How Reagan's team plans to rein in runaway inflation

Ronald Reagan's new economic team aims at reaching the green pastures of 6 to 7 percent inflation by the end of 1982, but girds for a very rocky passage over the next few months.

First task of the team -- two of whose key members will be Donald T. Regan as Treasury secretary and Rep. David Stockman (R) of Michigan as budget director -- will be to persuade money men and Americans in general that Mr. Reagan's policies can get a handle on inflation.

Obscured by the fanfare of inauguration parades and galas, the US economy will be posting "dismal figures" early in the new year, says a senior Reagan source.

Inflation may be running 10 percent or higher, and the economy -- hobbled by soaring interest rates -- may be sliding into recession, throwing more Americans out of work.

These troubles, says a member of the Reagan transition group, can overwhelm the new administration -- or be regarded as an opportunity.

A starting point, the source adds, is to present Congress immediately with a package of tax cuts and about $20 billion worth of spending trims -- "a credible scenario of budget cuts."

In achieving such a program, the source says, Mr. Stockman will be a "key player," as director of the Office of Management and Budget -- the agency that whips a president's budget into shape.

Stockman will try to trim two percent from the fiscal 1981 budget prepared for Congress by President Carter -- trims, presumably, that will come from nondefense programs, since Reagan defense outlays are scheduled to grow.

Some key economic advisers to the President-elect expressed surprise at the naming of Mr. Regan, chairman of the investment firm of Merrill Lynch & Co., as Treasury secretary, claiming they had not known of the choice until hours before his name leaked to the press.

Regan, a source explains, is largely an unknown quantity in terms of outlook and policy to people who have shaped Reagan's tax-cut and other economic policies in recent months.

Two of the President-elect's earlier choices for the Treasury post, former Treasury Secretary William E. Simon and New York banker Walter Wriston, withdrew their names.

Key to the success or failure of Reagan's economic policies, and perhaps of his presidency as a whole, says an adviser, will be the degree to which he can generate public confidence in the fight against inflation.

"A tax cut," this source says, "is effective only if it increases work, savings, and investment. We must make it attractive for people to save and invest."

At the heart of the Reagan tax program is a planned 10 percent across-the-board personal income tax cut in 1981, followed by similar trims in the two succeeding years.

This so-called Kemp-Roth proposal, named after its congressional sponsors, has been criticized by many economists as inflationary. Not so, says a senior Reagan adviser, if one looks at the tax package as a whole.

"Reductions at the top of the income tax scale," he adds, "will be saved, not spent." Well-to-do Americans will tend to save their extra money, rather than spend it, he explains.

"Tax savings given to people at the lower end of the scale," he says, "will be spent." To this extent, Kemp-Roth would be inflationary.

This inflationary aspect of Kemp-Roth is counterbalanced by savings generated by cuts at the upper end of the scale, and -- even more important --granted to business.

Taking the package as a whole, the Reagan tax program will be weighted toward the savings and investment side.

Accompanying the tax cuts, says an adviser, must be "spending discipline," expressed in budget cuts that will reduce the rate of growth of federal outlays.

Some experts doubt that Stockman and his OMB colleagues will be able to carve enough from federal budgets to offset the effect of tax cuts without hurting Americans at the bottom of the economic ladder.