Challenge to Change

By GEORGE J. CHURCH

COVER STORIES

Reagan calls for an end to the years of spendthrift Big Government

There are moments in the affairs of nations that historians, with the snug granny glasses of hindsight, adjudge climactic: the end of one era, the beginning of another, a true shift of the tectonic plates of society. Often such events largely escape the notice of those living at the time; significance dawns slowly, meaning comes piecemeal. Whether or not what Ronald Reagan asked of the U.S. last week in his televised address to the assembled houses of Congress will some day be considered such a moment remains to be seen. But no one who heard him will be able to claim that the country was not warned, that what he had in mind was nothing less than the most radical invocation to change in 50 years. He spoke to a single topic: his new Administration's program to curb the inflation and end the stagnation that have been crippling the U.S. economy. But in so doing he summoned his countrymen to take a historic turn: from more government to less. If he should succeed--and it is a very large if --the implications are immense.

No matter that the President, despite the warmest welcome that any Chief Executive has received from Congress in recent years, read parts of his speech too fast. No matter that the speech itself, studded with statistics, lacked Reagan's unique verbal tang. The potential, far-reaching importance of what he offered, of what he urged the legislators to accept and enact, was there. His program was detailed in a 281-page volume called America 's New Beginning: A Program for Economic Recovery, which Congress had already received. The numbers alone were startling enough: $467 billion less federal spending, combined with $709 billion in tax savings for individuals and businesses, over the next five years. Reagan called for cutbacks in federal programs dealing with everything "from space to the mailbox," as he put it in the speech.

But it is not just the size and sweep of Reagan's program that could cause future historians to look on it as the start of a new era: it is the direction and philosophy. His plan challenges all the assumptions that have powered Government economic and social policy for nearly half a century. The key assumption--which prevailed in practice, if not in rhetoric, through Republican as well as Democratic administrations--was that the people had to look to Government to ensure material prosperity and a reasonably fair distribution of wealth for all citizens. Thus the Government had to institute spending programs for the poor, and eventually the middle class, and expand them steadily. It had to devise a tax system aimed in part at shifting income from the affluent to the needy. It involved itself in everything from the maintenance of museums to the nutritional value of school lunches. And it has grown in size, power and influence over citizens' lives year by year.

Reagan believes profoundly that a swollen Government has now become the destroyer of prosperity, fanning inflation through endless deficits and strangling economic growth through excessive taxes. So, from now on, Government must choose to slim itself down. It must spend less, tax less, regulate less, trim rather than expand social programs and turn over responsibility for many of them to states and cities. Above all, it must stop trying to guide the economy and trust the energies of private workers and businessmen to pull the nation out of the stagflation swamp.

The President told Congress: "The taxing power of Government must be used to provide revenues for legitimate Government purposes. It must not be used to regulate the economy or bring about social change. We've tried that and surely we must be able to see it doesn't work. Spending by Government must be limited to those functions which are the proper province of Government. We can no longer afford things simply because we think of them."

For all its radicalism, Reagan's plan calls for something much less than a repeal of Lyndon Johnson's Great Society, let alone Franklin Roosevelt's New Deal. Among the spending programs that Reagan picked as targets, only a few would be axed completely; most of the others would not only continue but would grow, albeit more slowly. Indeed, total federal spending and tax collections would both rise, propelled by the inexorable forces of population and business growth, and an inflation that may diminish but will not go away. Total federal expenditures, by Reagan's own figure, would rise from $655 billion in fiscal 1981, which ends Sept. 30, to $912 billion five years hence. That would be a hefty $124 billion less than might be foreseen if spending kept ballooning at its present rate.

Still, the change in direction that Reagan proposed could hardly be more jolting. The iron law of budgets has been that more citizens receive more generous federal benefits every year. Reagan would reverse that process: under his plan, fewer people would qualify for welfare benefits, for long-term unemployment compensation, for subsidized school lunches, for Social Security disability payments, for low-interest, federally guaranteed student loans. Some 400,000 of the 5 1/2 million households now eligible to buy food stamps would be dropped from the rolls next year. And while total spending and tax collections would rise, they would grow less rapidly than the private economy; federal expenditures, as a proportion of the nation's total output of goods and services, would shrink from 23% this fiscal year to 19% in 1986, while the share taken by taxes would dwindle from 21.1% to 19.6%. In short, Washington would become a gradually diminishing force in American life.

If the plan works, that is. The President is taking a whole series of high-risk gambles. He is betting first that Congress can be persuaded to pass at least the key elements in his program in recognizable shape. That is at least questionable: though Reagan has clearly convinced the nation that a bold new venture must be attempted, he is asking Congressmen to vote for spending cuts that will hurt their own constituents--and there is something in his plan to offend just about every lobby in Washington.

The President is also taking a long chance that the deep tax cuts he wants will prompt savings, investment and hard work, and thus healthy economic growth. They could instead deepen deficits, lead to a consumer buying spree, or both; either would make inflation worse.

That prospect troubles many economists and businessmen who applaud what Reagan is trying to do. Says Otto Eckstein, a member of TIME's Board of Economists: "With only a little additional bad luck, the Government could experience a deficit of $100 billion." Adds DuPont Chairman Irving Shapiro: "I have a lot of trouble with this new economic religion. No businessman would run his business on the basis of an untested thesis."

The President, however, is counting not just on economics but on a change in the national psychology, to be engineered by convincing citizens that their leader knows what to do and is determined to carry out his plans. Said Reagan: "We are in control here. There is nothing wrong with America that together we can't fix." But can his program really convince workers, businessmen, bankers that inflation is not the wave of the future? Or will they go on demanding extra wage boosts, still higher prices, more interest on loans in a futile attempt to stay ahead of the game--and thus bring about more inflation, whatever Washington may do? Gauging the program's chances for checking inflation, Presidential Counsellor Edwin Meese last week admitted: "We are talking about something that is well over 50% and maybe 80% psychological."

White House economists concede--and the President duly warned the nation--that even if Congress passes Reagan's program intact, the payoff would not come overnight. The budget would not be balanced until fiscal 1984, a year later than the President originally hoped. In fiscal 1982 the deficit would be $45 billion, some $17 billion more than might have been expected under Jimmy Carter's tax and spending plans. (Reason: Reagan's tax cuts would temporarily lower revenues faster than his budget reductions would hold down spending.) The inflation rate would drop only from an all but intolerable one--an estimated 11.1% this calendar year--to a still very high 8.3% in 1982; unemployment would go down only from 7.8% to 7.2%.

Not until the election year of 1984 would the real benefits of a 5.5% inflation rate and a 6.4% unemployment figure be felt--and the White House conceded that these forecasts "may seem optimistic to some observers." As Reagan put it in his speech, his plan is designed "not to make things easy, but to make things better."

What if the plan is tried and fails? That is perhaps the scariest aspect of since the nation has seemingly run out of substitute ideas to right the economy. In the most forceful part of his speech, the President posed these questions for his critics: "Have they an alternative which offers a greater chance of balancing the budget, reducing and eliminating inflation, stimulating the creation of jobs and reducing the tax burden? And if they haven't, are they suggesting we can continue on the present course without coming to a day of reckoning?" For the moment the answer to both questions clearly is no, and it is a powerful argument for accepting Reagan's plan. But the very lack of convincing alternatives could bring nearer that day of reckoning, which the President defined this way: "Inflation and the growing tax burden will put an end to everything we believe in and to our dreams for the future."

The speech contained no surprises, since the general outlines of Reagan's program had been carefully circulated in advance. The President prepared the address in what is now becoming the usual way. White House Speechwriter Ken Khachigian put together a rough draft, which Reagan reworked sporadically during a Camp David weekend. Crammed as it was with fiscal details, the speech could not display Reagan at his rhetorical best. For once, the master of the TV homily and the after-dinner pep talk appeared not only ill at ease but even a bit defensive, as he spent some of the opening minutes talking earnestly about programs he would not cut, most notably, veterans' and basic Social Security retirement benefits.

The President originally had wanted to speak for 20 or 25 minutes, but found after practicing and timing himself that his talk was longer than that--it took 34 minutes to deliver--and he decided there was nothing he wanted to cut. As a result, his rushed delivery caused him, un characteristically, to misjudge some of his applause lines. Late in the speech, he drew a loud and long ovation by asking the assembled Congressmen and Senators to make his program not just the Administration's idea but "our plan." Reagan flashed his widest grin and remarked, "I should have arranged to quit right there" --then went on speaking for another 4 1/2minutes.

But a grade-B effort from Reagan is still an effective performance. The President introduced one characteristic touch to make statistics come alive: observing that the national debt is approaching $1 trillion, he remarked, raising his arm, that a trillion dollars stacked up in $1,000 bills would make a pile 67 miles high.* At least some opponents in the TV audience were grudgingly impressed. California Leftist Tom Hayden, 40, who opposes the program as inequitable, nonetheless judged Reagan's presentation "one of the most substantial speeches by an American President in my lifetime."

No wonder: Reagan's program lived up to its advance billing in weight and scope. The President made a few last-minute modifications. For instance, he trimmed a cut in food stamp spending next year from $2.5 billion to $1.8 billion. But the changes were not major. His plan has three main components:

> Spending. As he pledged, Reagan proposed reductions in an extraordinarily broad range of federal activities (see following story). In percentage terms some of the cuts would be very deep, and in dollar amounts they recall the celebrated witticism of the late Everett McKinley Dirksen: "A billion here, a couple of billion there--first thing you know it adds up to be real money." Many of the reductions would indeed be in the $1 billion-to-$2 billion range next fiscal year, and they add up to very real money: an estimated $41.4 billion in fiscal 1982, $123.8 billion by fiscal 1986. Those proposed savings, moreover, take into account an increase in defense spending, the giant exception to the austerity program. Citing enormous increases in Soviet military outlays since 1970, Reagan asserted, "To allow this imbalance to continue is a threat to our national security."

Reagan did pledge that the Pentagon would feel the budget-cutting pinch too. He proposed to close some military bases and pare down a pay raise for civilian employees of the Department of Defense. Even so, military spending next fiscal year would rise $4.3 billion over the $181.5 billion Jimmy Carter proposed, and that is a modest start. In fiscal 1983 the increase would be $20 billion; by fiscal 1986, $63.1 billion. Some of the projects the money would go for are obvious enough: a new manned bomber, an additional nuclear aircraft carrier, faster production of jet fighters. But Pentagon officials have yet to decide how they will allocate all the extra dollars.

> Taxes. The President would like to slash all income tax rates by 10% in each of the next three years, beginning July 1. Individual rates that now range from 14% to 70% (that top applies only to "unearned" income, such as interest, dividends and rents) would drop to a range of 10% to 50% after July 1, 1984. Assuming average deductions, the income tax on a family of four earning $20,000 would drop from $2,013 this year to $1,435 in 1984; the tax on a family earning $50,000 would fall from $9,323 to $6,809. Total savings to all taxpayers: $44.2 billion in fiscal 1982; $141.5 billion in fiscal 1985, when the cuts would be in effect for a full twelve months.

A minor flap arose just before the President's speech because Reagan decided to keep the top tax rate on "earned" (essentially wage and salary) income at 50%. That annoyed New York Congressman Jack Kemp, co-author of the tax plan whose main features Reagan adopted: Kemp had thought the rate would come down to 36%. He and others argue that deep tax cuts are especially needed in high brackets to prompt the wealthy to switch money out of tax shelters into more productive savings and investment.

In fact, Kemp may have misunderstood what the President was proposing. (Said one White House aide: "There are worse things than having daylight between this Administration and Jack Kemp." Kemp is widely regarded as a tax-slashing zealot.) For a married couple, the 50% rate now applies only to that portion of taxable income above $60,000 a year. Under the President's plan, the 50% rate by 1984 would apply only to taxable income exceeding $215,000--a level of wealth claimed on only three-hundredths of 1% of all tax returns, according to Treasury Secretary Donald Regan.

> Deregulation. Reagan announced some modest steps to ease the burden on business. For example, he rescinded Carter's order that building owners set thermostats no higher than 65DEG in winter and no lower than 78DEG in summer, a measure promulgated to save energy. More important, he ordered that whenever a federal agency proposes a new regulation that business would have to spend $ 100 million or more to obey, the agency must make a cost-benefit analysis of its proposed rule. Agencies would have to suggest alternatives, and choose the one that would cost business the least; disputes would be resolved by an Administration task force headed by Vice President George Bush. As examples of regulations that might be affected. Bush Assistant James Miller cited proposed rules governing noise in workplaces and the modification of buses and subway cars to make them more accessible to the handicapped.

The Administration clearly made an effort to spread the discomfort of the budget slashing across society, devising cutbacks that will affect business, the middle class and rural areas. But there is no disguising the fact that the burden will fall most heavily on low-income groups. The poor and marginal low-income families will suffer more from cutbacks in, say, the food stamp program than business will be hurt by a reduction in Export-Import Bank lending. And big cities would be hit especially hard by a variety of spending reductions.

The Administration contends that the poor and cities are hurt by inflation more than they are helped by Government spending programs, an argument that does not mollify many of Reagan's critics. The 18 members of the Congressional Black Caucus called a press conference to accuse the Administration of plotting to make the poor "hungrier, colder and sicker." New Orleans Mayor Ernest Morial predicted "disaster for American cities" if the program goes through. Marian Wright Edelman, president of the Children's Defense Fund, attacked the proposed budget cuts as "devastating to already barebone lives."

The big surprise, however, was that there was not a din of such outraged comments. The more general reaction was that Reagan's program is bitter, but necessary, medicine. Said Wisconsin Governor Lee Dreyfus: "It's like rabies shots. It's really going to hurt, but I know if we don't get it, we are going to die." While Republican Dreyfus might be expected to say something like that, many Democrats agreed that the nation can no longer afford ever expanding federal spending. Said Colorado's Democratic Governor Richard Lamm: "We are seeing the passing of an era. The age of exuberance is over and the age of austerity is here. I endorse the goal of the compassionate shrinking of Federal Government. We can spend smarter money, not bigger money."

Some critics who objected to parts of the President's program often found good things to say about other portions. M.I.T. Professor Lester Thurow, an adviser to George McGovern during the 1972 presidential campaign and a member of TIME'S Board of Economists, criticized the proposed budget cuts as providing only "token" reductions in programs that benefit high-income groups. But Thurow approves Reagan's ideas for regulatory reform: "There is a consensus that we are an overregulated society."

Over and over, too, people dubious about aspects of the President's plan took to heart Reagan's challenge to come up with a better one. New York City Mayor Edward Koch asserted that the proposals to slash mass transit aid and the food stamp program and eliminate the CETA program to hire the unemployed for public-service jobs "are wrong and must not be implemented." Koch added, however: "I agree that there has to be a reduction in spending. He has thrown down the challenge; it's very reasonable. If we don't like his proposals, it's up to us to propose alternatives." Said Manhattan Investment Banker Felix Rohatyn: "We should be warned that the pain of the cutbacks is likely to offset our pleasure from tax reductions. But we've got to give Reagan's program a chance, especially because we have no valid alternative."

The reaction that counts, of course, will come in Congress, and Administration officials were deep in plans to counter any foot dragging. David Stockman, Director of the Office of Management and Budget, plans to hold daily press conferences this week, flanked by Cabinet officers who will defend and explain their portion of the spending cuts. White House officials are making themselves available for a blitz of TV appearances, and their Cabinet colleagues are setting up to brief press and special-interest groups.

Reagan's allies are also preparing to lobby Congressmen in their home districts. Charles Wick, former co-chairman of Reagan's Inauguration committee, plans a closed-circuit TV program during which Administration economists will explain the plan to perhaps 15,000 Reagan loyalists around the country, who will then be expected to evangelize their Congressmen. Some White House aides are prepared to play rougher than that. Says one: "If a Republican doesn't vote for us, he will have one hell of a time getting us into his district to campaign for him in 1982. And if a Democrat votes against us, he just might see a lot of us in his district when he runs for re-election."

It may not come to that. Although most Democrats sat on their hands as Reagan announced his proposals to Congress, and blustered about them after the speech, the preliminary consensus is that Reagan will certainly win substantial budget and tax cuts--but probably not as much of either as he wants, and certainly not in the exact form he proposes.

Oddly, Congress seems in a mood to slash spending deeper, and faster, than taxes. While that attitude might seem to defy conventional political wisdom, there is strong reason for it. Public-opinion polls have consistently shown popular majorities in favor of lower spending. Reagan's impressive victory last November convinced nearly all legislators, Democratic as well as Republican, that the polls are reading the public mood correctly. Says Democratic Senate Whip Alan Cranston of California: "The attitude among Democrats here is that we can't be in the position of preventing him from trying what he was elected to do. We can't go along on every detail, but if we obstructed everything, it would be bad for the country and bad for the Democrats. The voters would remove a lot more of us."

That does not mean the cuts will come easily. Several Congressmen and Senators last week rushed to express support for Reagan's program--except, of course, for those aspects that might hurt their constituents. Representative Peter Peyser, a Democrat from the New York suburbs, found "obvious merit" in Reagan's proposals, but he also complained that cutbacks in student loans would deprive college-bound youths of money they "desperately need." Democratic Senator Henry Jackson of Washington congratulated Reagan on his plan, but opposed reductions in Export-Import Bank loans, which help finance huge overseas sales by Boeing, a major employer in Jackson's state. Though he is one of the architects of the plan, Jack Kemp felt the need to promise .his Buffalo constituents that he would fight any reduction in mass-transit aid to that city.

Reagan's problem will be to keep his program from being riddled with such "exceptions" in one committee after another. To that end, his legislative strategists have discussed wrapping many of the budget cuts into some kind of superbill, but no conclusive strategy has yet emerged. Leaders of both House and Senate pledge fast action; House Budget Committee Chairman James Jones of Oklahoma even talks of having a big budget resolution passed by Aug. 1. That would require a miraculous change in Congress's customary slow-moving ways.

The spending cuts probably will not be all that Reagan wants. In the Democratic-controlled House, Speaker Thomas P. ("Tip") O'Neill Jr. warned: "We're not going to let them tear asunder programs we've built over the years." The Budget Committee last week sent a letter to all 243 House Democrats suggesting as a goal the reduction of fiscal 1982 spending by $25 billion to $30 billion, rather than the $41.4 billion that Reagan proposes. A $30 billion cut might be acceptable to the President, but its composition is another matter. The Democrats as yet have little idea about what specific reductions they will accept.

On taxes, the going will be much harder for Reagan. Chatting with reporters en route to California at week's end, the President said he expected difficulty "possibly more over taxes than over ]spending] There's still that belief on the part of many people that a cut in tax rates automatically means a cut in revenues." In Reagan's view, tax cuts would spur so much economic growth that in the long run the Government would collect more revenue even at lower rates.

One part of Reagan's tax program should eventually move through Congress with ease. The President urges a speedup, retroactive to Jan. 1, in depreciation write-offs for business according to the so-called 10-5-3 formula.* It is expected to reduce business tax bills by $9.7 billion next fiscal year and $59.3 billion by fiscal 1986, giving companies that much more to invest. There is almost no opposition: legislators of all ideological stripes consider such a rise in investment necessary to reverse the decline in U.S. productivity.

But even that change will have to wait a while. Though Reagan insists that spending and tax cuts should be put into effect together, the Democrats who control the House,are adamantly resolved not to vote on any tax bill until all budget reductions are enacted, so that they can see how much revenue loss can be tolerated without producing ballooning deficits. Senate Majority Leader Howard Baker predicts that Congress may not finally pass a tax bill until 1982.

When the legislators do get around to voting on taxes, they will not enact the "simple and clean" income tax cut Reagan wants. Legislators, as always, will try to load the bill with all kinds of amendments: an increase in personal exemptions; further reduction of the capital gains tax on sale of assets, such as stock or real estate; an end to the "marriage penalty" that now forces many working couples to pay a higher tax on their combined earnings than they would if they were single and filing separately. To make room for such amendments, the cuts in basic income tax rates might well be shaved down; Democrats, in addition, want to reshape them to give proportionately more relief to lower-income groups. Finally, many Congressmen are leery of voting now to cut taxes well into the future. Says Illinois Democrat Dan Rostenkowski, chairman of the tax-writing House Ways and Means Committee: "There is no sentiment for a three-year cut."

Still, there seems little doubt that Reagan has sold Congress and the nation on the idea, if not the specifics, of a change in U.S. direction that would have seemed unthinkable a few years ago: As he flew to California for a weekend at his ranch, Reagan was his usual confident, joshing self. To a welcoming crowd he joked, "I know the ladies know about inflation. Once upon a time you used to put some money in your purse and go to the market and buy a bagful of groceries. Now you take a bagful of money, go to the market and bring your groceries home in your purse." White House aides were jubilant about initial response to the speech: 1,073 favorable phone calls in the first 13 hours, vs. only 92 negative. And back in Washington, Congressmen conceded that the President had seized the initiative. Said one congressional staffer: "The hard part is beginning. And it's ours, not his."

--By George J. Church. Reported by Laurence I. Barrett and David Beckwith/ Washington

* Reagan tried to work it out himself on a scratch pad and came out with 60 miles; the Bureau of Engraving and Printing provided the correct figure.

* Companies would be allowed to write off the cost of buildings in ten years, of machinery in five years, and of vehicles in three years.

With reporting by Laurence I. Barrett, David Beckwith

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