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Reagan, the Rock and the Hard Place

If the Democrats expect to win in ’84, they must do something about the economy right now

Ronald REAGAN, President of the United States of America

Ronald REAGAN, President of the United States of America at a state visit in Bonn, Germany on June 9th, 1982.

Ulrich Baumgarten via Getty

Now that the ’82 elections are over, serious pundits will begin their earnest stargazing toward 1984, but I think there is a fundamental question that ought to come first: What’s wrong with the Democrats?

During the campaign, their leading voices nodded reverently at the government’s fiscal crisis, piously scolding Ronald Reagan and the Republicans for runaway deficits. Sadly, the Democrats were not terribly convincing. Each of their would-be presidential candidates offered his own list of budget cuts, but even taken together, they do not add up to a persuasive solution. Democrats, as is their nature, would rather talk about the distant future and their “new ideas” for rebuilding America –– wonderful new programs for creating jobs, modernizing industry, reinventing prosperity.

Trouble is, when Democrats talk this way, many citizens instinctively put their hands over their wallets. New programs cost money, and Democrats usually wax fuzzy about who will pick up the check. The House Democratic Caucus, for instance, issued a general blueprint of “new ideas,” titled “Rebuilding the Road to Opportunity.” It outlined vast new investments in roads and education and basic research to rebuild industries and the nation’s worn-out public infrastructure. After bowing before the altar of balanced budgets, the report observed matter-of-factly: “The question of how best to finance these programs will have to be resolved in the future.” It makes one tremble for the U.S. Treasury.

If they were wise and bold, the leading players of Democratic politics would get together in the next few weeks and pound out a program for rescue and recovery. The right plan could staunch the hemorrhaging deficits in Ronald Reagan’s budget, prime the economy for a robust recovery and begin rebuilding America’s battered industrial base.

For starters, the Democrats could produce a dramatic list of at least, say, $80 billion in budget cuts and tax increases for each of the next three years –– not enough to balance the budget but sufficient to break the curve of Reagan’s runaway deficits. This $80 billion may sound outrageous, but it is, in fact, a plausible number. And finding it would allow the Democrats to launch their own program for economic recovery –– $25 billion to $50 billion in new spending aimed at real investment and real jobs. Not in 1985, when one of them hopes to become the next president, but right now, when America needs help.

This is not idle fantasy. Such a grand Democratic compromise is realistic, and necessary. The Democrats do have visions, but why should we take them seriously as long as they duck the hard question: How are we going to pay all the bills?

The alternative to Democratic leadership, in any case, is truly frightening. The Reagan White House, by all accounts, intends to continue its head-in-the-sand approach to the budget crisis it created, blaming its own excesses on Democrats and ancient history. Congress will stalemate in partisan name-calling. And the country will not get well. It will limp along with a weak recovery from the recession, high unemployment, high interest rates, more bankruptcies. As long as the federal budget remains so wildly out of balance, the prospects for genuine recovery are nil.

Don’t be misled by the stock-market rally or the recent decline in interest rates. Some politicians, as well as Wall Street traders, would like to believe the problem of federal deficits has gone away. They think that last summer’s heroic bipartisan efforts to cut spending and restore revenue lost in 1981’s outrageous tax giveaway were sufficient. But the leaders in Congress know the gloomy truth: They must wrestle again in 1983 with the same budget crisis they faced in 1982.

The latest authoritative budget estimates from Senate sources (which assume a solid recovery from the recession and modest reductions in unemployment and interest rates) reveal this scary picture: a federal deficit in the 1983 fiscal year of $180 billion. That is $20 billion worse than the previous estimate and $70 billion worse than Reagan’s record deficit for fiscal 1982. In 1984, rather than shrinking, the deficit will rise to $205 billion. In 1985, it will climb to $220 billion. In the years beyond, it will get even worse. In sum, if Congress does nothing substantial to avert this disaster, the four years of Ronald Reagan’s presidential budgets will accumulate something like $700 billion in additional federal debt –– that’s 40 percent of all the national debt obligated since the first days of the republic. I repeat: it’s scary.

While others proclaim their compassion for the unemployed and spin out grand visions for future jobs programs, there is one Democratic presidential candidate who wants to talk frankly about the here and now: Senator Ernest Hollings of South Carolina, the thinking man’s dark horse for ’84. Hollings’ silver hair and soft Charleston accent mislead strangers; it takes a while to appreciate that the corn-pone voice spits out hard nails. Hollings is smart, candid to a fault and a genuine hybrid Democrat –– a southern hawk who now dares to cut the defense budget; a former governor, impatient with rhetoric, who built solid support among blacks as an early advocate of liberal programs for education and nutrition. As a presidential candidate, Hollings has many liabilities, but the others might at least help themselves if they listened closely to what he is trying to tell the Democratic party.

Indeed, the Democrats are in a position to accomplish what is impossible for the Republicans. If they follow Hollings in asking sacrifices from all groups, a price that everyone must pay to help get the government back on track, they can make sure it really is fair. Democrats might even be believed on the question of fairness. Anything Republicans propose will look like more gouging.

But where would the Democrats find that plausible $80 billion? Senator Hollings has a list that adds up to $65 billion for 1984 and $105 billion for 1985. His colleagues could add some cuts here and take away somewhere else and still produce $80 billion in deficit reductions. Here is the framework:

Defense 
Hollings would reduce the planned growth rate in defense spending to three percent a year (still generous, while virtually all other federal spending would be frozen). This would save $13 billion in ’84 and $26 billion in ’85. Other Democrats argue that a reduction of $50 billion is possible without harming national security in the least, but any compromise has to be something that Democratic hawks will swallow. The consensus for defense increases is fast eroding, but Democrats are still scared to take it head-on, fearful they will be labeled again as wimpish peaceniks. That’s why defense cuts will be easier to sell as part of a grand package of emergency cuts in which everyone gives up something precious.

Taxes
Hollings wants to cancel the third year of Reagan’s cherished income-tax reduction and repeal the “indexing” of taxes against inflation –– saving nearly $93 billion by 1985. Somebody’s federal taxes will have to be raised in ’83 –– count on it –– so the argument is over whose taxes and how much. Other Democrats favor limiting the third-year tax reductions so they apply only to middle-income families and the poor, but that approach doesn’t save much. Several are flirting with the idea of an energy tax –– either on gasoline, to pay for road building, or on imported oil, to encourage conservation. That’s an odious idea to ordinary consumers, but perhaps northern liberals can work a trade with oil-state conservatives: If Congress enacts a modest energy tax, raising $10 billion to $15 billion, then it should also recapture the same amount from the tax giveaways to the oil industry. Closing more loopholes on business taxes would save even more, and Democrats could easily find at least $30 billion in restored revenue.

Fiscal freeze
This is where most good Democrats scream and run. As a practical matter, however, they are not going to be able to restore much money to the domestic programs slashed in the last two years, beyond a little patchwork here and there. The real pain comes in Hollings’ plan for a one-year freeze on cost-of-living increases for Social Security, Medicare and Medicaid, as well as for federal pay for civilian and military employees (Hollings exempts food stamps and disability aid on the grounds that those folks have already suffered deep cuts). After the one-year freeze, a modified version of annual increases would be adopted, protecting the elderly and others against inflation but not allowing them bonus dollars.

Democrats could make some honest promises to these constituencies: The Social Security system would be rescued from its temporary imbalance and, thus, protected from the more drastic benefits reductions the Republicans keep proposing. No one would lose his eligibility or current benefits. ”

“They have children and grandchildren, these senior citizens,” Hollings said. “So long as they know they’re not being cheated… If you talk honest economic sense to them, and politically it’s done across the board, they’ll go along.”

The freeze would merely moderate the projected increases for entitlement programs over the next three years, now estimated at $85 billion by 1985. This offers a modest savings of $15 billion to $30 billion a year, depending on the depth of Democratic courage.

By shrinking the Reagan deficits, Democrats would create the preconditions for genuine economic recovery. If financial markets are convinced that the federal deficits really are under control, the threat of soaring interest rates as the economy picks up steam is greatly reduced. The Federal Reserve Board, assured that the budget is at last in responsible hands, could agree to continue relaxing the money supply.

The president would undoubtedly resist, particularly the defense cuts and the tax increases for business, but responsible GOP leaders in Congress might rush to cooperate. With a knowing wink from Howard Baker, the Republican Senate leader, Tip O’Neill could steamroller his rescue-and-recovery plan through Congress and confront the president with no choice but to acquiesce.

At that point, the Democrats could begin to talk seriously about their programs for rebuilding America. And we would all begin to take their ideas seriously. A quick survey of what the Democrats are currently proposing suggests that, while their ideas still lack precision, a rough consensus is forming on the economic diagnosis. The nation is suffering from the decline of such basic industries as autos and steel (see “The UAW Fights for Survival,” RS 374), and the fierce foreign competition for dominance of the emerging high-tech industries. The deep strain will not be eased by simply ending the recession. Ronald Reagan didn’t cause these problems, and his lopsided version of laissez faire will not solve them. The Democrats propose to restore an activist federal government and a mild centrist version of national planning –– prodding labor and industry toward long-term modernization, financing basic investment in research and education, while the next president (naturally, a Democrat) forces more equitable trading practices on our allies. None of these ideas, I should add, is really new; all have been employed before when the country was in distress.

The Democrats want to do what Democrats always do best –– pour a lot of concrete and lay a lot of steel. Rebuilding the country’s roads and bridges, harbors and railroads has to be done sooner or later, and it’s the most direct way to create useful jobs now. This doesn’t have to wait until 1985, and it needn’t be in symbolic dribs and drabs. If they attend to the budget crisis first, the Democrats could enact a vast public-works program in 1983 and at least begin their industrial revitalization program. Let the president veto, if he dares.

This is possible because the Democrats really do seem to have learned a few lessons from their past excesses. For one thing, no one is now proposing any elaborate new programs that would merely send out government checks to distressed citizens. The era of expansionary welfare is gone, and it won’t be back soon.

All of the Democrats are emphasizing less direct means of federal financing –– loans and loan guarantees and interest-rate subsidies, rather than direct cash grants –– to help cities and states build roads or help industries find the capital for modernization. This new approach has at least two important virtues: It stretches out the impact of federal dollars and provides a natural veto over bad ideas. While, in the past, it may have been tempting to follow the trail of federal funds toward whatever ill-conceived idea made sense in Washington, neither local governments nor private interests will borrow to invest in an unsound project if they actually have to pay the money back.

Using this approach, Democrats could actually launch as much as $50 billion worth of reconstruction projects –– at an immediate cost of only $20 billion in new federal outlays. This would be enough to include some emergency legislation to save those on the brink –– small-business bankruptcies, or farm foreclosures next spring –– but the budget numbers are realistic. This is possible if Democrats, for once, would swallow the painful medicine first and demonstrate that they have discovered self-discipline.

Possible, of course, does not make it probable, especially when you’re talking about the party that would rather fight than win. 

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