THREE QUESTIONS come to mind as Congress begins its hearings on President Reagan's budget proposals. Neither of the questions is new, but the nature of this budget and the logic behind it give them a certain force.
First question: If a federal deficit is supposed to reduce unemployment, how come deficits and the unemployment rate have been rising rapidly together? The conventional answer is that the country is in a recession, and the deficit will soon get the economy growing again. But let's take a longer perspective. To avoid the ups and downs of recessions and recoveries, let's take the peak months of the past four business cycles.
In December 1969, the unemployment rate was 3.5 percent, and the federal deficit that year was $2.8 billion. At the next peak, in November 1973, the unemployment rate was 4.9 percent and the deficit was $4.7 billion. In January 1980, the unemployment rate was 6.2 percent and the deficit that year was $59.6 billion. At the most recent peak, in July 1981, unemployment was 7.2 percent in a year when the deficit was $57.9 billion. The current period is not comparable, since it lies at--we hope --the trough of a recession, but simply for comparison the unemployment rate is now just under 11 percent and the deficit this year will be over $200 billion. Does there not seem to be a pattern here?
The thought is receiving a good deal of attention among economists, and the purpose here is not to choose among the various possible explanations. It is merely to suggest that over the years that faithful old remedy, the deficit, has developed unpleasant side effects that seem to be making it much less effective while the amounts of money get larger.
Second question: If the burden of high income taxes kills initiative and stunts economic growth, how come growth was much stronger 20 years ago, when the income tax burden was heavier? Mr. Reagan's budget points out that the rise in the total federal tax load from 1963 to 1981, when Mr. Reagan took office, was in the regressive payroll taxes. The revenues of all other federal taxes put together --meaning mainly the income taxes--were 16 percent of GNP in 1963, but a slightly lower 15.3 percent in 1981. If it was the high brackets of the progressive income tax that explained poor growth and high unemployment in the 1970s, why did the economy expand so well in the early 1960s? And, you might add, why have things got dramatically worse since the top rates were sharply lowered a year ago?
Third question: From those two questions another follows. It is this. How much confidence do you have in continuing deficits, in combination with continuing tax cuts, to generate jobs over the years ahead and bring the unemployment rate steadily down?