The president now has his very own tax bill, to go with an already established victory for his dramatically reduced budget, substantial regulatory reform and a tough policy of monetary restraints, putting into effect all four main elements of the Reagan economic recovery program.
With this a fait accompli, what lies ahead is a fair test of whether Reaganomics is going to work, or whether the doubts of many here and abroad will be borne out. Some believe that the underlying economic problems in this country will not be solved by this or any other tax bill, but must be met by more basic labor and management reforms.
"The economic situation envisaged here for 1982 is weaker . . . in real and nominal GNP growth than the forecast published by the [Reagan] administration," said the International Monetary Fund's midyear world outlook report.
What the president has promised us is that his dose of supply-side tax-cutting, coupled with monetary stringency and a reined-in government, will do what has never been done before: create a rapid economic expansion (5 percent in 1983 over 1982) together with quickly declining inflation (down to 5.7 percent in 1983).
The administration got its victory on the tax bill just as the economy, characterized by Council of Economic Advisers Chairman Murray Weidenbaum as spongy, began giving off clear signals of a slowdown. Weidenbaum says "spongy" means the economy has weakened from a strong first quarter, but it has "the inherent ability to resume expanding rather smartly, especially with the economic policies that the administration is pursuing."
At the same time, Reaganomics is getting a break from a moderation in inflationary pressures, with the consumer price index below double digits when measured over a full year's time. The major elements in the lower inflation rate are clearly the oil glut and a better result recently in food prices -- neither factor attributable to Reaganomics. On the other hand, Weidenbaum claims that a share of the credit for moderating inflation should go to the monetary restraint program.
But if the latter is true, it must mean that high interest rates have slowed economic activity, which in turn has softened demand for housing, durable goods, automobiles and the like. This hardly seems to dovetail with the promise of lower inflation and greater economic activity. dIndeed, the reason the economy is spongy is because of high interest rates.
So far, the president has stood firmly behind the Fed's tough policy of reducing the growth of the money supply, without regard to what happens to interest rates. But the fear of overkill continues to widen, now that inflation has abated somewhat. And for the first time, even Weidenbaum, in a midyear assessment, says he has to "acknowledge that progress" in reducing interest rates (yet another seemingly contradictory Reagan objective) "has been slow."
Weidenbaum told the Senate Banking Committee that although short-term rates have come down some from mid-May peaks, "we have not yet seen the major downward movement that would ordinarily be expected to follow clear-cut evidence of a moderation in inflationary pressures and business activity." But he optimistically promises that interest rates will begin to wind down "in the near future."
Wall Street, which has been fooled before, will believe it when it sees it. They observe that already, Weidenbaum has had to mark up his earlier 1981 forecast for the interest rate on 90-day Treasury bills from 11 percent to 13.6 percent, and for 1982, from 8.9 percent to 10 1/2 percent. But even the new forecasts imply a sharp decline from the current 15-plus-percent level, to what seems like an unbelievably slow 6.8 percent in 1984, at the same time that the White House target calls for a 50 percent slash in monetary growth.
Peter G. Peterson, secretary of Commerce in the Nixon administration and now chairman of Lehman Bros. Kuhn Loeb Inc., says in a speech he's been making around the country that when the Reagan program first appeared and was put into computers, nine out of 10 times, the readout was: "Does not compute."
But beyond the computers, there is the worry about the deficit. Experts like Salomon Bros.' Henry Kaufman point to the combination of the revenue loss from the giant tax bill now approved by Congress and the massive increase in defense spending, which together outweigh the cuts in nonmilitary spending.
On Wall Street, the typical guess is that the fiscal 1982 deficit will run at least $20 billion higher than the administration's most recent projection of $42.5 billion, not counting off-budget borrowing. Some pessimists, Peterson says, suggest the possibility of a $100 billion deficit next year.
Even within the administration, there is concern among those not swept away by rose-colored expectations of the potential of supply-side economics. Office of Management and Budget Director David Stockman, who has to come up with some $40 billion-plus of further cuts for the 1984 budget (to achieve a promised balance), is leading a fight to cut back some of the increases in the swollen defense budget. It promises to be a bitter internal battle next year.
In any event, many observers were saying last January, in a rising tide of good will toward Reagan, that however untested were the ideas of his economic program, "it ought to be given a chance." Whether that was a good idea is now moot. The chance is at hand, and the results can be measured against the promise.