As Advertised, President Reagan has delivered to Congress the most ambitious tax-cutting and budget-cutting program in history. Whether it will be accepted by Congress, and whether it then will do the job as promised in the advertising copy, is another story.
At the moment, Reagan is being assailed by radical right-wingers in his own party for having made a few concessions to political realities -- for example, putting a limit on the tax generosity shown extremely wealthy taxpayers.
But the fact is, as the president said, he is making a substantial "break with past police" by adopting the basic theory of those same radical right-wingers, to wit: economic activity, inflation and interest rates are determined largely by expectations. Provide an incentive for work, savings and investment through large across-the-board tax cuts, and the private economy will grow like Topsy.
This is the much-touted "supply-side" economics, and Reagan has bought it lock, stock and barrel. The key elements are massive budget reductions, coupled with a tax reduction so big that traditional Republicans and many Democrats regard it as dangerously inflationary. For fiscal 1982, the combined personal and business tax cut Reagan proposed last night would be $54 billion, rising to $221.7 billion in fiscal 1986.
Even if Congress were to pass budget cuts that matched the tax cuts dollar for dollar, there is nothing in the fiscal program -- in the view of those not addicted to supply-side theory -- that works against inflation. The nation would still be face to face with OPEC, Reagan's oil deregulation orders, high farm prices and escalating wages. And the Federal Reserve would be following a restrictive credit policy maintaining high interest rates, themselves a collateral cause of inflation.
In the supply-side view of the world that has been developed for Reagan by Treasury Undersecretary Norman Ture, OMB Director David Stockman and his associated advisers, these specific cost-push factors causing inflation are ignored. Instead, the Reaganites revert to the argument that inflation must fall because individuals and businessmen will come to believe Reagan's commitment to free up the private economy. They will work harder, save more, invest more.
Whether or not the Reagan supply-side program works, it is unprecedented in concept and scope, and comes frighteningly close to Reagan's campaign commitments to a lesser role for government. It is a threat to good and important social and cultural programs. And it brushes off key international commitments, a subject to which I propose to turn in a later column.
Spending reductions of $49 billion in the budget for fiscal 1982 are merely the first installment of a five-year program that would boost the annual reductions to $68 billion in fiscal 1983, and then run in excess of $100 billion a year for the fiscal years 1985 and 1986.
Or, to look at it another way, the year-to-year increases in the budget that have averaged 16 percent in the last two years would be reduced (despite the nation's rising population) to a mere 7 percent.
The record tax reductions proposed by the president suggest that the real danger is not that the program doesn't go as far as the "crazies" would have suggested, but that the tax cuts won't generate the magic feedback attributed to them by the supply-side theorists.
The truth is that there is no real experience to guide us at this point. Despite the supply-siders' cocky assurances that the tax cuts will give families an incentie to save rather than spend, and businessmen the encouragement they need to add to their investment plans, there is little evidence to back it up.
Robert R. Nathan, an old New Dealer, points out that business investment decisions depend less on tax breaks and more on the expected profitability of the investment. In turn, this depends on demand (which supply-siders ignore), as well as cost factors such as interest levels. There is no direct known link between tax cuts and business behavior.
There are few experienced politicians of either part on Capitol Hill who believe that the spending reductions proposed by President Reagan can be passed simultaneously with the tax cuts. The natures that the tax cuts will come well before budget reductions, ensuring an increase in the budget deficit.
This possibility has the Federal Reserve Board, chaired by Paul Volcker, and Wall Street on edge. Sen. Jake Garn (R-Utah) now head of the Banking Committee, acknowledged the other day that tax cuts ahead of budget cuts would give inflation a new burst, and said he would urge Reagan, in such a circumstance, to veto the tax bill.
But for a first line of defense against excessive tax-cutting, Wall Street, the Fed and Republican traditionalists look to the Democrats -- the party of the Big Spenders -- to maintain a sense of fiscal responsibility. What a cockeyed world!