Paradoxes in Reagan Economic Policy Exacerbate Budget-Cutting Dilemma
Heinemann, H. Erich, American Banker
OVER THE NEXT couple of weeks, President Reagan will give the nation a progress report on the course of his "Second American Revolution." The State of the Union message (delayed for a week by the terrible tragedy at Cape Canaveral), the federal budget for fiscal year 1984, and the economic report of the President are slated to follow in quick succession. Together, these documents should provide a comprehensive account of how the world appears in early 1986 to the people currently working at 1600 Pennsylvania Ave.
As important as these traditional annual reports are in the history of any administration, they may prove to be particularly disappointing this year. The many contradictions in White House economic policy -- massive budgetary and trade deficits, an overvalued dollar and potentially inflationary monetary expansion -- are now rapidly narrowing the available options.
Unfortunately, there are few indications that Mr. Reagan is prepared to break the policy gridlock. The President continues to cling to the illusion that he has reduced the federal tax burden -- despite the fact that government spending has risen, both absolutely and as a proportion of the economy. Since all government expenditures have to be paid for some day, what the Reagan administration has done is to redistribute the tax burden (within the present generation as well as between present and future generations), not reduce it.
Even conservative Republicans are beginning to worry that by temporizing with the problems spawned by lopsided fiscal policies, the President will eventually compromise two of the central goals of his administration -- sustainable economic growth and stable prices.
"From what I can tell," said Rep. Bill Gradison, R-Ohio and a member of the House Ways ad Means and Budget committees, "an already rapid rate of monetary expansion is to be further stimulated" to devalue the dollar. He warned that this "can have only a temporary effect [in cutting the deficit], and if pursued too long, will rekindle inflation."
Mr. Gradison added that "the United States ought to pursue a monetary policy designed to control inflation, the only thing monetary policy can influence in the long run.
"Our trade problems," he went on to say, "are caused by a high dollar that is in turn caused by a high dollar that is in turn caused by an unbalanced fiscal policy characterized by high deficits.
"The sooner we recognize this, the sooner we will start addressing the underlying causes of our trade problems instead of pretending to do so by addressing their symptoms."
A year ago, the President proposed a budget that would have reduced the federal deficit from a projected $222 billion in 1985 (the actual deficit turned out to be $212 billion) to $82 billion in 1990. Initally, Congress balked at Mr. Reagan's proposals.
Selling Assets Is Illusory
After a long, hot summer of debate, the House and Senate agreed on a compromise budget resolution aimed at cutting the Treasury deficit to only $120 billion, also by 1990. Within weeks, however, the Congress thought better of such profligate behavior, and began work on what eventually became the Gramm-Rudman bill -- which purports to require a balanced budget by 1991.
Critics have raised a host of questions about the legal, political, and economic soundness of the automatic budget cuts that the Gramm-Rudman formula requires. Moreover, as Morgan Guaranty Trust Co. observed recently in its publication World Financial Markets, "the difficult issues on both expenditure and taxation have merely been deferred until later in 1986. In the meantime, appropriation bills continue to overrun the guidelines of last summer's Concurrent Budget Resolution, and an extremely expensive farm program has been enacted" and signed by the President.
Quite apart from such problems, however, advance leaks about Mr. Reagan's 1987 fiscal program make plain that insofar as the White House is concerned, much of the progress toward budgetary "balance" is to be accomplished by selling off federal assets to the public. …