Politics Over Reason

By Ed Magnuson

A fragile budget deal threatens to collapse

A President abruptly breaking an agreement with Congress and chasing the wispy dream of a constitutional amendment that would magically balance future budgets. Democrats in the House playing irresponsible politics and offering no alternative proposals. New and credible forecasts of astounding federal deficits. A midyear Administration economic report too rosy to be taken seriously on Wall Street.

All told, it was another rough week for the already battered U.S. economy. Even as the prime interest rate was inching down toward 15%, the Treasury Department announced that it would need to borrow nearly $100 billion in the last half of 1982, an escalation it had not foreseen only three months ago. That competition for limited available capital is likely to keep interest rates high. The latest economic indicators, which for two straight months had pointed toward a possible recovery, turned ominously flat. Worse yet, the painfully constructed underpinnings of Ronald Reagan's fragile 1983 bipartisan budget deal were in danger of falling to the wrecker's ball. The bickering between congressional Democrats and Republicans and between leaders of both parties and the President threatened to defeat a much needed tax increase and permit passage of budget-breaking bills. If those two events occurred, the whole budget process could come tumbling down.

The economic uncertainties increased despite the President's plea, in a TV press conference, for Americans to exert "enormous effort and patience" as, "slowly and surely, we're working our way back to prosperity." Reagan abandoned his cheery forecasts of the past. Still, he contended that "we're going to see an improvement in the second half of this year."

The public, however, has already been unusually patient with the President on economic matters. When he took office 18 months ago, his own pollsters found that most Americans agreed that he would need roughly 18 months to turn the economy around. What is more surprising, the latest independent polls show that most Americans are willing to give him yet another 18 months to produce results. This tolerance is based on Reagan's winning personality, a widespread belief that past policies have failed, and a valid feeling that no one is strongly pushing alternatives to the President's policies.

Reagan inspired scant confidence by using his press conference "to get a little more publicity for the American people to urge their Congressmen to adopt the constitutional amendment" requiring a balanced budget (see ESSAY). One reporter had an apt question: "[Aren't you] presiding over the biggest budget deficit in history and telling the American people, in effect, 'There ought to be a law against what I'm doing?' " Reagan insisted, fairly enough, that the big budget deficits cannot be laid solely "at an individual's door." Then he turned the question around, asking of his Democratic critics: "Why don't you give us what we've asked for? Why don't you give it to us now, and let's see how big the deficit will be."

Actually, if Congress had approved Reagan's original request for a 30% tax cut over three years starting Jan. 1, 1981, instead of the 25% reduction that began nine months later, the deficit would probably have been much larger. That is because the Federal Reserve's tight money policy, designed to curtail inflation, has kept interest rates high and thus offset the intended stimulus of the tax decreases. At the same time, Reagan's insistence on a record buildup in military spending has roughly nullified the nondefense cuts he had sought.

Alice Rivlin, director of the Congressional Budget Office, predicted last week on Capitol Hill that the 1983 budget deficit will be at least $140 billion; only last April the Administration had placed this imbalance at $101.9 billion. Moreover, Rivlin estimated that deficits in each of the following two years could run as high as $160 billion. The Administration in February had projected declining deficits of $82.9 billion in 1984 and $71.9 billion in 1985.

Rivlin agreed with the Administration that there could be some recovery later this year but predicted that it would not be "vigorous" as long as the deficits prevent a decline in interest rates. Appearing before congressional committees for the second week in a row, Federal Reserve Chairman Paul Volcker said Rivlin's estimates were "no surprise to us." Even Treasury Secretary Donald Regan conceded that Rivlin's projections had been "reasonably good" in the past.

The Office of Management and Budget, however, issued a midyear economic report that was decidedly more upbeat than Rivlin's forecasts. The OMB placed the 1983 deficit at $115 billion. It predicted that unemployment will drop from its current 9.5% to 8% by the end of 1983, while inflation-adjusted economic growth will run at 4.4%. Most outside economists see at best only a 3.3% rise. Such differences look small, but each increase of 1% can result in a net revenue gain to the Government of about $10 billion.

Both the Rivlin and Volcker projections assume that the $98.6 billion tax increase for the next three years, passed by the Senate, will be enacted by the full Congress, and that spending will be held within the limits agreed to by the President and the Congress in June. But at his press conference Reagan angered congressional leaders of both parties by insisting that he will observe only the military spending ceiling set for 1983. He said he would abide by overall spending targets set for 1984 and 1985 but not necessarily those for individual programs. Previously Reagan had agreed to cut $16 billion from the huge increases in defense spending that he had proposed for 1984 and 1985.

If these reductions are scrapped, nondefense spending will presumably have to be slashed even more.

The Reagan statement could not have been more poorly timed. Senate Majority Leader Howard Baker said publicly that he was "disturbed" by the President's comments, and one of Baker's aides said privately that his boss was "just furious." Oregon Republican Mark Hatfield, chairman of the Senate Appropriations Committee, said that a Reagan refusal to abide by the ceiling would be "a complete breach of faith." Democrats, were even more outraged. Senate Democratic Whip Alan Cranston of California accused Reagan of "reneging on his agreement on defense spending."

That bitterness was injected into the already emotional struggle over the Senate's record peacetime revenue-raising bill and the appropriation measures now moving through Congress under a self-imposed mandate to restrict spending for 1983 to below $770 billion. On both matters, House Democrats were playing cynical political games. With the fall elections approaching, they were mostly concerned with blaming tax increases on the Republicans, while also forcing them to support unpopular budget cuts.

The tax bill, pushed through the Senate by Baker and Senate Finance Chairman Robert Dole of Kansas, increases cigarette, telephone and air-travel taxes, calls for the withholding of taxes on interest earned from savings accounts and dividends paid on stocks, and shortens the holding period on property qualifying for lower capital-gains tax rates. It slices in half the so-called three-martini-lunch deduction for business entertainment (see ECONOMY & BUSINESS).

House Democratic Ways and Means Chairman Dan Rostenkowski last week persuaded the Democratic-controlled House to take an unprecedented step on this legislation: instead of debating or amending it, the House agreed to go directly into a conference committee with the Senate to shape a final tax bill that would have to be voted on by both chambers. Ostensibly, Rostenkowski was speeding up the measure and preventing it from being nibbled to death on the House floor. In reality he wanted Democrats to be completely insulated from it. The risk he ran was that the tax bill could die if Democrats did not eventually support it in the House--and then they would have to accept the blame.

On the appropriations bills, however, House Democratic leaders took an opposite tack. Instead of agreeing to Republican demands that funding be voted as a single package, thus shielding the legislation against similar pressures to delete or amend specific cuts, Speaker Tip O'Neill insisted on a series of funding votes. In reality, the Democrats want the tax hikes more than the Republicans do, and the Republicans want nondefense budget cuts more fervently than the Democrats do. G.O.P. leaders suggested that their followers might not vote for the tax bill if Democrats will not openly push for the spending cuts. If the tax increase died or spending limits were exceeded, the result could be a recovery-blunting deadlock with a veto-wielding President. In that fight everyone, including the American public, would wind up losers. --By Ed Magnuson. Reported by David Beckwith and John F. Stacks/Washington

With reporting by David Beckwith, John F. Stacks

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