Taming the "Monster"

By Edward E. Scharff

President Reagan sends out the first signals of Administration policy

Like an artist making the first brush marks on a blank canvas, President Reagan last week set out the initial signs of his Administration's economic program. In three swift strokes, he decontrolled domestic oil prices, abolished the moribund Council on Wage and Price Stability, and placed a 60-day freeze on about 100 pending federal regulations that were issued in the final days of the Carter Administration. None of those steps will make an indelible imprint on the economy, but taken together they show that the new Administration intends to translate the program outlined during the presidential campaign into specific Government policy. Said Reagan: "The clear message I received in the election campaign is that we must gain control of this inflationary monster. I want the American people to know we have begun."

Such a task will be made even more difficult by the uncertain and weak economy that Reagan faces. The price of gold, the litmus of uneasy times, tumbled a sharp $30.10 on the New York Commodity Exchange last Monday, then continued falling another $19.80 to close the week at $501.70, its lowest level in nine months. One factor in gold's slide was the remarks made by Federal Reserve Chairman Paul Volcker and President Reagan two weeks ago concerning a possible sharp drop in prices for the metal.

The U.S. economy, which grew at an unexpectedly strong annual rate of 5% during the fourth quarter of 1980, is now beginning to show signs of a new decline. The index of leading economic indicators, a harbinger of business trends, slumped by .8% in December, the first decline since last May. High interest rates and surging inflation are clearly beginning to be a damper on growth.

The President's actions last week were primarily intended to convince the public that the new Administration will use its political honeymoon period to push through major economic measures. Oil deregulation was the most significant of the week's decisions. Although it is expected to raise the price of gasoline by anywhere from 30 to 120 per gal. by the end of summer, the action will eliminate many of the distortions caused by artificial price restraints and gasoline allocation during the past decade. The controls were due to expire on Sept. 30, in any case, but the President decided to act now in order to send a signal to oil producers and to the public that he wanted to get the Government out of the business of regulating the price and availability of energy. Another advantage of immediate decontrol is that it will probably reap the Government an additional $3 billion to $4 billion in tax revenues during this fiscal year. The White House can use that money to help keep down the size of the budget deficit, which is now projected to reach $60 billion this year, even without any tax cut.

Reagan's economic advisers last week were also putting into shape the main elements of their so-called supply-side economic strategy. Supply-siders believe that inflation and slow growth can best be cured by enhancing incentives to save, invest and work harder. The two mainstays of the Administration's program: reduced Government spending and a 10% annual tax cut for the next three years.

The spending cuts will be difficult to achieve. While Congress is always ready to praise reductions in federal spending in general terms, it is normally reluctant to cut specific programs that help constituents. Key Reagan aides, including Donald Regan, Secretary of the Treasury, David Stockman, Director of the Office of Management and Budget, and Murray Weidenbaum, Chairman of the Council of Economic Advisers, held marathon sessions of up to six hours a day preparing the budget-cut proposals that are expected to be announced in mid-February.

Reagan's budget surgeons have an avowed goal of reducing federal spending by $15 billion during the current fiscal year and by another $30 billion to $35 billion next year. Each of the meetings was devoted to a specific section of the budget. Wednesday morning, for instance, was spent on energy-related issues, while the afternoon was set aside for a review of foreign aid.

The budget-reduction proposals are being kept secret, in part to discourage special interest groups from mounting pre-emptive protests. But Reagan and his staff reportedly have agreed in principle to cuts in certain areas. These include:

Social Security. For the moment, the White House will sidestep two of the most politically difficult issues relating to Social Security benefits: changing cost-of-living adjustments and raising the age of eligibility from 65 to 68. Reagan, though, will probably propose a gradual phaseout of minimum benefits for people who have not earned sufficient credits to qualify for the program. The main target will be the so-called "double dippers," people who retire from civil service or military jobs with pensions and then work for a few years in private enterprise to qualify for a second federal retirement benefit. Payments to students who are children of Social Security beneficiaries may also be reduced. Finally, the much abused standards for obtaining Social Security disability benefits may be significantly tightened.

Mass Transit Subsidies and Government Construction Projects. Major public works programs, including harbors and highways, will probably be scaled down, postponed or canceled.

New Fuel Technology. The Solar Energy and Energy Conservation Bank, a pet project of President Carter's that has an annual budget of $125 million, will be virtually abolished before it even goes into business. Research grants for synthetic-fuel studies, which were slated to amount to $735 million this year, will likewise be dramatically cut.

Food Stamps. Like every President since Nixon, Reagan will try to slash the bloated $10 billion food-stamp program. The new Administration is likely to suggest a 25% reduction.

The immediate response to rumors of the food-stamp cuts snowed the type of legislative opposition the White House can expect to almost any proposals to reduce federal spending. House Agriculture Subcommittee Chairman Frederick Richmond, whose Brooklyn district includes large numbers of poor people, declared that the suggested cuts would seriously endanger passage of a general farm bill. That put Senate Agriculture Chairman Jesse Helms, a North Carolina Republican, in a quandary. Though a strong and outspoken foe of the food-stamp program, Helms is a supporter of tobacco subsidies, which are part of the same farm bill.

When it comes to cutting taxes, the White House will naturally have a much easier time. Reagan aides last week gave the broad outlines of the tax reduction proposals that they will soon be sending to Congress. The Administration will suggest an annual 10% cut in personal income taxes and reductions in business taxes by means of accelerated depreciation on new investments. Both measures were advocated by the President during the fall campaign. Treasury Secretary Donald Regan indicated last week, though, that the Administration will not advocate any further reduction in the capital gains tax on long-term investment profits or any new tax breaks for interest and dividend income. Consumers, however, are likely to find the benefits of the tax cut to be as elusive as the siren of the Lorelei. Higher Social Security levies that went into effect on Jan. 1, and inflation, which automatically pushes people into higher tax brackets, have already wiped out most of the real gains that people might have got from a general tax reduction.

Few of the budget-cutting ideas now under consideration by the Reagan Administration are original. Many of them were proposed by past Administrations but never passed Congress. Nonetheless, Reagan's staff believes that the widespread economic discontent that swept them into office will provide the political support to push the spending cuts through the House and Senate. Reagan, though, will still have to mount a determined campaign both on Capitol Hill and with the public to win his battle against federal spending. --By Edward E. Scharff.

Reported by Laurence I. Barrett and Hays Gorey/Washington

With reporting by Laurence I. Barrett and Hays Gorey/Washington

This file is automatically generated by a robot program, so viewer discretion is required.