"If we could only get interest rates down," said Senate Majority Leader Howard Baker with a sigh, "the Reagan program would look golden." Back from a swing around the country, the Tennessean says that outside of Washington, businessmen and ordinary people aren't much concerned with the president's bumbling performances at press conferences or with El Salvador, but with one thing only: "High interest rates. That's what it's all about."
The curious thing is that neither Howard Baker nor key members of the Reagan administration who bemoan high interest rates are willing to make the hard connection between Reaganomics and the high rates.
The grand strategic design of the Reagan policy was to give his business friends what he felt was an overdue tax cut, finance a hawkish anti-Soviet foreign policy and let the Federal Reserve break the back of inflation by a crunching monetary policy. Everybody knew that the result would be a recession, although this was not publicly admitted. Privately, some of the more candid Reaganites said, "It's the price we have to pay."
But Ronald Reagan lives in a supply-side dream world, in which his business friends--with all those juicy tax cuts in sight--would spend a lot of money and magically create many new jobs, all on faith. As Baker observes with a sense of frustration, those businessmen would rather keep their money in high-yielding money-market funds than take unnecessary business risks.
The Federal Reserve began following a tight-money, monetarist procedure with the approval of the Carter administration in October 1979. When Reagan arrived at the White House, he gave his blessing to the monetarist approach, and egged on the Fed to be even tougher.
As economists Walter W. Heller and George Perry observed in their Minneapolis bank letter the other day, "The twin pillars of Reaganomics are tight money and tax cuts." And, they might have added, an explosion in military spending. When the Fed was confronted with Reagan's inflationary fiscal policy, it had little choice except to continue with a restrictive monetary policy.
Therein, as has been written here and elsewhere a hundred times, lies the internal contradiction of Reaganomics.
Now, some key business leaders and lobbyists have begun to see the handwriting on the wall, and are trying to push Congress into cutting the huge federal deficits that have financial markets in a panic. And they are beginning to make an impression on key Republicans as well as Democrats.
Tax lobbyist Charls Walker, who helped engineer the "10-5-3" plan for super-generous business tax deductions, concedes that the time has come for a mid-course correction in the Reagan program. Walker would consider delaying all or part of the 10 percent personal tax cut scheduled for mid-1983.
Meanwhile, Sen. Robert Dole, Republican chairman of the Senate Finance Committee, took action on his own initiative that may result in the repeal of one of the biggest tax steals in history--the "rent-a-deduction" portion of the 10-5-3 business depreciation that Walker helped engineer last year.
Republican politicians, embarrassed by the "rent-a-deduction" scam, pretend not to know how such an egregious bit of legislation became law. But as everyone on Capitol Hill understands, what happened was this: when the business community came to realize that the "10-5-3" depreciation deductions were so lush that some companies couldn't use them fully, the leasing idea was devised as a way to make everybody happy. Whether a company was profitable or not, it could benefit from 10-5-3.
Now, there is a groundswell in Congress to "do something" to bring down the Reagan deficits. Baker suggests an income surtax, a peculiar idea for a recession year. No one has the stomach to make the further cuts in Medicare, Medicaid and food stamp programs recommended by the president at a time when savings and loan associations are going bust and unemployment levels are the highest since the Depression.
Unhappily, there is no general consensus to do more than trim around the edges of the defense program--which doesn't explode on the expenditure side until after fiscal 1983.
The best guessing on the Hill is that after all of the various alternatives to the Reagan budget are distilled, the battle will focus on two ideas: Dole's plan to end or sharply cut back the "rent-a-deduction," and any of the several proposals to put off or cancel the 1983 personal tax cut. A combination of both of these "fiscal fixes" is necessary to give the Fed a chance to shift its monetary gears downward.