The MacNeil/Lehrer Report; 7199; Interview with Donald Regan

JIM LEHRER: Good evening. The Senate Budget Committee, ignoring President Reagan's proposed 1983 budget, today began serious discussions of six alternative versions, all of them aimed at cutting the size of the projected federal deficit, all incorporating one or more of Mr. Reagan's no-no's: cutting defense spending and entitlements programs, or adjusting the three-year tax cut. Senate Republican leaders said they detected a whiff of compromise in what Mr. Reagan said at his news conference last night; Senate Majority Leader Howard Baker saying he felt the President was now willing to consider defense cuts in particular, Senate Budget Committee Chairman Pete Domenici saying Mr. Reagan's announced willingness to listen to congressional budget alternatives was helpful and healthy. But Senator Domenici said his committee would no longer wait for specific compromise signals from the White House; his committee would produce its own budget version by April 17th no matter what. Some are calling it a game of budget chicken between the White House and Congress, a game that is wrapped up in economic forecasts, the recession, high interest rates, electionyear politics, and many other things. Most of which we're going to talk about tonight with Mr. Reagan's Secretary of the Treasury, Donald Regan. Robert MacNeil is off; Charlayne Hunter-Gault is in New York. Charlayne?

CHARLAYNE HUNTER-GAULT: Jim, the President reiterated his commitment to his overall economic plan, even as he indicated some willingness to be flexible. The only thing he flat-out rejected was any toying around with his plan to reduce income tax rates by 10% in July, 1983. On the budget he said that he was willing to listen to proposals on Social Security and defense, but on defense he added that the proposals must not jeopardize the overall military buildup. On interest rates the President said that neither the Federal Reserve nor the administration was responsible for the continuing high levels, but he also said that we are bottoming out of the recession, and predicted an upturn in the economy in the second half of the year. Jim?

LEHRER: Treasury Secretary Regan made that same summer recovery prediction a couple of days ago. Mr. Secretary, welcome.

Sec. DONALD REGAN: Thank you, Jim. Nice to be here.

LEHRER: On what do you and the President base that prediction?

Sec. REGAN: Well, we're looking at the factors that -- such things as industrial production, things such as retail sales. There are other indications that we are probably in the trough of the recession. Now, the average recession --

LEHRER: What does that mean, the trough?

Sec. REGAN: In the bottom of it. We've come down; we're in the bottom, and we'll soon be on the incline on the way up in this second quarter.

LEHRER: Do you expect this recovery to be a roaring recovery this summer?

Sec. REGAN: I know I used that word before.

LEHRER: I'm setting you up, Mr. Secretary.

Sec. REGAN: I understand that. But I think it will be a very decent recovery, yes.We're projecting currently around 4 1/2 to 5 percent increase in each of the quarters -- the third and fourth quarters of 1982 -- and we think that's a good, healthy recovery.

LEHRER: Speaking of roaring, you did say in February, which was just two months ago, that this economy was going to roar back to recovery beginning this spring. What's happened in two months to change things, to foul things up?

Sec. REGAN: Well, remember that I said that you would see the start in this second quarter of 1982. So we're right on target with the start in the second quarter and it gaining momentum during the third and fourth quarters.

LEHRER: But something must have gone wrong. I mean, that --

Sec. REGAN: Well, I'll tell you what's gone wrong. The recession is much deeper, both for the final quarter of 1981 and for the first quarter of 1982 than any of the economists had forecast, including us.

LEHRER: You know, it's an impolite question, but it has to be asked. You were wrong two months ago on the spring, now why are you -- are you more confident with this prediction this summer than you were, say, two months ago when you said it would happen in the spring?

Sec. REGAN: Yes, because, as I say, I think you'll see the signs of the recovery coming in the spring, with a definite recovery coming in the summer and fall of this year.

LEHRER: I see.

HUNTER-GAULT: Mr. Secretary, you said a few moments ago you had seen a couple of signs, but I was reading where Alan Greenspan, one of your people, said a couple of days ago that none of the usual signs that one sees that would signal an upturn, that one would see at this point, are there. What are you seeing that he isn't?

Sec. REGAN: Well, I'm probably looking a little over the valley toward the peak than Alan. I think Alan is still looking down in the valley. What I think will happen on this one, I think we'll come out of this recession, Charlayne, led by the consumer rather than by the smokestack industries. I --

HUNTER-GAULT: What do you mean by that?

Sec. REGAN: Well, I think that in recent months -- for the last six months, for example, consumers have not been spending as much as normal. They've been saving more or they've been paying down debt. As a result, they are poised to be able to afford to spend more money, and I think that once they get over the fear that the recession is going to be prolonged, or they get over the fear of inflation, then they will start to spend money.

HUNTER-GAULT: But isn't part of your plan that they would save that money?

Sec. REGAN: Well, those that can save will be. You notice I said that savings has increased. And with that tax cut that we have coming along on July 1st of 1982, people will get a 10% additional tax cut. They will have that money. In addition, the Social Security recipients will be receiving their COLA and there'll be more people receiving more receipts, something in the total of around $16 billion additional coming on top of a tax cut on July 1st. So all of this should be a stimulus to the economy.

HUNTER-GAULT: Are you signaling at this point that that means that on interest rates -- I mean, sorry, on the tax cut and on the Social Security cuts that some of the people in Congress seem to want, the President is going to stay firm, hold fast, hold steady?

Sec. REGAN: Well, Charlayne, the President reiterated that last night in his press conference, that the basics of his tax plan, the 5-10-10 -- 5% tax cut in '81, 10% in '82 and 10% in '83 are basics that he thinks should and must be kept in place. So we're rather confident that the tax cut will go through on July 1st of '82, and therefore people will have that money that I said they were going to have in order to stimulate the economy.

LEHRER: Mr. Secretary, you said that we're in the trough now. Does that mean that unemployment, say, is not going to get any worse than it is now?

Sec. REGAN: No, unfortunately, Jim, unemployment is what we call a "lagging" indicator; it lags behind the recovery. Factories start to -- tend to use the workers that they have, working longer hours, rather than hire new hires at first. They do that later. So as a result, and unfortunately I have to say this, there could be higher unemployment than the 8.8% that we saw last month.

LEHRER: Well, it's 8.8% now; new figures come out tomorrow. Do you expect them to break 9% or go even higher?

Sec. REGAN: I would say they'd probably be in the 9% area.

LEHRER: How much higher do you think they will go?

Sec. REGAN: Just slightly higher than that. I'm positive they're not going to break 10. And I don't think they'll go much higher than 9.

LEHRER: The other major pain of this recession, of course, is the number of bankruptcies, particularly among small businesses. Do you expect those to level out now that we're in the trough, or is that figure also going to continue to rise?

Sec. REGAN: No, I think that will continue to rise because they're mostly victims of high interest rates because they cannot afford to carry inventory and things of that nature and make payments. And I don't see interest rates coming down that fast to save them over the next several months.

LEHRER: What rate are interest rates going to start coming down, and when are they going to start?

Sec. REGAN: Well, Jim, this is a very peculiar situation. It's purely psychological. Every mathematical equation that you can run would indicate that with inflation down -- you know, inflation over the last three months has been 3 1/2%. Over the last five months it's been running at a 4 1/2% rate. You would think that with that kind of inflation that interest rates would certainly be single digit -- 8, 9 percent, something like that -- instead of where they are at 16, 16 1/2 percent. I think that the psychology is, is the money markets, in particular, are uncertain and, frankly, they distrust this administration and they distrust the Congress. They don't think that we will get these budget deficits under control.

LEHRER: Do they have reason to believe otherwise?

Sec. REGAN: Well, they've seen past experiences with past administrations, that in situations like this they've wavered. I think they're going to be pleasantly suprised this time and find that we are going to stick to it. And I think the Congress will live up to its responsibilities.

LEHRER: But there's no question in your mind that the deficits, real or -- well, we're talking about real ones. I started to say "real or imagined," but the deficits are causing the high interest rates, right?

Sec. REGAN: Yes. Even though at this time -- well, there is some monetary effects to this high rate of interest because the money supply has been a little bit volatile over the last three or four months and, indeed, during part of 1981 it was volatile. And when money supply starts to bounce around, people get very anxious again, and so there's uncertainty built into it.

LEHRER: If unemployment is going to continue to rise, if bankruptcies are going to continue to rise, if high interest rates are not going to come down dramatically, how are you defining the trough? What's the bottoming out that you're talking about?

Sec. REGAN: Well, the bottoming out has to be in GNP, as to where our gross national product will be. Remember that as some things are still coming down or are still staying down, others will start rising, and that's what I mean by -- the things that'll lead us out will be probably in the retail trade. Remember that 70% of Americans are employed in service industries, not in manufacturing, and I think it's in the service industries that we'll see this coming out.

HUNTER-GAULT: Mr. Secretary, if the interest rates continued high and unabated as they have for the last several months, could these rates delay the recovery beyond what the President and you are predicting, beyond the second half of the year?

Sec. REGAN: Yes, that is a distinct possibility. That's why we in the administration and the Congress are anxious to get at these deficits, because the longer we let the deficits hang out there, the longer interest rates will stay high, and the longer interest rates stay high, the less quickly will come the recovery period.

HUNTER-GAULT: The President said last night that the interest rates weren't staying up because of anything the Fed or the government was doing.What's your feeling about that?

Sec. REGAN: Well, he's absolutely correct in that.As I said earlier, you cannot find the direct linkage that there should be: if you run a high deficit you'd have high rates of interest, if you run a surplus you'd have low rates of interest. That linkage is not shown in any chart that at least I've been able to find.

HUNTER-GAULT: And yet the business community continues to insist that government policies are the reason for the deficits.

Sec. REGAN: That's correct. What they're worried about is inflation out in the future -- that we will continue to run huge deficits in '83- '84- '85 and the like. And if that happens, that the demands for the Treasury to finance those huge deficits will crowd them out of the money market, and there won't be money available for them to expand or to carry on their business.

HUNTER-GAULT: One of the other things that Alan Greenspan said was that the rates would start to fall when the administration and Congress produced a set of budget proposals acceptable to everybody, including the capital markets. Do you agree with that?

Sec. REGAN: Yes, I do. I think he's right on the button there.

LEHRER: This crowding out -- I mean, Wall Street's absolutely right on that, aren't they, Mr. Secretary?

Sec. REGAN: No, not necessarily. It all depends upon the size of the savings pool. If we can get people to save more, there would be a larger pool of savings available, part for the government, part for business. This is what they do in Japan. In Japan there is an enormous amount of savings, yet their deficits as a proportion of their gross national product, or as a proportion of their budget, run much higher than ours. And yet they don't have the inflation that we do.

LEHRER: Let's talk about these deficits. What is your current projection? Let's assume -- and it's a bad assumption because I think you would agree with me that Congress isn't about to pass the President's budget as submitted, the way it came down -- but let's assume under the President's budget -- what deficit are you talking about now?

Sec. REGAN: Well, the budget that we're talking about is for fiscal 1983, which begins October 1st of '82 and goes until the end of September of '83. In that particular period we're talking about a deficit somewhere around $96 1/2 to $97 billion.

LEHRER: Now of course the Congressional Budget Office says it's going to be $121 billion, and the Senate Budget Committee yesterday said, "We agree with the Congressional Budget Office and not the administration." Who's right?

Sec. REGAN: Well, who do you follow on forecasts? This is all in the art of forecasting. No one knows with precision exactly what gross national product is going to be in that period. Each takes a very sophisticated guess using an econometric model. Whose model is better or how it comes out, time alone will tell.

LEHRER: But isn't that crucial to Wall Street and the crowding out theory in bringing down interest rates?

Sec. REGAN: Well, look, as one who has spent 35 years on Wall Street, let me tell you that Wall Street doesn't know that much about econometrics and the like. A trader trading day in and day out --

LEHRER: I'm glad to hear that.

Sec. REGAN: -- is not really interested in that. What they're interested in is impressions. What is the impression, not the precision, of what's going to happen? And I think that they have the impression that we are going to have high deficits over the next three years.

LEHRER: Speaking of impressions, are the Senate Republican leaders correct in getting the impression that Mr. Reagan is willing to compromise on this budget?

Sec. REGAN: Well, I'll just repeat what the President said last night, which Charlayne described earlier. He said he is willing to listen.

LEHRER: That's as far as it goes?

Sec. REGAN: Well, that's what the President is saying. That's what we're waiting to hear.

HUNTER-GAULT: One of the things he said was that he was willing to give on the budget deficit if it didn't jeopardize the overall military buildup plan that he has in place. Where is the give there, from your view?

Sec. REGAN: Well, since I'm not in the Department of Defense and the like, I'm only the Treasurer, I would have to say, notice the way he said it. He said something that wouldn't, as I recall the words, basically harm the defense posture of the United States. I know that he places great stress on the civilian committee that's going to look into the Department of Defense to find out if there is any waste there, what can be eliminated, things of that nature.

HUNTER-GAULT: I think it was Mr. Connelly who said last week that there was at least $10 billion in that budget that could easily come out. Is that a figure that you feel is something to be used and is a serious figure that might be considered?

Sec. REGAN: Well, I'd have to do a lateral pass here to my fellow Cabinet member, Cap Weinberger. After all, that was his business. He was budget director in California; he was budget director at OMB here in Washington for quite a few years. He should certainly know how to cut that, and I'm relying on him to do it.

HUNTER-GAULT: But the bottom line on it is that there does seem to be a consensus over in the Congress among both Republicans and Democrats that this is clearly an area that is going to have to give. Do you buy that, accept that?

Sec. REGAN: Well, I'd have to agree with you that that's their opinion, and if they can point out where we could do it in accordance with the President's rules, we sure as heck would like to see it.

HUNTER-GAULT: What about Social Security? You were head of the task force that came out with the report today that said that without something being done immediately in Social Security there's going to be a serious shortfall by 1983. Doesn't that indicate that something's going to have to be done there?

Sec. REGAN: Well, yes. Something is going to have to be done, and done rather quickly about the Social Security trust fund. What our actuaries have projected for us indicates that some time in mid-1983, if nothing were done, that the Social Security trust fund would be severely strapped. Now, with borrowing of one fund or the other, we can get by for a short period of time, but it indicates that this commission that has been set up by the President certainly -- we're waiting for its report; it will report later this year -- sometime around the end of the year -- then the new Congress in 1983 is going to have to work very quickly on Social Security in order to get it whole again.

HUNTER-GAULT: Well, what kind of compromise do you think might be acceptable?

Sec. REGAN: Well, I think you have to go back to basics here, Charlayne. What has happened here is that when the actuaries were projecting what future costs would be, they never projected a rate of inflation as we had in 1979, '80 and '81. That being the case, we're simply running out of money too quickly, and if we're going to run out of money that quickly, we're going to have to revise some of our ideas about the cost-of-living adjustments.

LEHRER: Is thePresident prepared to do that?

Sec. REGAN: Well, I think he's going to wait until he hears from that commission as to what should be done about these cost-of-living adjustments. There are any number of ways you can go.

LEHRER: But as you know, that's one of the crucial areas -- that members of Congress say that that's a way the budget deficit could be reduced is by cutting the cost of living in these so-called entitlements programs. Is the President listening -- is that one of the things he'll listen to?

Sec. REGAN: Well, he's going to listen to his own commission, and naturally, he's put the chairman and four other members on that commission, so he will definitely listen to it.

LEHRER: But, he isn't going to listen on the tax cut, right?

Sec. REGAN: Well, coming back again, the tax cut that he says is his basic program was the business tax cut, the so-called 10-5-3, and then the individual tax cut, the so-called 5-10-10. And if you noticed again what he said last night, there were other ways that we discussed last year that revenues could be raised or so-called loopholes -- unintended tax benefits -- could be closed, and he's willing to listen to those.

LEHRER: But not on the basic tax cut?

Sec. REGAN: Not on the basic tax cut.

LEHRER: As you know, Mr. Secretary, many are suggesting that Mr. Reagan will go along with some changes in his list of no-nos -- defense spending, entitlements, all these things that we've been talking about -- but he just doesn't want to get hung for it. In other words, he doesn't want to appear inconsistent, so he'd let Congress do it, and then he will reluctantly agree.Is that the set-up? Is that the game plan?

Sec. REGAN: Oh, no. I wouldn't say that. I think the President in all sincerity has sent a budget up to the Congress. The Congress has decided it doesn't like it. So he's said, "All right, if you don't like my budget, let's see what your budget is, and I'd like to take a good look at yours." And he's waiting for that.

LEHRER: Are you concerned at all -- does it upset you at all that Senator Domenici said today, "We're going to go ahead without you guys"?

Sec. REGAN: Oh, no. Because we'd be very anxious for him to come up with some additional cuts or different cuts just so we can see what they are.

LEHRER: But the politics of that, if I may mention politics for a minute, doesn't that then set Congress up to take the heat rather than the President?

Sec. REGAN: Oh, no. I wouldn't say that because any bill that's signed, the President will be signing the bill. He's the one that has to accept it, and in accepting such a thing it becomes part of what the administration is doing.

LEHRER: Why has the President been not only reluctant, but has refused up to this point to give what is commonly referred to as a "specific signal" to his own party leaders in the Senate: "Hey, look, okay.I can handle a little cut in defense, maybe a little thing on entitlements," or whatever? Why has he been reluctant to do that?

Sec. REGAN: Well, last year he was urged right at the start -- "You will never get your tax cut through, you'll never get your budget cuts through, there's no way your program is going to do it. Why don't you just, you know, get off it and change your mind and come back to us?" Without wishing to impugn the previous administration too much, that's exactly what the previous administration did. They kept changing -- five times in one year they changed their budget. Now, I submit that, you know, that looks like vacillation, and this President is not that type ofperson. He's a strong man, and he believes in his ideas. And when he sends something up there he believes in it.

LEHRER: But if the Congress says, "Mr. President, this time you're really not going to get it unless you make some changes," it's still the same message? "I'm sorry, I'm a consistent president; I'm not going to make any changes"?

Sec. REGAN: No, look what you've just said, that you're not going to get any changes unless you make it, meaning the President. Why doesn't the Congress make it? That's what we're waiting to see.

LEHRER: And so you're delighted, in fact, that Domenici is going to go ahead and the Senate's going to go ahead?

Sec. REGAN: Oh, I wouldn't say "delighted," but I mean, you never like to go through these exercises, but I do think that he is doing a good thing in starting the process, because delaying is bad.

LEHRER: Why?

Sec. REGAN: Well, remember what we said. Money markets are worried about these deficits. Unless they see some progress down here, we're not going to get those interest rates down. Now, the longer we delay this process of getting started, the longer interest rates are going to stay up, and the longer this recession is going to stay in place.

LEHRER: So there is a deadline, in fact, a time problem?

Sec. REGAN: There's an urgency here.

LEHRER: Excuse me, Charlayne.

HUNTER-GAULT: I'm sorry. I was just about to ask the same question, Jim, in terms of the deadline, because this alternative plan is due out April 17th, and yet Senator Laxalt has said that the economy and your party as well are headed over a cliff unless a compromise is reached by the middle of May. First of all, your response to that, and then when do you think time will run out? I mean, what's your deadline?

Sec. REGAN: Well, without being precise as to a definite date, all you can say is that the longer we wait the worse off the whole nation is, and I think that it's incumbent upon both sides here to get moving on this as quickly as possible. I wouldn't want to put a definite date, you know, as to when one side or the other must have a movement.

HUNTER-GAULT: Also, just based on what you were saying a moment ago about the President holding firm to his policy, the public perception of that firmness seems to be that the President is simply inflexible. Does that bother you at all, that that is the perception that is going out in the public, and that basically it is causing the public to seem to lose confidence in the President's program itself?

Sec. REGAN: Well, the President is far from inflexible. He's just a man that knows what he wants and tries to get what he thinks is best for this nation, as the leader of the nation. Notice what he did last year. When he finally, reluctantly accepted the 5-10-10 tax cut starting on October 1st. As a matter of fact, he made a crack about that last night, saying that had his program of 10-10-10 been in effect on January 1st of '81, the recession might not have come, and might not have been as bad. But he did show flexibility last year. So I don't think you can say that the man is inflexible. He's firm, yes, and I think that's what the nation wants, and that's what the nation admires -- a man who knows his own mind and will stand by his principles.

HUNTER-GAULT: But at this point all of the polls and all of the surveys say that the public is losing confidence in the President and his program.

Sec. REGAN: Well, I think that's explainable by the fact that we're not seeing any progress, that we are in the recession. This is a pocketbook issue. People are looking at what's happening to them, what's happening to their neighbors, what's happening in their state or their locality. And they see around them signs of this recession, and I think they want something to be done and done quickly.

LEHRER: Former President Ford says in an interview which is going to be published this weekend that supply-side theory must bend to reality, and the reality of a recession with people out of work, with business hurting, etc., etc., etc., and that Mr. Reagan must bend. Will Mr. Reagan bend?

Sec. REGAN: Bend to what?

LEHRER: To the reality of a recession?

Sec. REGAN: Well, I think he understands that there's a recession. He keeps talking about how he went through the Great Depression. He understands this type of thing. He knows of the realities. So that I think that as far as his bending, if that means will he compromise or will he give away the shop, there's a big difference there. If it's just compromise, I think, as he indicated last night, he's willing to listen.

LEHRER: Are all these stories true, Mr. Secretary, that all the President's advisers and all his Republican leaders in the Congress are all telling him, "Bend, compromise," and he's a majority of one saying "No, go away fellows".

Sec. REGAN: Well, since I don't know all of the people from whom he's getting advice and the like, I wouldn't want to characterize it. I'd merely say that as far as I know, most of his advisers are telling him of how conditions are, and waiting for him to make up his mind.

LEHRER: Are you still as confident about Reaganomics now as you were when you came here 15 months ago?

Sec. REGAN: Well, if by Reaganomics you mean the fact that we think that people can spend their money better than we in the federal government can spend it, yes, I'm absolutely confident that people can spend money better than we can.

LEHRER: Mr. Secretary, thank you very much. Charlayne, good night.

HUNTER-GAULT: Good night, Jim.

LEHRER: And we'll see you tomorrow night. I'm Jim Lehrer. Thank you and good night.