Conservatives urging President-elect Ronald Reagan to pick a group of top economic advisers who will push for radical tax cuts regardless of economic circumstances and for a return to a gold-backed U.S. currency are going to be disappointed.
The highly publicized "struggle" for influence with Reagan on economic issues, according to all available evidence, ended well before the election when he began emphasizing not just tax cuts, the foundation of the so-called supply-side economics that had dominated his earlier campaign pronouncements, but also major cuts in federal spending.
The purists among supply-side economists believe the American economy has fallen on hard times because income tax rates have become so high no one saves or invests very much or even works very hard. Instead, they argue, people concentrate on spending their money before inflation makes it worth less. As a result of these perverse inventies, all tied to high tax rates, business has invested too little, to allow the economy to grow in a healthy, noninflationary way.
Since the culprit, in the supply-side view, is high tax rates, the proper answer is massive tax cuts. If the cuts were large enough, they would revitalize the economy by encouraging saving and investment on such a scale that new supplies of goods would halt inflation. And federal revenues would soar, eliminating any deficit caused by the tax cuts. Therefore, these economists, such as Arthur B. Laffer of the University of Southern California, discount any need to cut federal spending.
Now, the concern of a number of conservatives, including some of the California businessmen who have been Reagan backers and confidants for years, is that the new president will not be willing to take the economic and political risks associated with an unfettered supply-side approach. In other words, out of a misplaced worry over the size of the federal budget deficit and its potential impact on inflation, Reagan will not cut taxes deeply enough.
These conservatives' fears are well-founded. Of all the prominent supply-side backers, only Rep. Jack Kemp (R-N.Y.) remains in the inner circle of people with whom Reagan consults on the economy, and noneconomist Kemp is valued more highly for his political acumen than his detailed economic policy advice. For instance, Kemp was the only member of this group on Reagan's key economic policy coordinating committee that is meeting in Los Angeles this weekend. After its own separate sessions, the committee was to meet today with Reagan to give him detailed recommendations for tax and spending cuts, as well as suggestions on other economic policy issues.
The committee is dominated by men derisively labeled "traditionalists" by the conservatives who want radical tax proposals to flow from a Reagan presidency. George P. Shultz, vice chairman of the Bechtel Group, former secretary of Treasury, former secretary of Labor, and former director of the Office of Management and Budget, is the chairman.
By almost any usual yardstick, the members of the coordinating committee should be considered conservative: former Federal Reserve Chairman Arthur F. Burns, economist Milton Friedman, Citibank Chairman Walter Wriston, former Treasury secretary William E. Simon, former chairmen of the Council of Economic Advisers Alan Greenspan and Paul McCracken, former deputy Treasury secretary Charls E. Walker, former OMB directors James T. Lynn and Caspar Weinberger, geologist Michael T. Halbouty and Kemp.
But the recommendations these men will be giving Gragan this weekend will fall far short of satisfying the conservative groups such as the Heritage Foundation, which would prefer a purer dose of supply-side tax cutting.
The head of Reagan's transition team, Edwin Meese III, trying to keep the conservatives on board, thanked the foundation, which runs a Washington-based research group, and said its views would be carefully studied.
There is little sentiment on the economic policy coordinating committee, however, for getting the tax-cut cart too far in front of the spending-cut horse. One member of the committee explained it this way:
Marginal tax rates have gotten so high for middle- and upper-income taxpayers that they should be scaled back significantly. That ought to encourage additional saying, which in turn would make more funds available to finance greater investment by business. In this sense, all the committee members are supply-siders.
But whatever the assurances from Laffer and his colleagues that the payoff from these tax cuts will be essentially instantaneous, most of the members just don't believe it. And if Laffer is wrong, huge personal income tax cuts would swell the federal deficit and generate more inflation. If that happened, even temporarily, politically it could doom the entire effort to restore noninflationary economic growth through increasing personal and business incentives. At the same time, waiting until the budget is balanced or in surplus to begin the tax cutting process would be like chasing one's own tail and about as useful.
Therefore, the sentiment on the committee is to begin the process -- just as during the campaign Reagan promised he would -- by cutting personal taxes 10 percent across the board as soon as possible next year, with business getting other cuts, primarily in the form of faster write-offs for their inventments. Together, the cuts would be worth about $40 billion annually, but less in 1981 if they are not made retroactive to Jan. 1. Meanwhile, by pushing hard for large spending cuts, it should be possible to hold down the deficit and minimize the risk of adding inflation.
The committee member laying out this rationale acknowledged that the real confrontation with the pure supply-siders could come, not in the next few weeks -- after all, that group will be getting the first installment of the tax cuts they want -- but sometime in 1981. If inflation is not subsiding somewhat, or if Reagan for whatever reason has not been able to slash spending as he now plans, many of the committee members probably would be reluctant to advise Reagon to go ahead with the second of the three 10-percent-a-year personal income tax cuts that the supply-siders want and that Reagan promised in the campaign.
And Reagan might well heed such advice. In an interview with The Washington Post shortly before the election, Reagan described both his tax- and spending-cut goals as "targets" to be sought using flexible policies that would depend upon economic and budgetary conditions. That is one reason some conservatives have mounted efforts to have a pure supply-side advocate picked for the key job of Treasury secretary. Flexibility probably will be needed during 1981. The cost-push inflation the United States is experiencing is still running at the threshhold of the double-digit range. Food prices are widely predicted to be shooting up next year, and oil prices could rise sharply again, particularly if the war between Iran and Iraq continues. Meanwhile, unemployment, 7.6 percent in October, could begin to increase again if the recovery from the recession falters, as many economists expect it to do early next year.
The Fed's determined stance is one reason so many members of Reagan's economic policy-coordinating committee are so skeptical about plunging into a no-holds-barred, supply-side ceconimic policy. Any increase in the federal budget deficit places that much more strain on financial markets since the government has no choice but to borrow to pay its bills. In other words, the spending cuts they are insisting on, should normally mean interest rates would be lower than they otherwise would be. And that could only help spur more business investment in new plants and equipment.
In the short run, however, even the first installment on the tax cuts probably will make inflation somewhat worse than it otherwise would have been. As a member of one of Reagan's economic advisory task forces, an economist who is a staunch Reagan supporter, put it, "If they do it correctly, the administration will get a lot of bad news in 1981."