First impressions count enormously in politics. In preparing its initial economic program, the Reagan administration navigates between the twin dangers of rushing ahead so fast that it proposes a package that it can't explain or defend and of delaying so long that it appears indecisive and confused. And what makes the exercise so delicate is genuine uncertainty about the government's economic powers.
There is an intellectual vacuum. Old economic orthodoxies are wounded, but nothing is ready to take their place. "We've reached the point where we've lost our underpinnings on the relationship between the budget and the economy," said a career government economist.
Reagan's first proposals will play against this backdrop. The air will be filled with numbers: of budget deficits, tax reductions and spending cuts. Unless his proposals seem a coherent whole, the administration risks bewildering the public and getting bogged down in tedious debate that hurts its political effectiveness.
To appreciate the difficulties, you have to take an excursion into some of the technicalities of budgetary economics. Economists have long watched something called the "high employmentc budget. This represents an estimate of what the budget deficit or surplus would look like at some assumed definition of "high employment," now about 5 percent unemployment. It's a central part of the old orthodoxy.
If the high employment budget were in "surplus," it was assumed to be safe to cut taxes even if the actual budget were in deficit. The reason was simple: In a depressed economy, raising taxes in an effort to eliminate the deficit simply would send the economy into a deeper slump. The actual deficit was assumed to reflect high spending for unemployment benefits and low tax revenues; the high employment budget, which didn't show the extra spending or reduced revenues, was supposed to give a clearer view.
All this may sound lke mumbo jumbo, and maybe it is. As time passes, the concept of the high employment budget becomes increasingly suspect.
One basic problem involves its reliability as a measure of the government's real impact on the economy. A whole array of spending activities aren't covered by the official budget: off-budget programs (now worth $20 billion), which are simply left out of legal fiat; government loan guarantees, which mean that government gives someone else the right to borrow and spend; and government regulation, which means that government orders someone else to spend.
A second equally important shortcoming involves the economic effect of the actual deficits. They raise the government's need to borrow and, presumably, increase interest rates in the process. If one way of helping the economy out of its slump is to cut taxes, another is to wait for lower interest rates to simulate additional borrowing and more spending.
These apparent abstract ramblings have enormous practical and political relevance for Reagan.
By the conventional logic of the high employment budget, no one would quarrel with a tax cut in 1981. The latest estimates of the Office of Management and Budget, based on the Carter budget, show the high employment budget moving from a $14 billion deficit (at an annual rate) in the fourth quarter of 1980 to a $41 billion surplus at the end of 1981. This happens because inflation kicks people into higher tax brackets, creating an invisible tax increase.
But there's a catch. If the Reagan administration proposes large tax cuts, as it has promised, it risks swelling the actual deficit significantly. Even with some questionable budget assumptions, the Carter administration's proposed fiscal 1982 budget (beginning next October) would reduce the actual deficit to only $28 billion. Piling a $25 billion to $35 billion tax cut on top of that would produce a third consecutive year of actual deficits in the range of $60 billion.
These qualifications are espcially important now. The current economic slump is concentrated in two credit-sensitive industries -- automobiles and housing. In addition, the country has an urgent need for energy-saving investment both by households and businesses. All this argues for having interest rates, not tax cuts, play the major role in generating revival.
Somehow, Reagan has to mesh all these uncertainties and contradictions into a coherent statement of purpose and action. You donht have to eavesdrop on the inner councils of the new administration to see its broad choices.
Reagan could attempt to define away the problems by saying that his tax cuts would be "noninflationary": that they would create the types of "incentives" for work and investment that would diminish inflation.
The great danger is that this will be seen as a sham. People simply may not believe it; they've heard it all before. For all the seminar chatter about "incentives," the most basic effect of a tax cut is to put money into peoples' hands. And, leery of the value of their savings in an inflationary world, people tend to spent what they get.
An alternative approach is a sort of honesty-in-government strategy; Reagan could tie tax reductions to spending cuts. It seems plain now that government spending runs consistently higher than government's willingness to tax. Since 1969, there has been one actual surplus and only two tiny surpluses in the questionable high employment budget.
Reagan simply could say this has to stop. Either Congress votes spending cuts -- or more accurately, reductions in increases -- or he will veto tax cuts. The risk, of course, is that everyone gets mad and nothing gets done.
Probably no one, not even Reagan, knows how he will come out. But, however he decides, he needs to do more than deliver a mountain of detailed proposals to Congress. He needs to project a vision of how things work and find a program that fits consistently with that vision. Otherwise, he faces the sort of political debacle that Jimmy Carter created with his "moral equivalent of war." Fine rhetoric alone won't wash.