In his State of the Union message next Thursday, President Ronald Reagan will spell out the specifics of his ambitious plan to chop $40 billion to $50 billion worth of government spending in fiscal 1982.
Whatever he says, though, take it with a grain of salt. "It's Alice-in-Wonderland economics with a lot of fairyland and Disney thrown in. . . ."
This biting denunciation of Reagan economics comes from Pierre Rinfret, the outspoken head of the economic consulting company bearing his name.
In fact, the 57-year-old Rinfret -- who's been an economic adviser (either officially or unofficially) to presidents Kennedy, Johnson and Nixon -- thinks Reagan's program is so much pie in the sky and that he'll be lucky to get $10 million worth of federal cuts through Congress.
That has to be one of the gloomiest assessments around, since even some of Reagan's critics acknowledge that cuts of $30 billion or so are possible in fiscal '82.
The implications of just $10 billion of budget cuts are ominous, Rinfret tells me.
For starters, an even higher inflation rate. Rinfret calculates the figure at 15 1/2 percent for all of 1981.
And since high inflation and high interest rates go hand in hand, Rinfret expects this year's prime rate -- the best borrowing rate to the banks' most credit-worthy customers -- to bounce between 16 and 24 percent.
Accordingly, Rinfret is telling clients that the housing and auto markets this year will be a disaster. And his projections surely bear out his gloomy scenario. He predicts only 950,000 housing starts vs. 13 million in 1980. And he expects domestic auto production to drop from 6.4 million units last year to 5.7 million or 5.8 million in 1981.
"That means Chrysler is dead, and Ford will be hanging on by its fingernails," Rinfret says.
But why can't Reagan pull off his program, I asked our economic soothsayer.
"Because his nonsensical concept breaks down when you examine the details," he responds.
Rinfret explains that the theory behind the Reagan program is to cut taxes. That stimulates consumption (or consumer spending), which, in turn, is supposed to lead to more capital investment. And therefore, the economy grows faster, which provides more federal revenues -- and these revenues then pay for the tax cut.
But Rinfret argues that the tax cut doesn't really boost consumption when you look at the facts. The Kemp-Roth proposal (the three-year, 10 percent annual tax cut) works out to about $287 the first year for the median-income family of four. But higher Social Security taxes, coupled with higher energy and food costs, add up to $484 -- leaving the average family with a loss of $197.
Turning to capital investments, Rinfret asserts that you couldn't produce more capital goods in 1981 than in 1980 even if you wanted to.
He points out that the nonferrous metals industry (aluminum, copper and zinc) -- which is vital in the manufacturing of machine tools and machine equipment -- already is operating at 99 percent of capacity. And if you want to invest more in plant and equipment, you've got to buy more machine tools. But the problem, explains Rinfret, is that you can't get them in the United States; there's a 16-month backlog. And if you go to Japan for them, that's adding to the trade deficit.
Much is made of the potential boom in the defense-related aerospace and aircraft industries. But Rinfret points out that the industry has never operated above 78 percent of capacity because of the shortage of skilled labor. And right now, the industry is going at 74 percent of capacity -- leaving little margin, therefore, to expand.
"If there's no increase in consumption and little room to grow in capital equipment, you're not going to get more federal revenues," Rinfret says. "And therefore the tax cut is highly inflationary."
With much higher defense outlays -- the word is that Reagan will ask for $220 billion to $222 billion in defense budget authority for fiscal 1982, up from fiscal 1981's estimated $160 billion of outlays -- and no important stimulus to the economy, the budget deficit should widen even farther, Rinfret says.
He estimates a deficit of $70 billion this year and around $100 billion in fiscal '82.
Why so glum on Reagan's ability to slice $40 billion to $50 billion from the budget?
Because 85 percent of it is ordained by law, he replies.
Rinfret observes that 3 million people are on Social Security, 2.8 million are federal civilian or railroad retirees, and 2 million are on veterans' pensions. In addition, he notes that 22 million people get food stamps, 18 million receive Medicaid, and 28 million are on Medicare.
It's almost impossible to control the benefits of these groups, says Rinfret, because their political pressure is mind-boggling and the overwhelming majority of Congress will not oppose them. There are just too many vested interests.
He also points to the mushrooming -- and thus far seemingly uncontrollable -- costs of the Trade Readjustment Assistance Program; this is money allotted to workers displaced by foreign competition. Uncle Sam doled out $196 million in calendar '79, $1.6 billion in '80 and the current going rate is $2.5 billion.
And how, asks Rinfret, do you control annual interest payments of some $80 billion on the national debt? The answer is, he adds, you don't.
The bottom line: that higher inflation rate Rinfret talked about earlier, or as the economist puts it, "a lot more suffering this year for the average guy."