Let's say it up front: President Reagan has presented Congress and the nation with an economic program that is irresponsible: its parts don't add up, its fiscal and monetary assumptions are contradictory, its expectations exceed credibility, based on historic experience, and it pushes the nation to the edge of financial disaster.
Last year Sen. Howard H. Baker Jr., the Republican majority leader, labeled the first Reagan budget "a riverboat gamble." This one is even worse: It shows that the president is out of touch with reality, transformed from the chief exponent of balanced budgets to the biggest deficit-spender in history.
Over the five years fiscal 1983 through 1987, Reagan asked for authority to spend $1.644 trillion on defense. That works out to $900 million every day, including Sundays, for those five years. George C. Wilson, the Washington Post's veteran Pentagon reporter, uncovered an estimate (the one that prompted lie-detector tests) that the real bill would be closer to $2.4 trillion. That works out to more than $1.3 billion every day.
Can the nation afford this kind of excess?
"No clear economic rationale exists for the persistence of deficit spending year after year," the Congressional Budget Office notes. The president pokes fun at liberals who--he says--are suddenly deficit-conscious. But earlier budget problems "pale by comparison with the problems that face the country today," the CBO adds. Moreover, there is nothing in Keynesian doctrine that endorses chronic deficits in a period when the private economy is supposed to be strong.
On the stump in Minnesota, the president last week assailed "paid political complainers" who challenged his budget. And in his hortatory and highly defensive budget message to Congress, the president paused to lambaste "the voices of doubt, retreat and rejection that are beginning to rise."
He failed to mention that prominent among those doubters, who urged an adjustment in his policy, were Treasury Secretary Donald Regan, OMB Director David Stockman, White House advisers James Baker and Ed Meese--in fact, the entire White House inner circle except for domestic policy assistant Martin Anderson (who since has resigned).
As conservative economist Rudolph Penner observed, it's not unusual for presidents to make optimistic predictions. What's different this time is that "he Reagan doesn't have a margin for error." In the long run, Penner points out, former budgets always showed a big surplus. But Reagan, with a $750 billion tax cut over five years, and the staggering military budget, has wiped out the ability of the economy to generate a surplus for the foreseeable future.
Reagan thus has staggering budget deficits penciled in as far as the eye can see (even assuming he gets what he wants from Congress). The budget never reaches a balance--according to Stockman, it won't be possible until sometime beyond 1988.
President Reagan ignored his own team's advice to raise tax revenue. But that would have been an admission that last year's supply-side tax cut was too big. So Reagan "held" the budget deficit to a "mere" $91 billion for the coming year not only by claiming $56 billion in "savings" that a dubious Congress is sure to reject in large part, but also by adding in $39 billion in revenues reflecting a brisk recovery that is virtually impossible in the face of higher interest rates that have the economy in an exhausting bind.
This is more than the cosmetic fix-up of budget numbers that presidents Johnson, Nixon, Carter et al. practiced from time immemorial. It is based on a rigid commitment to an ideology that brushes aside reasonable questions and demands adherence to Reagan's economic faith in the simultaneous application of a stimulative tax cut and a restrictive monetary policy.
"Fears that the upturn will lead to a sharp upswing in interest rates and choke off recovery, while understandable on the basis of previous history and policies, are unjustified in the light of current policies and the administration's determination to carry them through," says the Economic Report of chief economic adviser Murray L. Weidenbaum.
Isn't this more of the same bland assurance given last year, that if the public has faith in Reaganomics, the program will work? Weidenbaum was asked.
His response: "The sooner the public sees all of the elements of the program work their way through the economy, and understands that the economic environment of the '80s is going to be different from the years that preceded, the sooner the public sees this, the sooner the adjustments will be made."
That's not very convincing. The president promises the kind of rapid economic growth that liberals and conservatives alike reject as dream-world stuff--given current high interest rates. In an unguarded moment, even Treasury Secretary Regan, when asked at the National Press Club how the recovery could proceed in the face of high interest rates, mumbled under his breath: "That's a good question."
But good soldier Regan, beating the drums for the budget as proposed by the president, labeled as "conservative" the estimate for real economic growth averaging 4.7 percent 1982 through 1987, because it is lower than the 5.4 percent average recorded in 1961-66. What Regan failed to point out was that in the 1960s, neither the administration nor the Federal Reserve of that era was in bondage to a strict monetarist regime that forced interest rates to record highs.
Now, despite the supposed magic of lush depreciation allowances, businessmen aren't anxious to invest in a way that underwrites economic growth. One executive told me: "With high interest rates, we're earning 14.5 percent, 15 percent on our Treasury investments--that's better than the 12 percent return we expect on our business." In this environment, who needs to take a private enterprise risk?
To their credit, the principal scholars at the American Enterprise Institute, such as Penner and Herbert Stein, in sympathy with much of the Reagan administration's underlying philosophy, do not shrink from pointing out the internal inconsistencies of the Reagan forecast.
The AEI's William J. Fellner, for example, hoping against hope that the administration will eventually "do the right thing" by raising taxes, pointed out to reporters that the Reagan prediction of more than 10 percent growth in the average value of the Gross National Product over the next five years doesn't square with his prediction for declining inflation at the same time.
"We've never had an expansion of nominal GNP like this when it wasn't during an inflationary period," Fellner said.
If the Fed keeps money growth rates to its 4 percent target of this year, the only way for nominal GNP to get up to 10 or 11 percent is for money to churn over faster in the economy, at a 6 or 7 percent rate. The technical word is "velocity." This is twice as high as the average for the past 28 years, and exceeds even the highest peaks recorded in single years.
"If we get a big increase in velocity," Fellner said, "then the Fed should tighten up, instead of going along with an increase in nominal GNP. This inconsistency between the Fed's restrictive money policy and the high GNP growth forecast by Reagan leaves me with a feeling of uncertainty."
You don't have to be an economist--merely a cynic--to figure out that the administration needed to have a big nominal GNP in its tables in order to "collect" enough tax revenue to make it appear that the budget deficits won't be even worse.
The Economic Report does not contain the monetary policy assumptions for 1983 and beyond. And Weidenbaum refuses to say what velocity rate the administration's budget and other projections depend on. But he promises that enough velocity will be there, and insists there can be an economic expansion without inflation, while interest rates are falling, and the money supply growth is steadily decreasing.
Most observers outside the administration just don't believe Weidenbaum. They argue that high interest rates are inevitable, in the face of the deficits projected, as business competes with the Treasury for available funds. The White House rebuttal is that there will be a huge "pot" of savings in the private sector--supplemented by investment funds from abroad--with which to finance the enormous federal deficits, along with business demand.
The financial markets don't believe it. Neither does Fellner. He pointed out that even if the administration gets its program through Congress, and even if the nominal GNP balloons as forecast, the relative drain of the proposed deficits to the net amount of savings would about equal past records. And those records were set when the economy was in an advanced stage of recovery--an environment the Reagan team used to criticize as dangerously inflationary.
Regan and the rest of the team-players are now saying that big deficits won't cause a run-up in interest rates--which will come down as inflation comes down. But that's what the Reaganites promised last year, and it didn't work: Reaganomics I was a bust.
So here we are at Reaganomics II. The promise that its supply-side tax program would pay for the huge military build-up and yield a balanced budget with low interest rates and reduced inflation having bombed out, Reaganomics II abandons the goal of a balanced budget, but stubbornly clings to a huge tax cut and hawkish commitments to the Pentagon.
Lyndon Johnson found out that he couldn't have guns and butter without inflation. Ronald Reagan can't have a $750 billion tax cut and a $1.6 trillion military build-up at the same time. The nation is in desperate need of Reaganomics III, which will give up something of one or the other. If Reagan won't write a new script that way, Congress must.