Caught in a Riptide of Red Ink

By WALTER ISAACSON

Despite Reagan's victories, his budget is out to sea

Just as Ronald Reagan was persuading a recalcitrant Congress to make one more $4 billion cut from fiscal 1982 spending, a sour note was sounded. It was riot another anguished cry from those objecting to the pain of the budget knife, although that crescendoing chorus was heard too last week, but a warning from his own economic lieutenants. The economic crusade, they said, suddenly seemed seriously off course, inexorably headed toward the largest deficits in the country's history.

According to the projections brought to the Oval Office, the deficit for fiscal 1982 may reach $109.1 billion. This would dwarf the previous record of $66 billion under President Ford in 1976, which was the last full fiscal year during a Republican Administration. Worse yet, Reagan's package of $283 billion of tax reductions and $130 billion in budget cuts, combined with the lingering effects of the current recession, threatened to produce a total deficit of $423 billion over the next three years. When he first proposed his radical program last February, Reagan said that the plan's supply-side stimulus would result in about a $40 billion deficit for 1982 and a small surplus by 1984.

Murray Weidenbaum, chairman of the Council of Economic Advisers, joined with Budget Director David Stockman to counter Treasury Secretary Donald Regan's objections to using more pessimistic forecasts of economic growth in preparing the projections. Then Weidenbaum and other Administration officials tried, somewhat implausibly, to downplay the traditional Republican view that deficits lead to spiraling prices. "There is no direct or indirect connection between deficits and inflation," CEA Member William Niskanen told a stunned audience at a seminar sponsored by the conservative American Enterprise Institute. The Administration's new contention that deficits need not inhibit business expansion seems shaky at best. The tax cuts were designed to provide a pool of private savings that could be used for new investments. But the Government borrowing necessary to fund the projected deficits threatens to soak up every nickel and more.

Democrats ridiculed the Republican revisionism. Said House Budget Committee Chairman Jim Jones: "If someone in the Carter Administration had said that cumulative three-year deficits of $400 billion don't matter, Republicans would have called for his impeachment." In fact, Republican Congressman Trent Lott of Mississippi almost did just that last week, calling on the White House to demand that Niskanen be fired. And the Republican Senate passed a resolution asking the President to present a plan to balance the budget by 1984. The White House quickly announced that the opinions expressed by the top economic advisers were not those of the President. As Reagan said in his first economic speech last February: "We know now that inflation results from all that deficit spending."

Not much can now be done to alleviate the 1982 deficit. The final battle on spending limits was concluded last week when Congress made one last $4 billion trim. In doing so, Congress settled a dispute with the President over roughly $2 billion in controversial cuts, which had caused Reagan to veto a spending resolution last month. Democrat Sidney Yates of Illinois could not resist taunting House Republicans: "Instead of having a deficit of $109 billion, you'd have a deficit of $107.5 billion." The new "continuing resolution" allows the Government to operate while the final appropriations bills are being written.

Partly to discomfit the victorious Republicans, the House Democratic leader ship forced a separate vote on foreign aid, which has been funded for the past three years by continuing legislation designed to avert a showdown on the issue. Reagan had to line up support from a majority of Republicans, who generally vote overwhelmingly against foreign aid, to get the bill passed.

The struggle over the fiscal 1983 budget, the first version of which is due to be submitted next month, is already under way. Stockman has been urging draconian cuts in domestic programs, perhaps so Reagan can later ask for lesser, though still hefty, reductions without seeming hardhearted. Cabinet officials have begun to declare their dismay publicly and most are taking their protests to the President instead of acquiescing to Stockman's demands. Congress also is almost certain to balk. Says Joseph McDade of Pennsylvania, a savvy Republican on the House Appropriations Committee: "We'll not see a repeat next year of what we saw this year."

For the moment, the White House plans to forge ahead with efforts to find further feasible cuts in domestic programs. Many of the President's frustrated top advisers, including Stockman and Chief of Staff James Baker, hope that once Reagan has slashed as deeply as he can, he will reconsider some of the economic options he has to this point adamantly ruled out. One would be raising taxes, perhaps by proposing new excises on cigarettes and liquor, or by accompanying the deregulation of natural gas with a windfall profits levy that could produce $20 billion a year. New York Congressman Jack Kemp, a firm believer in the tax reductions, charges that his lapsed protege, Stockman, deliberately concocted the frightening deficit forecasts and made them public in order to necessitate such action. Another route would be for Reagan to seek a palatable way to curtail the inflation-based increases in entitlement programs, although he will find it all but politically impossible to touch the granddaddy of them all, Social Security. Finally, he may be forced to revoke the dispensation he has granted to the Pentagon, which last week almost casually requested $6 billion more for 1983 to speed delivery of two nuclear aircraft carriers. The increase in defense spending over five years requested by Reagan is $181 billion.

The riptide of red ink and the resistance to further domestic cuts make it clear that Reagan can hardly dent the deficits merely by cutting social spending. It is becoming evident that his goal of reducing taxes, raising military spending and balancing the budget is no less difficult to achieve than many of his sharpest critics claimed. --By Walter Isaacson. Reported by David Beckwith and Neil MacNeil/ Washington

With reporting by David Beckwith, Neil MacNeil

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