not retrenchment; that the election may be fought over a thumping tax cut (advocated by expected GOP presidential candidate Ronald Reagan), and that even while Congress is pointing to the first "balanced budget" in 12 years, the more likely prospect is for a deficit of from $20 billion to $50 billion.

A harsh attack on President Carter's economic policies by former Treasury Secretary George P. Shultz, now an economic adviser of Mr. Reagan, outlined the Reagan camp's approach. Mr. Shultz forecast on NBC's "Meet the Press" June 15 a deficit up to $50 billion next year. Social security and other automatic increases, he declared, will raise taxes up to $90 billion in fiscal year 1981. He urged an immediate tax cut of around $30 billion, which he indicated Mr. Reagan also advocates. And he denounced higher taxes in the developing recession: The economic policies being followed by Mr. Carter right now, he said , "are virtually insane."

The Shultz statement opened the Reagan campaign. On the political front, the 1980 recession could give the election to the former California Governor. Both the political "ins" and the "outs" are adjusting their approaches to the new situation. Normally, an administration is held responsible for developments in the business cycle -- rightly or wrongly. In any case, business ups and downs exert a tremendous gravitational pull on politicians.

The past few months brought these developments:

* Industrial production dropped 2.1 percent in May, the biggest drop in five years, and the third monthly drop in succession.

* Unemployment has climbed from 7.8 percent in May to well above 8 percent, and may be inching toward 9 percent this summer.

* Each 1 percent of increased unemployment costs the Treasury some $20 billion in lost revenue and increased benefits.

* Unemployment is perhaps four times higher for teen-age city blacks, and the Miami ghetto riot warned of latent racial difficulties.

* Inflation has dropped dramatically (if perhaps temporarily) from around 18 percent to around 12 percent, with prospect of only a 10 percent rise in the consumer price index by fall.

* The Federal Reserve Board has lifted the brakes on interest rates, and the prime rate of big bank loans has declined dramatically.

Not for a long time has the economic climate of America changed so swiftly and spectacularly. There had been speculation about "recession" for years, but now it is here. Washington hasn't been able yet to adjust to it. This is vividly illustrated in the drive to "balance the budget."

The conventional remedy for inflation is to balance the budget. This is deflationary, just as federal spending in a slump is stimulative. Washington now is caught between two sides in an unusual degree of confusion. Congress and the White House are sometimes pulling different ways. The popular demand to "balance the budget" rolled in from an agonized public with extraordinary force as prices rose to unconscionable heights. Now comes the new drive in an election year to aid business and workers.

Hanging over Washington is Governor Reagan's espousal of the Kemp-Roth proposal to cut taxes 10 percent a year for three years, with the hope that this will so stimulate business that the Treasury will actually be in balance at the end.

Some Democrats who don't accept Kemp-Roth think they do discern a Reagan willingness to take stimulative action. They think Mr. Carter should forestall him with his own tax cut, both for political and economic reasons. So far Mr. Carter says, "Wait till next year." But "next year" is after the election.