After President Reagan's smashing victory in the House on his budget proposals, demoralizing the Democratic leadership. It seems likely that he will also be able to get much of what he wants on the tax side. Therefore (politics aside) the question of whether the highly touted recovery program will work becomes more important than the legislative battle over the precise details.
Will the combination of reduced spending and reduced taxes over the next three or four years actually boost investment, productivity and the ability to sharpen our competitive edge abroad?
Will an anti-inflation effort heavily centered on a monetarist policy, as applied by the Federal Reserve Board, actually lower interest rates as administration officials forecast?
The first, most obvious answer is that no one knows for sure. But the typical reaction of economists and businessmen, including many who are most sympathetic to the president, has been one of skepticism. This has been observed by a respected conservative economist, Herbert Stein, former chairman of the Nixon economic council, and now a senior fellow of the American Enterprise Institute.
In a thoughtful analysis published last month by the AEI, Stein cuts directly to the main inherent contradiction of the Reagan program: it demands a highly restrictive money policy so as to reduce inflation. But if that kind of crunching money policy is applied, it is more likely to slow the growth of the economy and keep unemployment high.
"If the monetary part of the program is followed," Stein writes, "we should expect slower growth of nominal GNP than the administration's goals require. eIn that case, we would get either less inflation, less growth of output or both. All experience suggests that what we would get first would be mainly less output."
The administration has been promising something quite different: a reduced rate of inflation, and a high level of output, and a falling level of unemployment. There is nothing in historical experience -- not even a detailed set of economic justifications -- for such a scenario. It depends entirely on accepting Reaganomics -- a blend of monetarist theory and supply-side tax reductions -- on faith.
Reagan's program is open to the the kind of critique leveled by Stein because he is proceeding with a huge tax cut in the face of huge federal budget deficits.Since there is no magic wand with which to wave the deficits away, it is necessary, as Treasury undersecretary Beryl Sprinkel admits, to view the picture "through monetarist eyes." That means the Federal Reserve "must do its job" of keeping the money supply growth modest and stable. Only when the Fed "monetizes the debt" by printing money do deficits cause trouble, according to monetarist theory.
But the administration can't have it both ways. If the Fed applies the monetary brakes as President Reagan is demanding, it likely will not reduce the inflation in the economy. Instead it will slow down real production, real growth -- and with that comes a rise in unemployment.
Stein adds that even if supply-side tax measures were to boost productivity, thus helping to boost output, such a result wouldn't be seen for a long time: "This judgment is not a matter of ideology. . . . The presently available evidence on such matters does not support the view that we can get a big boost to productivity in the next few years from the Reagan program."
Herb Stein is a cautious fellow, and he leaves himself a limb: "It is possible that the Reagan program will touch some button previously unrecognized in the economy that will give a big boost to productivity." But he clearly feels the more realistic appraisal is that the Reagan program on balance will be deflationary, with the jobless rate in 1986 as high as it is now, and the budget not balanced in 1984 because private investment will not in fact be booming as the supply-siders have promised.
The administration has been saying (and many Democrats have bought the idea) that the Reagan program ought to be allowed to have a full trial run. But that's playing games with the country's future. Democrats who advocate it, risking (or hoping for) the kind of recession Stein outlines, are totally irresponsible. Forget, for the moment, the somewhat different complaint of many liberal economists -- that the program is unfair across the income brackets, distorted in terms of geographic region and inflationary to boot.
For the sake of argument, assume only that there is something in what conservative Republicans, like Stein, predict: a serious deflation and a hunkering-down period, rather than the bright economic rebirth Reagan paints. Stein happens to think that would not be such a bad outcome. But if the public understood the risk, would Reagan get the approval ratings shown in the polls?