The audacity of political and economic strategy taking shape in the Reagan administration is glimpsed in budget director David Stockman's rejection of conservative orthodoxy and opposition to broad cutbacks in Social Security benefits.
Politically, Stockman is seeking to protect the Republican Party from its incorrigible desire to throw widows and orphans to the wolves and thereby embellish a villainous reputation that has helped lose elections for a half-century. The new Office of Management and Budget director is saying that there are methods less painful, both for Republicans and the old, to cut the budget.
His economic justifications are equally intriguing. They are based on his confidence that President Reagan's supplyside economics will transform inflationary contraction of the economy to noninflationary growth. If indexing of Social Security payments (which is designed to keep pace with inflation) is reduced, it would be tacit admission that Reagan's policy will fail.
Specifically at issue is an idea to save billions in social Security payments by recalculating cost-of-living allowances. When Stockman visited Wall Street after his selection by Reagan, he found stalwarts of the nation's great financial houses obsessed with the idea of cutting the budget by clipping away at old-age pension checks.
On Capitol Hill, Republicans were equally enchanted by the notion, perpetuating the party's image crystalized when President Hoover dispatched the U.S. Army against the bonus marchers. Many Democrats were also interested, including House Budget Committee Chairman James Jones. Even Jimmy Carter, who campaigned for reelection as the pensioner's best friend, proposed scaled-down cost-of-living allowances in his last budget.
Stockman was opposed from the start and said so publicly to the National Press Club in his first speech as OMB director, a position given surprisingly little publicity. Long before that speech, Stockman had determined that the politically feasible way to reduce federal spending is to pull out a few goats from the herd, not shear all the sheep.
Cutting back cost-of-living adjustments for all Social Security beneficiaries certainly would be shearing sheep. Stockman prefers less politically sensitive goats: reducing special categories of Social Security, saving over $3.5 billion a year. That includes eliminating aid to college students and restructuring disability payments.
Stockman always doubted budgetary benefits from throwing widows and orphans to the wolves. To make sure, he called for advice from an astute supplyside analyst: Alan Reynolds, vice president Chicago's First National Bank.
Reynolds' eight-page memo, now circulating at OMB, asserts that "there is no clear evidence that the existing Consumer Price Index as a basis for Social Security cost-of-living adjustments exaggerates living costs at all." In fact, he said, "retired people usually spend a larger share of their budgets on food and fuel than the CPI assumes, and these prices have risen faster than the CPI."
The Reynolds memo also points to a pitfall inherent in the Carter budget proposal to switch the indexing formula away from purchased housing to rental housing: declining mortgage rates would then not cause reduced costs, because the decline would not be reflected in the index. Indeed, OMB tables show that if inflation is subdued and interest rates fall, the Carter change would step up Social Security outlays by fiscal 1984.
Thus, tinkering with Social Security indexing would be a sign of retreat for Reagan's bold economic policy. "Undue political concern with the budgetary cost of adjusting benefits for inflation does not give a helpful signal," Reynolds writes. "If political and monetary authorities are serious about getting inflation down, why would they express alarm over minor changes in the way fedeal spending is adjusted for inflation?" a
Supply-siders Stockman and Reynolds clearly would not. They have bigger dreams on their horizon. They are less concerned by vagaries of indexation on Social Security than in using tax reduction for inflation-free growth.
Banker Reynolds, one of the nation's most succinct writers about economics, concludes his memo by making an un-Republican, un-bankish comment that economically strapped retired people are not to blame for the runaway budget: "There is no unambiguous evidence that indexing Social Security benefits by the CPI does more than barely compensate for inflation. . . . Even if real Social Security benefits of retured people rose during inflation, many of those same people are greatly injured by what inflation does to private pensions and lifetime savings."
Accordingly, leaving the Social Security index alone not only fits Stockman's sheep-and-goats tactical maxim but adds a new dimension to Reagan's economic strategy. It avoids the politically ruinous Republican instinct to conscript inflation's sorriest victims as vulnerable front-line soldiers in the war against it.