Conservative Conservatism

By GEORGE J. CHURCH

Reagan's economic package is toned down to add up

George Bush once accused him of practicing "voodoo economics." John Anderson scoffed that he was working "with mirrors." Jimmy Carter derisively charged that his schemes would so deplete the Treasury that the Government could not afford to keep even "the night watchman at the Lincoln Memorial." Through it all, Ronald Reagan fed the doubts by refusing to spell out what kind of economic program he had in mind beyond his seemingly impossible promise to lower taxes, increase military spending and balance the budget. Last week, finally, he supplied some of the details of his proposals and produced a kind of five-year plan for capitalism that was far more coherent and defensible than the impression conveyed by his earlier statements.

The new Reagonomics, like the old, reflects the candidate's veneration of the free-enterprise system as the great creator of wealth and his hatred of Government intervention as the inveterate stifler of that system. But the new plan has been stripped of excess ideological baggage, and for the first time Reagan's advisers have attached numbers--debatable, but plausible--to some of its components. The plan's essential points, as outlined by Reagan and his advisers:

LOWER TAXES. The heart of the program is, as before, a 30% slash in personal income tax rates, 10% in each of the next three years--the so-called Kemp-Roth formula. Beginning in the fourth year, tax rates also would be "indexed," i.e., tied to inflation rates so that only a rise in income greater than the rise in prices would push a taxpayer into a higher bracket. Business taxes would be reduced by speeding up the depreciation write-offs that companies could take for modernizing their plant and equipment. Cost to the Treasury: $22 billion in fiscal 1981, which begins Oct. 1; a stunning $192 billion a year by fiscal 1985. Faster growth prompted by the cuts would reduce the impact, but only to $153 billion annually five years from now.

LESS SPENDING. With revenues lowered, Reagan would cut federal expenditures at least 2% below currently expected levels in fiscal 1981 and more in later years until the total reduction reached 7% in fiscal 1985. "Actually, I believe we can do even better," said the candidate. His goal is to hold spending 3% below anticipated levels next fiscal year and 10% by 1985 (spending would still increase, but less rapidly than at present). Savings: a minimum of $13 billion next fiscal year, $64 billion to $92 billion in 1985. This would be accomplished, says Reagan, primarily by ending "waste, extravagance, abuse and outright fraud in federal agencies and programs." He gave no examples of how he would wield the knife, nor did he promise to ax any programs outright--not even social welfare projects he has inveighed against in the past. The hold-down would be achieved despite an increase of at least 5% a year, adjusted for inflation, in military spending that Reagan contends is needed to "restore our defenses."

A BALANCED BUDGET. Though his spending cuts would not even come close to matching his tax reductions dollar-for-dollar, Reagan's advisers insist that he can nonetheless make revenues equal expenditures, possibly as early as 1983. The rationale: the Senate Budget Committee, a reasonably neutral source, has predicted that if no change were made in tax laws, federal revenues would more than double in the next five years to a staggering $1 trillion, given even modest economic growth, generating more income to be taxed. Reagan, the advisers contend, could whack away at tax rates to make the increase much smaller, and the revenues pouring in would still be enough to pay for spending that would be rising much less swiftly under a Republican Administration. Says Reagan of balancing the budget: "We can do it. We must do it. And I intend that we will do it."

REDUCED REGULATION. Says Reagan: "Government regulation, like fire, makes a good servant but a bad master." In company with many nonpartisan economists, he believes that excessive regulation is strangling business investment and worker productivity. He appointed Murray Weidenbaum, head of the Center for the Study of American Business at Washington University in St. Louis and a member of TIME's Board of Economists, to head a task force that will recommend just which regulations to scrap or modify. Weidenbaum says that he will look especially closely at the Environmental Protection Agency's ever-expanding mass of stringent antipollution rules.

The end result, in Reagan's view: businessmen freed of heavyhanded regulation will invest more; workers, released from oppressive taxation, will labor harder and save more; the economy will grow, producing more jobs and less inflation.

Reagan's grand plan jettisoned some of his old favorites. No longer does he muse about returning the U.S. to the gold standard, an idea that startled economists because it would make the monetary system too inflexible. Reagan has dropped proposals to abolish gift and inheritance taxes, which would increase the drain of his tax cuts on the Treasury.

More important, Reagan has abandoned the far-out idea that deep tax cuts would come close to paying for themselves, even without spending reductions, by stimulating so much economic growth that the Government would collect about as much revenue with lower taxes as it would with the existing high rates. That notion was pressed by U.S.C. Professor Arthur Laffer, Economic Consultant Jude Wanniski and New York Congressman Jack Kemp, a trio that Wanniski proudly characterized as "the wild men" of the Reagan entourage. Under their influence, Reagan sometimes talked as if tax cuts were a kind of economic cureall.

Laffer and Wanniski have now been shunted aside, and Kemp, while he still campaigns hard for Reagan, is no longer regarded as an influential issues adviser. The current program was shaped by study groups organized by Martin Anderson, a conservative economist who was an adviser on domestic affairs in the Nixon Administration. The panels included Alan Greenspan, former chairman of the Council of Economic Advisers and a member of TIME's Board of Economists, George Shultz, former Secretary of the Treasury, and Charls Walker, a leading tax expert. The group is sometimes joined by Arthur Burns, conservative chairman of the Federal Reserve Board from 1970 to 1978. The advisers acknowledge that the extra revenues generated by speedier economic growth will not offset the impact of the tax cuts, hence the sharp reductions in spending to avoid huge deficits.

Actually, Reagan's new program bears some resemblance to Carter's: both talk of reducing regulation, and the first-year tax cut that each proposes is roughly the same in dollar amount. There is one key difference. Ironically, Carter boasts that compared with Reagan's, his plan is tilted more toward encouraging business investment and less toward giving consumers more money to spend. Quips Alfred Kahn, Carter's anti-inflation adviser: "I'd like to know the night and the hour when the Republicans and Democrats exchanged economic philosophies."

For all its new realism, however, Reagan's five-year plan is still risky and open to bitter Democratic assault. Carter began the attack last week, blasting "the Reagan-Kemp-Roth tax proposal" before a group of New Jersey editors as "absolutely ridiculous . . . highly inflationary."

The attack on Reagan's economics is likely to focus on two questions. First, the charge that tax cuts on the scale that Reagan is advocating will reduce federal revenues far more than he calculates. The Carter Administration's Office of Management and Budget earlier put the cost to the Treasury by fiscal 1985 at $285 billion, compared with Reagan's claim of $192 billion. So enormous a reduction, the Democratic argument goes, would either produce ruinously inflationary deficits or force spending cuts so outsized that the Government would be unable, in Carter's words, "even to continue the routine programs that are designed to help the American people to a better life."

In the nature of economic forecasting, an arcane art that relies on calculations of production and income projected years into the unknowable future, neither side can prove its case. But even some Republicans are worried that Reagan has committed himself too strongly to major tax cuts too far in advance. Former President Gerald Ford left a dinner in Reagan's Chicago hotel suite last week to tell reporters that it was unwise to decide now how much to cut taxes in 1982 and 1983 because "I don't think we can see down the road to what the situation will be in 36 months." Democratic orators seized on his remark. Vice President Walter Mondale sniffed that "even Ford said he could not support" Reagan's tax proposals.

The second question is whether Reagan will really be able to enforce the spending cuts that he now admits are necessary to balance his tax reductions. The early portents are not favorable. Many economists believe that federal spending can never be brought under control without a clampdown on the "entitlement" programs--Social Security, veterans' benefits, Medicaid--under which more Americans every year qualify for benefits that are guaranteed by law to expand. And Reagan last week pledged himself to maintain "necessary entitlements already granted to the American people," though he opposed adding any "new programs funded by deficits." Says Otto Eckstein, a Democratic member of the Board of Economists: "If you are not going to change the entitlement programs and if you want more military expenditures, there is no way on earth that you can achieve savings anywhere near the magnitude [that Reagan proposes] and if you can't achieve those savings, then of course you can't afford Kemp-Roth."

Finally, if elected, Reagan will have to push his programs through a Congress that is bound to be highly skeptical--one in which Democrats will continue to control at least the House, unless Reagan wins by an unlikely landslide. Even some top Republicans have misgivings about Reagan's proposals. Says New York Representative Barber Conable, ranking Republican on the tax-writing House Ways and Means Committee: "I regret that Reagan has hewn to the line on Kemp-Roth. I think that Congress would use Reagan's plan as a starting point, and do its own things, as it always does." Thus Reagan's program is almost certain to be changed if he makes it to the White House. The prospect of altering the design does not dismay all of his advisers. Though, understandably, they will not come out and say so, even privately, some would not be unhappy to see Congress reduce the size of the tax cuts, thereby making Ronald Reagan's already scaled-down program even more modest still.

--By George J. Church.

Reported by Laurence I. Barrett with Reagan and William Blaylock/Washington

With reporting by Laurence I. Barrett, Reagan, William Blaylock

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