A shift in economic policy is inevitable after last Tuesday's Republican landslide in the Senate and presidential elections. But it is far less certain that there will be much change in America's economic prospects, at least for next year.
The sharp jump in interest rates just after the election sounded a word of warning to those who hope for a dramatic reversal in the nation's economic fortunes. New administration or no new administration, the chances are the United States still will have high inflation and high interest rates, sluggish productivity and only slow growth in output and employment next year.
"The economy is like a great big ship," in the words of one of Ronald Reagan's advisers on the economy, Paul McCracken of the University of Michigan. He meant that it cannot be turned around quickly.
But word from the Reagan camp at the end of last week was that the president-elect and his economic officials certainly would try to turn it around as quickly as possible. And in his major campaign speech on the economy on Sept. 9, Reagan promised that a "national economic policy will be established, and we will begin to implement it within the first 90 days" of taking office.
Some likely elements of this policy already are clear. But, strange as it may seem after a long election campaign in which the economy was one of the major issues, there still is considerable uncertainty about what the overall thrust of the new administration's policy will be. Will Reagan show himself the fiscal conservative of some of his campaign rhetoric, or could his tax and budgetary policy turn out to be rather expansionary?
In part the confusion is because Reagan has yet to spell out just how and where he will cut spending in order to reconcile his apparently inconsistent aims of cutting taxes, increasing defense spending and reducing the budget deficit.
His clearest commitment is to a sizeable tax cut for individuals next year. The 10 percent across-the-board cut in personal tax rates that Reagan promised for next year would cut federal income taxes by just over 13 1/2 percent on average.
This may fall in favor of a $39 billion tax-cut bill now before the Senate. Reagan has given his blessing to this if it -- or something similar -- is passed in the lame-duck session of Congress that begins on Wednesday.
The Senate bill also would give big tax cuts to individuals next year, although both proposals still would leave the burden of taxes and Social Security higher than this year.
Reagan also has supported, while not committing himself to, a plan for further 10 percent cuts in tax rates in both 1982 and 1983. Before the election, the Kemp-Roth tax plan seemed unlikely ever to pass Congress. Many of Reagan's advisers now hope that it has a chance. But Sen. Robert Dole (R-Kan.), who is expected to take over as the new chairman of the influential Senate Finance Committee, poured cold water on the plan last Thursday, saying that it could be inflationary. His support would be essential if the proposal is to get through Congress.
Reagan and his team of economic advisers may learn the power of Congress early. Even with a Republican Senate, Reagan's more radical tax measures could get lost in Congress. This leads to yet another question mark over the likely economic impact of Reagan's victory.
Nevertheless, it is a good bet that, with big cuts in business taxation -- the nature and size of which have yet to be decided -- Reagan's tax policy will provide for a substantial reduction in federal revenues from the level they otherwise would reach.
It is much easier to cut taxes than to trim spending. And it also can be done much more quickly. A majority of Reagan's advisers, including the more traditional Republicans who now dominate his economic policy-making, appear to favor going ahead with tax cuts even if they are not at first matched dollar for dollar by spending cuts.
This could swell the budget deficit next year and boost the economy, but at the cost of higher interest rates and perhaps more inflation. It would be a far cry from "conservative" economics.
During the campaign, Reagan stressed the need to get people back to work and industry to expand again. He described his economic policy as a "strategy for growth." He did not, of course mean a traditional expansionary policy aimed at raising economic growth through demand management and bigger budget deficits. And he may put on the brakes, with a little encouragement from Capitol Hill, if he finds that happening.
For there is another side of Reagan economics, typified in the pronouncement that, "The problem with the U.S. economy is swollen, inefficient government . . . and too much printing-press money."
This side believes in attacking inflation, reducing the budget deficit and reining in government spending.
Already Reagan sources have made it clear that they intend to wield the ax as soon as they take office. But they still have not said where the blows will fall. They may do so soon.
Last week, key Reagan economic advisers expressed confidence that the growth of federal spending can and will be cut "easily." Reagan sources said that the president-elect aims to pare spending by 2 percent across the board in fiscal 1981, which began last month.
But until the cuts are spelled out, there must be some doubt about whether they can be achieved. It is likely to be especially difficult to make much impression on 1981 expenditures, as the year will be almost one-third over by the time Reagan takes office.
It is not a question of making actual cuts in the level spending, several of the advisers said, but of curbing spending growth. But slowing spending growth in nominal terms can, in times of inflation, mean cutting spending in real terms. In addition, there has been considerable dispute about Reagan's figures [shown in the table] for both tax revenues and spending.
Carter administration officials attacked Reagan's figures as inconsistent or dependent on deep cuts in existing federal programs. An analysis by Chase Econometrics suggested that the spending levels in the fact sheet could only be met by sharply cutting federal grants in aid to state and local government.
Then, either taxes would have to be raised, offsetting some of the proposed cuts, or other spending would have to be pared -- which might be difficult and would tend to reduce economic growth -- to avoid a big increase in the budget deficit, according to the Chase study.
The next few months should clarify Reagan's priorities on the economy as he is faced with hard choices in office.
The theories that underlie many of his statements have yet to be tried in America. Rejecting the emphasis of Keynesian economics on demand management, Reagan and most of his advisers stress the importance of supply-side economics.
They claim that it is possible to stimulate growth by reducing taxation and relaxing regulation, while fighting inflation through lower government spending.
This relies on three propositions that are, to say the least, highly uncertain. One is that government spending itself is chiefly responsible for inflation, rather than the budget deficits associated with it or outside factors such as higher oil prices and bad harvests.
The explanation sometimes advanced for this is that if government takes away some of their money people feel poorer, even if the money is transferred back to them in some way -- for example, via welfare payments or by providing government services. They then want higher wages to compensate for the taxes lost or they become less productive. Other economists would argue with that explanation of the present inflation in the United States.
carter officials had come to the conclusion that the only way to bring inflation down significantly -- without high unemployment -- was to attempt some form of incomes policy. This would be anathema to Reagan. So his anti-inflation strategy will rely on cutting government spending and, perhaps, curbing the budget deficit. This is unlikely to yield a dramatic return in 1981, especially if food prices go up sharply after the latest poor world crops.
A more optimistic view in the Reagan camp is that expecations will be so favorably affected with a Reagan victory and with early evidence of success in trimming spending that inflationary psychology will diminish, bringing down interest rates and then inflation itself. This remains to be seen.
The other proposition concerns the effect of taxation on output. Reagan no longer relies on Laffer-curve proponents for economic advice. But he stil seems to believe that a cut in personal taxes will stimulate output through raising work incentives, even if its overall effect on demand is neutralized by spending cuts. There is as yet little evidence to support this view.
There is now a consensus among policymakers that higher investment is needed to help raise productivity. Carter, Reagan, and the Senate Finance Committee have proposed cuts in business taxation to encourage investment. But it will take some time for any business tax cut to work through productivity.
Reagan already has warned that some time will be needed for his policies to work. It will be interesting to see over the coming years what sort of economics he espouses in office, and just how they affect the nagging problem of persistent inflation, still-high unemployment and disappointing productivity. At least the timing of the business cycle will be on his side next year, with the economy now forecast by most analysts to be recovering, albeit slowly.