My conclusion from many conversations with businessmen is that the Reagan administration has not done a convincing job in selling the idea of "supply-side" economics -- either in explaining what it's all about or getting hardheaded business managers to believe that a big tax cut will stimulate economic growth without causing a new inflation.
On "Meet the Press" last Sunday, economist Walter Heller (like President Reagan, a good communicator) made this point effectively: "[The administration] is saying that we're going to have these huge supply-side effects, and that . . . you're going to stimulate an enormous amount of work effort and savings and investment.
"Nothing in the historical record supports that -- nothing. The new supply-side economics is a kind of laetrile for the cancer of inflation. It is a nostrum, not a cure."
Another skeptic is Peter L. Bernstein, president of the consulting firm of the same name. In an article in the Institutional Investor, Bernstein suggests that the eager supply-siders on the Reagan team are raising false hopes. "What is it that we are trying to increase the supply of?" Berstein asks. He points out that once you get past oil, gas and food products (where the supply, if increased, will not come cheaply)" "clearly identifiable shortages are hard to find."
To the supply-siders' lament that there is a manifest shortage of investment that the Reagan tax program presumably would rectify, Berstein responds that the tax benefits could lead to an untargeted and probably wasteful expansion. He's supported by Henry Kaufman and other financial experts who believe that a sharp reduction in or elimination of capital-gains taxes would be much more effective than the excessively generous depreciation schedules Reagan advocates.
So the business attitude toward the Reagan tax program is replete with doubt, and the doubt is being voiced with increasing insistence. It extends to the Reaganites' belief in the force of "expectations" of a dramatic turnaround in the economy.
Psychology is clearly an important economic ingredient. But there is a painful innocence about the whole expectations theory that assumes the nation will react with some kind of unanimous response to the encouragement that derives from lower taxes. As Bernstein notes: In a world of imperfect information and always efficient markets, "expectations are seldom changes as more inflationary than others." The Reagan program, moreover, makes no allowance for dealing with sudden traumas, such as another major interuption to Persian Gulf oil supplies.
The true believers in the Reagan administration, you will not be surprised to learn, are still true believers. One of them is Norman Ture, a veteran economist who, Treasury undersecretary for tax policy (an upgraded slot), is the highest Reagan administration official advocating supply-side economics.
Over coffee and sandwiches in a Treasury conference room the other day, Ture said that "The fundamental analytical premise" on which the Kemp-Roth cuts are based "is that it's the marginal tax rates that are the real villians in the piece." These are too high, and must be cut without any pretense that there is concern over an equitable distribution of the tax cuts over the full income scale. Designedly, the high-income earners are to get the bulk of the tax cut benefits.
Ture is convinced that fully 50 percent of the money left to individual taxpayers by the cut in the marginal rates -- the rate on the last dollar earned -- would be saved and pumped back into investment. "Taxes enter into people's behavior at the margin," Ture said. "It's the marginal rate that enters into decision-making, that determines what you should do with respect to earning the next dollar of income or disposing of the next dollar of income.
But even the Reagan administration couldn't buy anything as far out as Ture's 50 percent savings projection, in the face of historical experience that shows a national savings rate around 7 percent. The actual economic forecast supplied to Congress, under the guiding hand of Economic Council Chairman Murray Weidenbaum -- while plenty optimistic -- was much more reserved.
For historical support, Ture falls back on the Kennedy depreciation guidelines of 1961-62, which allowed more generous write-offs, and the individual tax cuts that Heller devised in 1962, which were eventually passed during the Lyndon Johnson regime in 1964. Heller labels Ture's analogy a "fairy tale," pointing out that the Kennedy tax cuts, at a time when inflation was only 1 or 2 percent, were designed to stimulate demand, not supply.
"We had a lot of unused capacity in the economy, unemployed people, unused factories and so forth, and the idea was to utilize that existing supply capacity with the tax cut," Heller said. What Heller suggests, and what businessmen increasingly lean toward, and what Congress is likely to deliver, is a much more modest and traditional tax cut. By the end of the session, supply-side tax theory may be back on the shelf.