THE RECOVERY, President Reagan keeps saying, proves that his strategy is working. That, unfortunately, is exactly wrong. The recovery now beginning has been generated by a big budget deficit that is driving up consumers' spending--the very medicine that Mr. Reagan always said was addictive and was getting the country into serious trouble.
The original Reagan position, as expounded in 1980 and early 1981, is worth recalling. It argued that the constant reliance on pumped-up consumers' demand brought only short-term gains at the expense of long- term economic growth. As public policy pushed people to spend more, they saved less--which was bad for business investment in future productive capacity. Because of inadequate capacity, each cycle of recovery was proving to be shorter and more inflationary than the last. The emphasis, he said, ought to be on promoting supply capacity rather than consumers' demand. That was the basic idea of the supply-side strategy, and there Mr. Reagan had an important point.
It was the next step that got him into trouble. To turn things around, Mr. Reagan called for an enormous tax cut. According to the supply-side theory, a tax cut was to encourage people to save more; that, in turn, would set off a long boom in business investment and non-inflationary growth to raise employment and standards of living.
None of that, of course, has happened. The tax cut became law two years ago this summer. The current behavior of the savings rate is particularly dismaying. The savings rate is the share of after-tax income that people choose not to spend. In the early 1970s, through the 1974-75 recession, it averaged over 8 percent. In 1981, when Mr. Reagan took office, it was 6.6 percent. Since then it has fallen. The figures for the spring quarter, published last week, put it at a spectacularly low 3.9 percent.
Business investment, after inflation, has also declined over the past two years. The reason is simply the recession. But the surge in investment was supposed to begin even before the tax cut was passed, in anticipation of it. Instead, there is still no hint of it.
In economic policy, Jimmy Carter was in many respects the forerunner of Ronald Reagan. Mr. Carter distrusted big government, and he committed himself to firm schedules for balancing the budget. But in the middle of his term he abandoned his own convictions in a desperate reversion to the familiar methods to get growth rates up and unemployment down. The same thing now seems to be happening again.