The Unkindest Cuts of All

By GEORGE J. CHURCH

Reagan gets down to the nitty-gritty on slashing Government spending

"I can assure you, by morning I'll be hung in effigy. The screams will be heard from border to border and coast to coast. "

This was Ronald Reagan's forecast of the reaction he will get to the economic program that he will unveil to a joint session of Congress and a national TV audience on Wednesday night. The President will announce sharp slashes in federal spending, as much as $50 billion in the next fiscal year, and deep reductions in taxes. He anticipated angry howls, but also the backing of a majority of Americans, who seem to agree that the Government must stop its spending spree. Said liberal Republican Senator John Chafee of Rhode Island: "We've run out of alternatives."

Thus, as Reagan made his prediction last week to 40 state legislators and county executives at the White House, there was a note of eager anticipation in his voice, for his overly gloomy forecast was part of a skillful campaign to convince Americans that the spending cuts are both necessary and equitable, that they will spare almost no one who has been sharing in the largesse of a profligate Government.

Reagan's campaign seemed to be succeeding. Far from proposing to hang the President in effigy, the state and county leaders left the White House expressing general support. In addition, seven labor chiefs, 18 Governors and 20 Hispanic leaders, who came to Washington at Reagan's invitation to hear his preliminary sales pitch, also held their fire. Said Georgia's Democratic Governor, George Busbee: "We all agree that the economy is in a mess. The President had to act immediately."

One reason for the lack of opposition, as was learned by the many Congressmen and Senators who spent the Lincoln's Birthday recess with their constituents, is that the home folk share Reagan's belief that the Government cannot keep piling up deficits. Democratic Senator David Pryor warned constituents in Arkansas to expect severe cuts in the budget for the Farmers Home Administration, which extends credit to rural people who have trouble borrowing elsewhere. Their answer, according to Pryor: "Inflation is our worst enemy. If that's what it takes, we'll support it even if it hurts."

But, as Reagan well knows, the calm could prove deceptive, and his prediction of the response to his plans may not be so very wrong. His program, reversing a trend toward ever larger Government that has been gathering momentum for almost 50 years, represents a high-risk gamble. And while much of the nation seems ready to take the chance that less spending and lower taxes will pay off in slower inflation and more economic growth, Americans are waiting anxiously for the program that he will spell out this week.

The details of the program prompted some wrangling within the Administration last week. On the tax side, the President decided to propose initially a single bill providing more generous depreciation allowances for business, and the so-called Kemp-Roth cuts of 10% in individual income-tax rates for each of the next three years. The Administration will ask that the depreciation changes be made retroactive to Jan. 1, but probably will propose that the start of the income-tax cuts be delayed to July 1. That would muffle their effect on the federal deficit for fiscal 1981, which ends Sept. 30; the deficit is now estimated to be at least a highly inflationary $60 billion, with no tax reduction at all.

The President and his aides want other tax changes, too. Among them: cutting the top tax rate on interest and dividend income to 50%, from the present 70%; reducing the "marriage penalty," a provision in the tax laws that now forces many couples in which both husband and wife work to pay a higher tax on their combined earnings than they would if they were single and filing separately. David Stockman, Director of the Office of Management and Budget, had urged that these changes be wrapped into the first tax bill. The President instead decided to propose at first a "simple and clean" depreciation and income-tax bill that Congress just might be persuaded to pass swiftly. He will present other tax changes later. By doing so, Reagan is running a conscious risk that Congress will be tempted to festoon the first bill with all kinds of amendments embodying legislators' pet tax ideas.

The Administration seemed more unified on budget cuts. Stockman reported that the Cabinet had agreed on 90% of the reductions to be recommended to Reagan, and that the President had quickly begun approving them. At one session he fingered a jelly bean, joked:

"They tell me the purple ones are poison," then nonchalantly popped it into his mouth--as if to symbolize that he was slashing spending with equal nerve and verve.

For all the bravado, the big news last week was what Reagan would not cut.

He announced that seven programs, promptly dubbed "the seven sacred cows," would be spared from the budget ax. The lucky seven: Social Security pensions; Veterans Administration disability benefits, even those for non-service-connected ailments; Medicare payments for the elderly; Supplemental Security Income for the elderly, blind or disabled poor; free school breakfasts and lunches for poor children; Operation Head Start, which prepares disadvantaged youngsters for school; the summer jobs program for poor youths.

The avowed purpose of issuing the don't-hit list was to redeem Reagan's pledge that his spending cuts would not hurt the "truly needy." But many veterans and Social Security pensioners scarcely meet the stern definition of truly needy people offered by OMB Associate Director Donald Moran: "People who in the absence of Government benefits could not survive."

Moreover, Social Security and veterans' benefits are prime contributions to one aspect of the inflationary cycle. The payments are regularly increased to compensate for inflation, and the higher benefits then swell the federal deficits that spur still more inflation. The real reason for the exemptions appeared to be to reassure millions of politically powerful members of the middle class--as well as some of the genuinely needy--that their benefits will not be cut, and thus prevent them from adding their voices to the chorus of complaints about the reductions that Reagan will propose.

That chorus will be loud. Reagan is still pushing for cuts in an astonishingly broad range of spending programs, including some highly popular ones. For example, while keeping hands off free school lunches for poor students, his aides are considering asking Congress to abolish federal subsidies for inexpensive meals served to children from less-needy families. Moreover, Administration officials say, on some occasions when the President has objected to a budget-cutting idea proposed by his aides, he has demanded that they shoot for deeper reductions than they first planned.

One of Reagan's concerns is to convince Congress and the nation that the disadvantaged will not suffer disproportionately from the spending cuts. Despite the exemption of the sacred-cow programs, some of the deepest reductions the Administration is considering--in food stamps, Medicaid and unemployment compensation, for example--will affect low-income people.

Administration officials promise there will be many reductions in Government services that benefit the middle and upper classes and business. Some samples:

a higher tax on airline tickets, forcing passengers to pay for many airport services now funded by Washington; fees on yacht owners to pay for channel maintenance now financed by the Coast Guard; cuts in agricultural subsidies that the Administration believes help corporate more than family farmers.

In addition, Reagan last week resolved one of the few serious disputes among his subordinates with a decision displeasing to Big Business. Special Trade Representative William Brock and Commerce Secretary Malcolm Baldrige strongly opposed any cuts in loans made by the Export-Import Bank to American corporations to facilitate export sales. They contended that the nation needs more exports to reduce its trade deficit. "The President was sympathetic to the balance-of-trade argument," reported one aide. Even so, in the name of requiring sacrifice from business, Reagan approved a proposal by Stockman to slash Ex-Im Bank's lending 20%, or $2 billion, in the next fiscal year.

The very effort to spread the budget cuts across a broad spectrum of society all but ensures that the Reagan program will be attacked by the widest possible range of interest groups, including many now voicing pious support for the general idea of less spending. Already last week, Democratic House leaders, while advising their followers to go along with Reagan's proposal as far as they can, signed a letter warning Reagan to keep his bands off subsidies for development of synthetic fuels, which Stockman suggested chopping by $6 billion in the next fiscal year. Nor were Democrats alone in opposing specific cuts. Republican Governor John Dalton of Virginia objected to a proposal to reduce federal aid for construction of the 101-mile Washington, D.C., subway system, which benefits many commuters from his state.

Administration strategists are keenly aware that if every committee in Congress is asked to approve reductions in its pet programs, the budget-cutting drive may bog down in a hopeless tangle. Said Democratic Congressman David Obey of Wisconsin: "The way this town works, a lot of the turkeys will be salvaged and useful programs will be gutted." Accordingly, Reagan's legislative aides tentatively decided last week to wrap almost all of the program into four superbills. They are: the tax bill; a "recision" bill ordering reductions of $13 billion in spending for the remainder of fiscal 1981, which ends Sept. 30; an "entitlements" bill that would enable the Government to reduce spending on certain programs, such as food stamps and Medicaid, under which benefits are now guaranteed by law; and a "reconciliation" bill. This last would set a limit on fiscal 1982 nonmilitary spending, about $50 billion below the $544 billion proposed by Jimmy Carter; the defense portion of the budget Reagan may increase by $24 billion, to $220 billion. The reconciliation bill would require approval by only three or four committees; if it passes, the many other committees that later vote money for specific programs would be required to stay under the overall ceilings. Whether congressional leaders will buy this approach is extremely doubtful.

Even before the battle was joined, the President began thinking ahead to further economic moves. He named an advisory board of twelve prominent non-Govern ment economists, headed by former Trea sury Secretary George Shultz, that will meet with him every three or four months to take stock of how the struggle against inflation and unemployment is going. In talks to Governors, state legislators and county executives, Reagan began urging a futuristic program to transfer all administration and funding of entire categories of Government programs, such as education and welfare, from Washington to states and localities -- an idea that would involve a revolutionary shift in domestic political power.

All these plans, however, must await the outcome of the tax and budget pro gram, which for the moment is quite revolutionary enough. Reagan is proposing the deepest cuts in expenditures ever sought by a President. He is asking the nation to take a bold gamble that major tax cuts will spur savings, investment and noninflationary growth, rather than merely cause deficits to rise and create still more inflation (see ECONOMY & BUSINESS). In selling this economic adventure to the nation, he will need all his proven skill as an orator. His ability may never be more tested than it will be on Wednesday night.

Douglas Brew and NeiJ MacNeil/ Washington

With reporting by Douglas Brew, Neil MacNeil

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