The 36C Buck Stops Here

By George Church

So vows the President, warning, "We have to face the truth "

Ronald Reagan normally sleeps soundly, but he woke up worried at 4 a.m. last Wednesday. Neither of the two drafts that aides had prepared for the TV speech he was to deliver 41 hours later--his first from the White House--sounded quite right to him. So the President got up in the predawn darkness to scribble on a yellow legal pad, beginning a painstaking rewrite that continued later with the help of speechwriters and ended only five hours before he went on-camera in the Oval Office. Though Reagan rarely carries cash, he made a point of bringing a dollar bill into one session with his advisers, but forgot to take coins with him also and had to ask Aide David Fischer for some. The purpose was to try out a gesture that he later used on TV: holding up the greenback in one hand and tossing a quarter, a dime and a penny onto his desk with the other in order to dramatize the way inflation has shriveled the purchasing power of a dollar earned in 1960 to a mere 36-c- today.*

That, however, was the only touch of playacting; otherwise the drama of the speech came from its subject and context. Both were important enough to justify fully the President's deep concern with sounding the right tone. His task was to begin rallying public support for a program designed to jolt the U.S. out of what he called "the worst economic mess since the Great Depression." Though details will not be spelled out until next week, enough is known already to make it obvious that the program marks a drastic change in national direction. It combines slashes in federal spending so deep and painful--perhaps $40 billion next fiscal year--and tax cuts viewed by many economists as so risky that all of the President's persuasive powers will be needed to induce the nation to accept them. Predicted Senate Majority Leader Howard Baker: "We're going to have the biggest legislative battle in this country since Franklin Delano Roosevelt, and certainly since World War II."

Reagan's speech was an impressive opening gun. Talking quietly but seriously for 18 minutes in layman's language, the President asserted that the nation has no choice but to break with its past profligacy. Said he: "We have to face the truth." Ticking off some familiar statistics --back-to-back years of double-digit inflation for the first time since World War I, 7 million unemployed, a national debt of $934 billion--he warned that "we are threatened with an economic calamity of tremendous proportions, and the old business-as-usual treatment can't save us." The fault, he said, lies in an explosive growth of Government spending, "punitive" taxes and excessive regulation that are sapping the economy's productive strength. The only solution, he said, is to slice both spending and taxes, deeply and together.

The language was a touch hyperbolic, the analysis heavily simplified, and a figure or two mildly debatable. For example, the President put the prospective deficit in fiscal 1981, which ends Sept. 30, at $80 billion, vs. the commonly cited estimate of less than $60 billion; he was including the activities of federal lending agencies that are not counted in the formal budget. But on the whole, Reagan made an effective, and graciously nonpartisan, statement of his views; he stressed over and over the explosive growth of spending and deficits in the past 20 years, implicitly blaming Republican as well as Democratic Administrations. Since 1960, he said, the federal budget has increased by 528%, which is almost 23 times as fast as the U.S. population. But Reagan struck a note of hope too, declaring in a confident manner that "all it takes is a little common sense and recognition of our own ability" to begin rebuilding a growing, noninflationary economy.

The speech was only one part of the biggest lobbying effort on a domestic issue to be launched from the White House in years. After Reagan spells out his program in what amounts to a State of the Union address on Feb. 18, the drive will begin to look like a revival of last fall's election campaign. Vice President George Bush and several Cabinet members are expected to go on tour plugging the program; Reagan himself may hit the road for a few days of speechmaking. His kitchen cabinet--close associates from California who have no official positions in the Administration--met last week in Washington with hundreds of community leaders from around the country to drum up support. Political Consultant Stuart Spencer, an election aide, has been rehired by the White House, to devise a nationwide newspaper and TV advertising campaign on behalf of budget and tax cuts. The object of all this effort will be to build pressure in favor of the proposals among the constituents of Senators and Representalives whose votes will be crucial to getting it passed. The message aimed at the home folks, according to a White House aide: "You've won the battle, now don't lose the war."

Meanwhile, the White House is consulting leaders of special-interest groups, urging them to suspend judgment on the program until they see the full details, rather than mobilize now to fend off budget cuts that might hurt them. Reagan met separately last week in the Cabinet Room with a dozen big-city mayors, the 18 members of the Congressional Black Caucus and 30 leaders of farm organizations. He told them that the Administration intends to spread the pain of spending reductions equitably across U.S. society. Though all were apprehensive, most left taking the wait-and-see attitude that the President urged. Even Democratic Representative Shirley Chisholm, a black liberal from New York, was willing to hold her fire. Said she: "There are lots of politicians that perhaps you don't believe from time to time. You have to give a person an opportunity to show whether his word is going to be his bond."

At the same time, the President is skillfully courting powerful members of Congress, inviting them to the White House for long private chats. Reagan stepped up his Hill wooing last week by paying a public 45-minute call on a bipartisan group of 13 House and Senate leaders. To underscore the symbolism, he met with them in the ornate President's Room of the Senate, where Chief Executives once signed bills; the last to do so was Lyndon Johnson in 1965. As in the private talks, Reagan appealed for support without disclosing any details of his program, but the legislators were so pleased that they applauded him when he entered and again when he left. House Speaker Thomas P. (Tip) O'Neill remarked afterward: "He's got charisma. He's got class. He's got political hype, make no mistake about it."

More than charisma and hype, however, will be needed to sell the program, if the Administration's final budget proposals are anywhere near as drastic as indicated by a 149-page black book circulated by the Office of Management and Budget among key congressional Republicans. The report, which Howard Baker dubbed "the book of cuts and wounds," lists about half the reductions in planned future spending that White House advisers are considering. At this stage, they are only recommendations to Reagan; which ones the President will eventually adopt is not yet known.

Nonetheless, the book is a startling document. The Administration's aim is to reduce nondefense spending by $14 billion to $15 billion in the few remaining months of fiscal 1981, by $40 billion to $50 billion in the next fiscal year, and by even more in the years that follow. To achieve those goals, the President is pondering cuts that would affect the elderly, the poor, students, workers, farmers, businessmen, artists--just about everybody.

Some of the proposals that David Stockman, Director of the Office of Management and Budget, has made to Reagan on the budgets for fiscal 1981 and 1982:

>Tighten eligibility requirements and trim benefits slightly to cut back spending on food stamps, which was previously budgeted at $12.9 billion for fiscal 1982, by $2.6 billion. Make subsidies less generous for meals that are served in day-care centers and schools to reduce the cost of child-nutrition programs by 25%, or $1 billion. Put a limit on Washington's contributions to the federal-state Medicaid program, which helps poor Americans pay for health care, to save $1 billion in fiscal 1982.

>End payments that enable states to extend unemployment compensation for periods longer than the standard 26 weeks, saving $1.1 billion in fiscal 1982. Forbid the CETA program, which offers public service jobs to the hard-core unemployed, from expanding this fiscal year, and eliminate it altogether in 1982, saving $3.7 billion that year.

>Cut business subsidies by as much as $6 billion next year by trimming federal grants designed to encourage development of synthetic fuels, such as oil burned out of shale rock. Also, reduce (by an as yet undisclosed amount) funds earmarked for the Export-Import Bank, which facilitates sales of U.S. products and services overseas.

>Reduce funding for the Farmers Home Administration, which extends credit to people in rural areas who have trouble borrowing elsewhere, by $2 billion in fiscal 1982. In addition, force the Rural Electrification Administration to borrow in the open market, rather than at much lower Government-guaranteed interest rates.

On and on goes the list of potential cuts: the black book suggests reductions in federal aid to the arts, in support for public TV, in mass transit, in postal subsidies and in the space program, even though both Reagan and Stockman are ardent space buffs. Not even the most popular federal programs are spared. In the case of Social Security, the Administration would leave basic retirement benefits untouched. But it is considering scrapping the $122 minimum monthly benefit to retirees who have paid very little into the system and payments to students whose parents have died, as well as reductions in disability payments. Potential savings in fiscal 1982: $2.3 billion.

In several cases, the black book suggests reductions that would be low at the start but grow dramatically in future years. Savings from imposing a limit on Medicaid spending, to take one striking example, are projected to multiply from $100 million this fiscal year to $1 billion next year and $5 billion in fiscal 1985. Speculative though such estimates are, the mere attempt to make them stands the normal budgeting process on its head. Traditionally, the Government starts programs for which spending is relatively small in the early years but snowballs drastically as time goes by. The Reagan Administration is trying to throw that process into reverse.

Ambitious though the Administration's plans are, there are limits to them. Reagan noted ruefully in his TV speech that all the cuts that he proposes will merely make federal spending lower than it otherwise would be, not lower than it is now; total spending will continue to grow because of inflation, however much the White House and Congress may hack and trim. Moreover, there is one gigantic exception to the Administration's cut-and-slash plans: military spending. Secretary of Defense Caspar Weinberger is likely to propose, and Reagan may well recommend, a fiscal 1982 defense budget of $220 billion, almost $24 billion above the figure Jimmy Carter had suggested and $55 billion more than the Pentagon's current budget. That would gobble up more than half the cuts that Reagan is expected to propose in civilian expenditures, even in the unlikely event that Congress enacts every last one of his recommendations.

All of which casts doubt over the other fundamental part of Reagan's economic program: sharp cuts in personal and business taxes. In the President's view, taxes are holding back business growth and feeding inflation quite as much as the explosive growth of federal spending. In his TV speech, he reiterated his familiar pledge to recommend a 10% slash in income tax rates in each of the next three years, plus more generous depreciation allowances for business, and insisted that the reductions must not be held up to await the outcome of the congressional budget debate.

In past years, said the President, "there were always those who told us that taxes couldn't be cut until spending was reduced. Well, you know we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance simply by reducing their allowance." In other words, tax cuts are necessary not only to prompt savings and investment, but also to force Congress to crack down on spending. Nonetheless, there are deep fears in Congress that reducing taxes as drastically as Reagan wants would bloat an already inflationary deficit. House Budget Committee Chairman James Jones of Oklahoma predicts that Congress will cut income tax rates by 10% for only one year, not three in a row.

Slashing spending may be even harder. Some cynics suggest that Stockman is recommending the most shocking range of reductions imaginable so that Reagan can raise sighs of relief by eventually adopting a somewhat milder program. But Congressmen know that Reagan's landslide victory pointed to an anti-spending mood among Americans that the President is appealing to. So there is likely to be something in the eventual program to anger almost every lobby in the country, and they will be heard from. Said Republican Senator William Cohen of Maine: "The President had better move fast before his pedestal crumbles. He's got a tide of good will now, but that is going to fade fast. Every group in my state is beginning to call in."

The difficulties of changing established congressional budget-voting patterns--and the irresistible temptation that many legislators feel to act like demagogues on even the most necessary economic proposals --were underlined for Reagan last week by a silly fight over the national debt. The President asked for a $50 billion increase in the ceiling on that debt, to $985 billion. Like his predecessors, who have had to ask Congress to raise the debt ceiling 21 times since late 1973, he had no choice. If the Government's authority to borrow were not increased, it would run out of money to pay its bills and be unable to function after mid-February.

The trouble was that Republicans for years in the Democratic-controlled Congresses have voted solidly against increases in the debt ceiling, even some proposed by Presidents Nixon and Ford. Then they would portray Democrats who voted to raise the ceiling as champions of wild spending. This time the Democrats were determined to make their G.O.P. colleagues squirm. The Democrats proclaimed that they would not vote for Reagan's request unless a majority of Republicans did too.

Reagan sent a letter to every member of Congress pleading for a yes vote, and House G.O.P. Whip Robert Michel of Illinois twisted Republican arms mercilessly. Eventually, Republicans did support their President by 150 to 36, and the full House passed the debt-ceiling increase by a vote of 305 to 104. In the G.O.P.-controlled Senate, however, Democrats played the same kind of charade that the Republicans had so long used on them. The Democrats pushed a motion to raise the debt ceiling by only $28 billion, rather than Reagan's requested $50 billion, on the specious ground that the President's drive to cut spending ought to make the bigger increase unnecessary. The motion was defeated by 51 Republicans and Democrat Russell Long of Louisiana, voting against 41 other Democrats. Even then, the Senate indulged in six hours of partisan wrangling and taunts before finally passing Reagan's request by 73 to 18.

The President is also encountering his first troubles with the Washington bureaucracy. In his initial hours in office, he ordered a hiring freeze that in effect blocked anyone who accepted a Government job after Nov. 5--the day after the election--from going on the payroll, unless he or she had actually reported to work by Inauguration Day. Washington resounded with tales of people who had quit other jobs, sold their homes and moved their families to the capital only to be denied promised Government employment. Reagan pledged to grant exemptions for true hardship cases, but that did not stop the National Treasury Employees Union, representing 120,000 federal workers, from asking the U.S. District Court to overturn the retroactive features of the hiring freeze.

So the howls begin in what undoubtedly will swell to a coast-to-coast chorus of complaints against the President's bold program. It is open to legitimate analysis, doubt and objection. Reagan will have to prove that whatever spending cuts he finally proposes will not hurt the "truly needy," a pledge that he repeated over and over last week. His tax-reduction proposal does indeed run a risk of swelling the deficit.

But the President's plans at least mark a sharp break with past spend-and-tax policies that, as he says so correctly, have failed spectacularly. And the need for vigorous, unconventional action can scarcely be denied. If the U.S. economy is not quite on the brink of "calamity," it is at least riddled by inflation and battered by recurrent recessions that to gether are reducing national standards of living. The burden of proof is on those critics who assail the President's program to show that they have a convincing alternative.

--By George Church,

Reported by Laurence I. Barren and Neil MacNeil/ Washington

--After the cameras stopped rolling, Reagan gave the 360 back to Fischer.

With reporting by Laurence I. Barren, Neil MacNeil

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