The tax bill means a lot more than money alone. It means that President Reagan and Congress were able to recognize the danger into which the economy had fallen and -- much harder -- to do something about it. Those forecasts of future deficits, with their threat of inflation and high interest rates, had cast a heavy shadow over business and the hope for lower unemployment. But, much more damaging than the technical economic analyses, there had been for months a growing sense that the president was clinging rigidly to a doctrinal position while a divided Congress remained entangled in its own internal quarrels. That turns out to be wrong. The winners last week were neither party nor faction, but the country as a whole and anyone who wants to see the American economy grow.
The two crucial bills passed last week, the budget reconciliation bill on Wednesday and the tax bill on Thursday, make a real difference in fiscal policy. But the fact that change was possible, in the summer of an election year, is probably more important than anything else. Earlier this year, hardly anyone would have bet a nickel that it could be done. How did it happen?
A lot of sensible Republicans were talking as early as last fall about the need for a tax increase, but Mr. Reagan refused to hear of it. He was sticking with the doctrine that the only way to balance the budget was by cutting spending. But when Mr. Reagan brought out his proposed budget last February, it was notable chiefly for its huge and expanding deficits. Evidently even Mr. Reagan, with David Stockman at his side, was having trouble finding cuts. Congress immediately discarded the Reagan budget and began writing one of its own that required a substantial tax increase. Simultaneously, Sen. Robert Dole, the chairman of the Senate Finance Committee, began writing the tax bill. To be passed, it required the active support of both President Reagan and Speaker O'Neill. That led to the memorable meeting between the two at the Capitol one afternoon last April. But their negotiations collapsed under an overload of suspicion that each intended to blame the tax increase on the other in the autumn campaign.
At that point, you might have abandoned the whole tax idea as dead--unless you happened to notice that both houses of Congress continued to work on a budget resolution, passed in June, calling for a tax bill precisely the size of Sen. Dole's. Then, remarkably, in July both the president and the Democratic leadership of the House began to swing.
The explanation lies in the peculiar pattern of the current recession. The economy went through a bad slide last winter, but by April -- at the time of the meeting between Mr. Reagan and Mr. O'Neill -- it seemed to be ending. Consumer price inflation appeared to have dropped nearly to zero. While unemployment was high, it looked as though a recovery was about to bring it down over the summer. The White House was sure that its strategy was about to take hold, and it was in no mood to make compromises.
Then, as the weeks passed, it became clear that April had been no turning point. By the beginning of summer, both consumer prices and unemployment were moving up again with dismaying speed. Businessmen of high standing were warning both the White House and Congress that continued high interest rates were beginning to do permanent damage to the structure of American industry.
The president began to swing. The supply-siders in his party bitterly protested. But since they were unable to come up with either a plausible explanation of the continued decline or any remedy -- other than a return to the gold standard -- they lost the argument. Once his mind was made up, Mr. Reagan began to push the tax bill with great vigor and skill.
Both he and the Democratic leaders of the House are entitled to great credit for recognizing that circumstances were changing, and that they had to act. But greater credit is owed to the men who saw this crisis coming, and have worked for nearly a year to meet it -- notably Sen. Dole, Sen. Pete Domenici of the Budget Committee, and the Senate majority leader, Howard Baker. Federal fiscal policy is now being managed chiefly by this small group of Republican senators, and they are doing it uncommonly well. This weekend finds the economy being steered in a different, and more promising, direction than at any time since the year began.