The budget season is on us again, and Congress is caught up in fighting a three-alarm fire. Yet much of today's debate is out of touch with new economic realities. The economic strategies that worked in the 1920s, or even the 1950s, simply will not work today. Just as the military debate must shift from questions of quantity to questions of quality, our economic debate must also be transformed.

Our immediate task is to reduce interest rates and end the recession--without starting a new inflationary spiral. But beyond short-run measures, we must address the fundamentally new economic challenges of the 1980s. Domestically, the United States is undergoing a transformation as significant as the Industrial Revolution. It is shifting from a heavy industrial and basic manufacturing economy to one increasingly based on high technology, information, communications and services. Already, more workers are generating, processing, analyzing or distributing information than are engaged in agriculture, mining and manufacturing goods combined.

At the same time, we have increasingly become part of an international economy. Three new global actors in particular--Japan, OPEC and the newly industrialized countries--are weakening our control over our own domestic economic performance.

The key to growth in the future is to capitalize on these changes, rather than resist them. While business and labor must do their part, government can both encourage and support their actions by taking initiatives in three critical areas:

1) Adopting genuine tax reform. We must continue to expand America's productive capital base--both physical capital (new plants and equipment) and human capital (the skills and knowledge of American workers).

Fundamental reform of our tax system should be the centerpiece of this effort. Unlike last year's misguided attempt to patch up a basically flawed system, true tax reform must be simple, it must be fair, and it must promote saving and investment.

One way to achieve all three goals is to stop taxing personal income, and start taxing personal expenditures. In such a system, income saved or productively invested would not be taxed; only the income consumed or spent would be taxed. Thus, this system would greatly increase capital formation.

Such a system is not a national sales tax or a value-added tax, because taxes would not be imposed on purchases. Instead, just as now, we would report our taxable income once a year and pay taxes on the portion consumed. A single exemption --say $10,000-$15,000--would cover reasonable living expenses and protect the poor. Progressivity --the hallmark of a fair system--could be achieved with a graduated tax on spending above the exemption. Such a system certainly deserves discussion.

2) Encouraging investment for new jobs and growth. The technological revolution can and should make the choice between "sunrise" and "sunset" industries irrelevant. The new technologies--particularly information technologies--are creating new high-growth industries, buty they can also revitalize traditional manufacturing industries to keep them competitive in world markets. There are three ways to foster these technologies: first, promoting productive new investment across all industries; second, aiding the creation and expansion of small businesses; and third, stimulating investment in long-term research and development by businesses, universities, and government.

For example, full expensing of investment and a reduction in corporate tax rates should be substituted for the "10-5-3" accelerated depreciation and the investment tax credit. Another possibility is creating a new class of stock--New Capacity Stock--that would be issued only to raise revenues for new plants and equipment or new research and development. The stock would be exempt from capital gains tax on its first resale, making it attrctive for initial investors but limiting the long-term drain on Treasury revenues.

3) Preparing workers for new and different employment opportunities. Perhaps the most tragic aspect of the administration's supply- side economics program is its neglect of a vital resource for growth--the American worker. The shifting economic structure means both occupational upheaval and new opportunities.

The economic well-being of today's workers and those entering the work force in the 1980s depends on our finding effective means to address the mismatch between existing skills and the changing demands and requirements of the new economy. A nationwide job bank could link state-run employment services and match prospective employers with available employees. Job opportunity vouchers could be created for unemployed workers with few prospects for reemployment. The vouchers could be used to pay the costs of retraining or on-the-job training expenses.

We must also maintain firm government support for basic education and training of our nation's youth and disadvantaged workers. Government programs that have worked should be augmented with new reliance on the private sector.

Finally, employee ownership and worker participation in management decisions are important trends we would support and encourage. Government can assist by making employee ownership a criterion for special-preference government programs and by removing biases against worker participation in current laws.

We live in a time when change is making traditional theory obsolete. When the conventional economic wisdom fails, it is time to revitalize the American genius for adaptation and invention. The three sets of initiatives described above--combined with an effective energy policy and expanding international markets and opportunities for U.S. firms --can chart a renewed course toward economic growth.