Yes, There Are Issues

By WALTER SHAPIRO

One would not mistake it for a meeting of the American Economic Association. Nor has it yet taken on the serious sheen of a think-tank symposium on economic policy. But Campaign '88 is changing, slowly evolving into a serious debate over budgetary blueprints for post-Reagan America. In the wake of the October stock market crash, the universal lament was that none of the candidates, with the exception of Democrat Bruce Babbitt, was talking realistically about ways to reduce the deficit. Now, surprisingly, a demanding electorate and a hectoring press corps have forced the candidates to defend their fiscal proposals, and a few have even responded with some reasonable policies. Two weeks before the Iowa caucuses, the usual focus on personalities and images has partly given way to, of all things, a serious debate over economic issues.

As each candidate tried to position himself last week for the final-stretch run, the gamesmanship was obvious. But what was also striking was the frequency with which candidates couched their arguments in economic terms. Michael Dukakis, for example, felt a political need to challenge Babbitt's current media boomlet. Dukakis' chosen weapon? An attack on the fairness of Babbitt's antideficit panacea: a national sales tax. Richard Gephardt, whose political fortunes have been as volatile as the options market, crept into a narrow lead in Iowa in two major polls last week. His secret: a strong dose of populist economics built around his get-tough posturing on trade. In Iowa, Gephardt shares the old-line Democratic constituencies mostly with Simon. The two men traded epithets last week, and the battlefield was their respective records on tax equity: Gephardt's support of the 1981 Reagan cuts vs. Simon's lonely opposition to the 1986 reform act.

The economic debate is not as heated on the Republican side, partly because most contenders still worship at the shrine of bitter opposition to tax increases. Still, notice what Jack Kemp did when he needed a few stones to sling at Bob Dole and George Bush. He turned, as he so often does, to economics. After first pelting both front runners for temporizing on past tax cuts, Kemp followed up last week by deriding them for trying to freeze Social Security benefits in 1985.

These issues were not isolated blips on the political radar screen. In fact, nothing better illustrates the growing sophistication of the public and press on economics than the intense pressure on the candidates to offer credible proposals to shrink the deficit. Budget realism has become the new litmus test in both parties, as Pete du Pont discovered to his chagrin when he recently called a cousin, a well-heeled doctor, to ask for a campaign contribution. Rather than reaching for his checkbook, the doctor chided du Pont about his supply-side antipathy to new taxes. "Not raising taxes is crazy," said the cousin. "We've got to raise taxes."

Not every candidate faces a rebellion within his own family, but the changed economic mood is palpable. Until recently, the candidates had been roughly divided into two camps: the Painless Dentists and the Bitter-Medicine Doctors. The dentists tried to prescribe different forms of novocaine to numb public awareness of the nation's economic distress. Their nostrums included Kemp's supply-side magic, Bush's above-the-fray obliviousness, Simon's trust- me arithmetic and Dukakis' collect-unpaid-taxes gimmickry. Aside from Dole, who for the most part just talked about the need for tough remedies, the bitter-medicine doctors were all long shots like Babbitt, who seemed much more likely to be right than President.

But in recent weeks painless economic dentistry has become discredited. Some leading contenders, Bush and Dukakis in particular, still seem wedded to smoke-and-mirrors posturing. But the trend is for the other candidates to join Babbitt in the specificity sweepstakes. Last week Gary Hart unveiled a comprehensive, though far from imaginative, plan to close the budget gap. Under attack for vagueness, Simon put out a white paper on the economy, which included a few grudging last-resort tax increases. Dole recently redeemed a bit of his reputation as a budget statesman by calling for a one-year spending freeze, while defending an oil-import fee against heavy fire from Bush and Kemp. Even Kemp, whose Panglossian view of the deficit often surpasses Ronald Reagan's, now calls for a lid on governmental expenditures.

The Democrats, free from any need to emulate the President, have adapted far faster to the stringencies of a cupboard-is-bare era. Part of the credit must go to Babbitt, who set the initial high standard with his honest-numbers proposals for a national sales tax and the means testing of federal benefit programs. As Republican Rudolph Penner, the former head of the Congressional Budget Office, puts it, "You may disagree with his program, but you have to admire its completeness."

Babbitt faces a dilemma. He was showered with media kudos for his courage in supporting a 5% levy on consumer spending -- in effect, a national sales tax. But now that the novelty has worn off, he must defend the idea on its merits. No one disputes Babbitt's claim that even if necessities like food and medicine were exempted, the tax would produce perhaps $220 billion over five years. In fact, the danger could be that the tax works too well. "It may provide a framework for raising more money than we need," says Allen Sinai, the chief economist at Boston Co. So far, however, the political debate has been over the equity of Babbitt's proposal. Dukakis and Albert Gore have publicly charged that the plan soaks the little guy. Babbitt responds by pointing out that his program includes sales-tax rebates for low-income Americans. In truth, such a mechanism could ensure relative fairness at the cost of some complexity.

Hart's new budget plan takes the classic Washington green-eyeshade approach, adding a new user fee here, trimming a half-forgotten loophole there. Taxes are a major part of the mix: Hart favors retaining the top income-tax bracket at 33% and dramatically increasing the often regressive "sin" taxes on liquor and tobacco.

Simon's plan is far more problematical. Even as he tries to refute Gephardt's charge that he represents "Reaganomics with a bow tie," Simon cannot resist the blandishments of King Canute-style economic assumptions. He purports to balance the budget by 1992, but his numbers include $45 billion in savings from a drop in unemployment and $30 billion to $40 billion recovered through a decline in interest rates. "It's like telling people you can have a diet of hot-fudge sundaes and still lose weight," insists Carol Cox, the president of the Committee for a Responsible Federal Budget. Take long-term interest rates. They are set by market forces that weigh, in part, the seriousness of the federal commitment to deficit reduction. Putting it bluntly, the surest way to drive up interest rates would be for President Simon to declare that his balanced-budget pledge depends on lowering them.

Simon is willing to raise taxes, after a fashion, if the unemployment and interest rates refuse to respond to his entreaties. But clearly tax increases pain Simon; early drafts of his economic white paper had just one line on taxes. Even now, he plans to make up for any budget shortfall in outmoded soak-the-rich fashion: raising income-tax rates for individuals earning more than $100,000 a year. As unpopular as the rich may be in some Democratic Party circles, there just are not that many of them: each 1% increase in tax rates under Simon's plan would bring in merely $2 billion in revenues.

In fairness to Simon and Hart, there is another revenue producer in both of their deficit plans: oil-import fees. This is, in effect, a hidden tax; it raises gasoline prices at the pump without being directly visible to consumers. That is part of the reason that support for duties on imported oil cuts across the political spectrum, having won the endorsement of Gephardt, Gore and Dole as well. The rest of the equation is simply regional politics: such fees would amount to a windfall for domestic producers in Super Tuesday states like Texas and Louisiana by allowing them to raise their prices to match the new cost of imported oil. True, oil-import fees would spur energy conservation. But so would the more direct approach of an increase in federal taxes on gasoline, which is on no candidate's deficit-reduction agenda.

Though Dole talks sense about fiscal responsibility, he refrains from laying out his deficit arithmetic and, at times, seems positively unenthused about his own one-year budget freeze. "It isn't the best policy," he said last week. "But it is easily understood and can sell politically." But that is still a profile in courage compared to Bush, whose only tangible proposal is to slash the capital-gains taxes to 15%. This leftover supply-side nostrum, also endorsed by Kemp, would destroy the tax-reform principle that earned and unearned income should be treated alike.

Democrats Gephardt, Dukakis and Gore are ill positioned to take much partisan advantage from the Republican deficit distress. Gephardt's notions of bitter medicine, for example, do not extend to Iowa voters; he fervently backs a farm bill that he admits would increase food prices. Dukakis still clings to his widely ridiculed notion that stricter IRS enforcement would slash $35 billion from the deficit. Dukakis does not want to discuss new taxes, claims Chris Edley, his campaign-issues director, because he fears that they would draw attention from his IRS compliance scheme. Gore is equally vague. All he offers is platitudes and a modest grab bag of $16 billion in minor, last- resort taxes.

Perhaps the most important economic issue in the campaign is not what the candidates propose but what the voters will feel when they go to the polls. For all the obsession with political strategy, presidential campaigns are often won and lost by the numbers: unemployment, inflation and interest rates. Last October, it looked as if the nation was headed for a major recession, which would enhance the political fortunes of the Democrats, particularly those who were willing to talk sense about budget problems. There are, in fact, continued signs that rocky waters lie ahead, most notably last week's report that housing starts in December tumbled by a startling 16%. Yet most recent economic forecasts suggest that the economy may somehow muddle along until at least November. And that means good news for the Republican nominee, whoever he may be.

With reporting by Steven Holmes/Des Moines and Elizabeth Taylor/Cedar Rapids