President Reagan came into office saying that large tax cuts, less government regulation, slower growth of the money supply and less federal spending would bring down inflation quickly and revitalize a stagnant economy.
He has not fully abandoned that position. But in his State of the Union address last night he acknowledged that curing the nation's economic problems "has taken more time, and a higher toll, than any of us wanted . . . . "
Instead of the unalloyed optimism of his earlier messages, Reagan offered caution: "Our confidence must also be tempered by realism and patience . . . . The permanent recovery in employment, production and investment we seek will not come in a sharp, short spurt. It will build carefully and steadily in the months and years ahead."
Reagan's speech reflected a new awareness of the complexity of a number of economic problems, including unemployment, perhaps now his major political worry. No longer was there a stated belief that a swift economic recovery and the marketplace would do the entire job of providing work for all those who want it; at least some government help would be needed to deal with "structural" unemployment.
How differently things have turned out from Reagan's initial vision is highlighted by the federal budget deficit. Two years ago the president planned to balance the budget in fiscal 1984. Last night the White House issued a fact sheet pegging the 1984 deficit at $231 billion and described proposed "savings" of $43 billion--mostly spending cuts--to bring it down to $189 billion.
In his State of the Union speech last year, Reagan was still clinging to his supply-side vision, arguing, "Higher taxes would not mean lower deficits . . . . Raising taxes won't balance the budget."
Since then, Reagan lobbied hard for a tax bill passed last summer that is expected to raise $98 billion in revenues over three years. He also pushed a gasoline tax increase through Congress.
And last night Reagan proposed a "deficit reduction insurance policy," another tax increase to raise $40 billion to $50 billion annually. Taxes would go up beginning in late 1985 if the deficit for fiscal 1986 is expected to be more than 2 1/2 percent of gross national product, or about $105 billion.
Without those standby tax increases, Reagan would be unable to show a declining path for the deficit in the years ahead when he sends his 1984 budget to Congress next week. Even with the tax increases and the spending cuts Reagan wants, the deficit is still estimated to be $117 billion in 1988.
The course of the nation's economy over the last two years--with unemployment rising to a post World War II record of 10.8 percent instead of falling to 7 percent as originally expected by the administration--has forced Reagan to alter both his economic policies and his rhetoric about the proper role of government in economic matters.
In February, 1981, the first Reagan report on the economy said, "More government intervention in the economy cannot possibly be a solution to our economic problems." In contrast, he told Congress last night that " . . . The challenge of government is to identify the things we can do now to ease this massive economic transition for the American people."
Reagan, who after a long delay agreed to support a new job training program enacted last year, went a step further last night in acknowledging that even an economic recovery will leave some of the unemployed behind. "The recovery will provide jobs for most, but others will need special help and training for new skills," he said.
That special help should include extension of unemployment benefits, incentives to employers to hire the long-term unemployed, new aid for displaced workers and "new incentives for summer youth employment to help young people get a start in the job market," Reagan said.
Few details were provided, but none of the proposals is comparable in scale to the large public employment programs of the past, such as those under the Comprehensive Education and Training Act (CETA). Most appeared to be aimed at encouraging private firms to hire the hard-to-employ, using a combination of subsidies and perhaps, for the summer youth employment incentive, a lower minimum wage.
Just as the long-running recession in the United States has forced Reagan to alter some of his perceptions, the growing danger of an international financial crisis brought on by the worldwide slump has pushed him to change his attitude toward the economic problems of the rest of the world.
His latest policy proposals include strong support for increasing the resources of the International Monetary Fund so that it can lend more money to financially strapped developing countries. This is a direct reversal of the administration's original policy stance.
"We must . . . recognize that our own economic well-being is inextricably linked to the world economy," Reagan said. "We export over 20 percent of our industrial production, and 40 percent of our farmland produces for export."
Reagan outlined a "broader strategy in the field of international trade--one that . . . is fairer to America's farmers and workers in the world marketplace."
The strategy includes seeking more authority for the Export-Import Bank to guarantee loans to foreign buyers of U.S. goods, and possibly an increase in the authority of the bank to make such loans directly. The Ex-Im Bank's lending and loan guarantee authority had been a target of administration efforts to save money and cut federal involvement in the marketplace.