The foundation of Ronald Reagan's economic policy -- shrinking the size of the federal government relative to the economy -- is as conservative as the Republican presidential candidate himself. To achieve that goal, however, Reagan recently spelled out a set of tax proposals worthy of a liberal Democrat in the heady days of the New Economics in the 1960s, including large personal tax cuts for individuals and much smaller ones for business.
President Carter, clearly more liberal than Reagan, is doggedly pursuing a considerably more conservative tax policy than his Republican opponent. He wants no action on a tax cut until next year, and his package of cuts, much smaller than Reagan's to begin with, focuses on stimulating business investment, not cutting personal tax rates.
The independent candidate, Rep. John Anderson of Illinois, would forego any tax cuts until the budget is balanced. Only then would he pursue cuts intended to increase personal saving and spur business investment.
Which of these approaches will have the most appeal for voters in November is anybody's guess, though various polls consistently indicate there is little pressure now for a tax cut.
At the moment, the linchpin of Reagan's policy still is missing. To keep his proposed tax cuts from generating an inflationary boom, Reagan promises to cut federal spending from $633 billion to $620 billion in the fiscal year beginning Oct. 1 and adds that he believes another $6 billion could be trimmed, as well.
Pursuing "a comprehensive assault on waste and inefficiency," Reagan declares, will result in a smaller growth in spending year after year. By fiscal 1985, he claims, spending would be at least $64 billion lower than the $920 billion projected by the Senate Budget Committee. Full achievement of his spending goals would knock yet another $28 billion off the 1985 total. Reagan, however, would increase defense spending by at least $15 billion.
In short, the GOP candidate says he can add to defense spending and still reduce that $920 billion to $843 billion. This cut, and faster economic growth is supposed to produce a whopping $100-billion-plus surplus.
Whether all of this is possible has become the focus of the economic debate between Carter and Reagan. The president tells audiences that his challenger's program is irresponsible and highly inflationary. Reagan and his advisers have gone to considerable lengths to portray his proposals as responsible ones that will give results far better than the current combination of high unemployment and inflation.
Reagan has given few details about where he would make his cuts. He has named a spending control task force, headed by former Nixon budget chief Caspar Weinberger, to find ways "to search out and eliminate waste, extravagance, fraud and abuse in federal programs."
But in the recent speech in which he outlined his economic proposals, Reagan emphasized, "This strategy for growth does not require altering or taking back necessary entitlements already granted to the American people. The integrity of the Social Security system will be defended by my administration."
However, Reagan advisers, such as Alan Greenspan of Townsend-Greenspan & Co., a former chairman of the Council of Economic Advisers, say the cost of some entitlement programs -- such as unemployment benefits, food stamps, welfare and medical assistance -- could be lowered substantially through tighter administration.
The question is whether all these programs and other possible areas of economy add up to enough to allow savings on the order Reagan calls for, no matter how tightly they are run. Reducing outlays by as much as Reagan proposes would take a "major re-engineering of the entitlement programs," says economist Otto Eckstein, "and he seems to be saying he won't do that."
Here is how the numbers seem to come out using estimates from the Office of Management and Budget based on the functional totals calculated by the Senate Budget Committee:
The committee's $920 billion spending estimate includes $270 billion for defense. (Adding more money for defense would simply increase both numbers equally.) Thus, $650 billion is left for all non-defense outlays. Ten percent of that, or $65 billion, would be needed to pay interest on the national debt, leaving $535 billion.
Social Security and railroad retirement benefits, which Reagan has singled out as untouchable, would take $229 billion in 1985. Retirement benefits for federal employes would account for another $28 billion, according to the budget committee figures. These two items together would eat up nearly half of the non-defense, non-interest portion of the budget.
The remaining $278 billion includes $20 billion for veterans income security programs (regular military retirement benefits are part of the defense spending total) which Reagan is highly unlikely to attack. Another $10 billion would be needed to pay for commitments already made under various housing subsidy programs, assuming no new subsidized housing units are authorized in the next five years. That leaves $238 billion.
The big items remaining, which undoubtedly would be targets for Reagan's cuts, include $96 billion for Medicare and Medicaid, $36 billion for public assistance (Supplemental Security Income for the elderly, aid to families with dependent children, food stamps, etc.), $19 billion for unemployment compensation, and $7 billion for nutrition programs other than food stamps, such as the school lunch program.
The remaining $80 billion in non-defense spending would have to cover all general government costs as well as energy research and production subsidies, farm subsidies, aid to education, manpower programs, and the like.
Reagan's task force must come up with ways to slash at least $93 billion from that $238 billion. Even if the entitlement programs were cut by say, 25 percent, Reagan would still have to find some place to reduce spending by another $53 billion, $53 billion out of that $80 billion. If he is to meet his "full" spending reduction goal, yet another $28 billion has to be cut.
Since Reagan is projecting roughly a $100-billion surplus for 1985, perhaps some of that margin could be used to fund programs that could not be cut as much as Reagan now intends. In any event, Greenspan held a press conference Friday to respond to administration attacks on Reagan's arithmetic. "To argue that Governor Reagan's program is irresponsible is nonsensical."
Greenspan, in effect, said the entire numbers exercise was only intended to show that what Reagan has in mind is doable. A key point is that Reagan has not made his tax cuts in any way conditional on achieving his spending cuts, one significant difference from Carter.
On Carter's part, the reversal of economic emphasis to one of containing inflation is due to the burden he bears from a record of steadily worsening inflation during his term in office, a record broken only recently by a recession that has clouded his earlier accomplishments in reducing unemployment.
Charles L. Schultze, chairman of Carter's Council of Economic Advisers, has warned repeatedly in recent months that the danger of accelerating inflation is too great to take the risk of stimulating the economy. In fact, even though major details of Carter's economic policy have changed sharply over the course of 1980 -- as Reagan loves to point out -- the goal of that policy has been consistent: to keep a lid on economic activity so that the food and energy price surges of 1979 do not get built into the nation's wage structure and leave the United States with a still higher underlying rate of inflation.
In today's high-inflation world, Schultze says, large tax cuts carry large risks.
Moreover, there is a consensus -- at least among most economists and most members of Congress -- that more business investment is needed to improve the growth of productivity and thereby reduce inflation in the future. The money for that investment must come either from the share of national output being consumed by individuals or by governments.
Since the administration has been twisting congressional arms all year to try to trim the federal government share, with decidedly modest success, no Carter economist has much faith that federal spending can be cut sufficiently to allow the necessary resources to be channeled to business for investment in new plants and equipment.
That means the money must come from higher taxes on individuals. For a given level of government spending, and a given rate of growth of the money supply, higher taxes -- which inflation conveniently provides by pushing individuals into higher tax brackets -- means a smaller federal budget deficit or a larger surplus, at least in the short run. As the government borrows less, or actually begins repaying part of the national debt if it can manage a surplus, those funds which otherwise would be used by the government are available to the private sector for investment.
Those are the reasons why Carter late in August proposed a tax cut to be enacted next year that would reduce calendar-year tax liabilities for individuals and businesses by $27.6 billion. Because of the delay in passage Carter wants, his proposals would reduce revenues by only $7.3 billion in fiscal 1981, compared to $18 billion for Reagan.
Carter's proposed business tax cuts, like Reagan's, primarily involve giving firms faster tax write-offs for their capital investments. But while Reagan would cut personal taxes by 30 percent over three years and then index the personal income tax so that it did not go up because of inflation, Carter wants only limited personal cuts.
Carter offered a tax credit that would be equal to 8 percent of what employes and employers have to pay in Social Security payroll taxes. The president also proposed offsetting part of the so-called marriage penalty -- under which married couples with both spouses working pay significantly higher taxes than if they had the same incomes but were not married -- and increasing somewhat the present earned income tax credit for the working poor.
In fiscal 1985, the Treasury Department estimates Carter's tax reductions would total $54.9 billion. Carter economists agree, however, that achieving an acceptable rate of economic growth between now and then will likely require more tax cuts, perhaps nearly double what Carter has so far suggested.
Carter, in his announcements last month, said he was crerating an Economic Revitalization Board with members from business, labor and the general public to give advice on a wide range of economic questions. Reagan immediately derided this as just one more bureaucracy that would mean more government involvement in the economy, not less.
The president also plans to continue his present intervention in private wage and price decisions through the voluntary wage-price standards administered by the Council on Wage and Price Stability, and hinted he might again propose an incomes policy in which wage or price increases above some standard might involve a tax penalty, or alternatively, a tax benefit for those who comply with such a standard.
Independent John Anderson says he will also seek to devise such a tax-based approach to an incomes policy to help curb inflation.
All of this is anathema to Reagan. He and his advisers believe the key prerequisite to a healthy U.S. economy is a smaller government. That is much more important, for instance, than having a balanced budget.
As Greenspan told the Senate Budget Committee a few weeks ago: "Our primary goal is a vital and growing economic system. The issues of inflation and budget balance are secondary.
"We wish to achieve budget balance or surplus, and defuse the underlying inflationary pressures in our economy, in order to achieve the primary goal -- a vital economy . . . "If we achieve budget balance through a major increase in the tax burden, we will stifle our productive system," Greenspan said.
This view provides a rationale for the large tax cuts Reagan is proposing. On the one hand, the cuts, which would reach about $30 billion in calendar 1981 and more than $200 billion by 1985, would keep the nation's real tax burden from increasing. On the other, the cut in federal revenues would provide a strong incentive for trimming federal spending.
When Reagan outlined his proposals in a speech, he also denounced Carter for having just offered his fifth new economic program in 3 1/2 years. "We must restore confidence by following a consistent national economic policy that does not change from month to month," Reagan declared.
Nowhere in the speech, however, did the Republican candidate note that he was that day unceremoniously dumping previous commitments to a wide range of individual and business tax cuts that in fiscal 1985 would have added up to more than $90 billion.
Reagan, who had been pressed repeatedly for a comprehensive statement of his economic proposals, found they simply did not add up and was forced to change. The result left him much closer to the economic mainstream but still with a much riskier set of proposals than Carter's as far as inflation is concerned.
The candidate offered no estimate of his own about future rates of unemployment or inflation, either with or without his program. The Senate Budget Committee's economic projections he used as a starting point for his budget figures included a fairly standard assumption that inflation would wind down very slowly -- to 7.6 percent in fiscal 1985 from 9.8 percent in fiscal 1981 -- if there are no large inflationary shocks, such as last year's skyrocketing energy prices.
Greenspan says the Reagan program would stiulate economic growth, which normally would mean a somewhat higher rate of inflation. In this case, however, the tax cuts would result in a large enough increase in productivity growth Reagan's proposals "would bring inflation down rather than raise it," Greenspan maintains. "His [inflation] goal is obviously less than 7.6 percent."
Anderson has not laid out any detailed estimates of how his package of proposals would affect unemployment or inflation during his first term in office. But he has stressed what he calls "responsible fiscal and monetary policies," and he favors an amendment to the Congressional Budget Act that would limit federal spending to an "appropriate" percentage of GNP.
His approach involves less inflation risk than even Carter's, though it likely would produce a slower recovery from the current recession and therefore mean somewhat higher unemployment than would Carter's plan.