New Tactics at Half Time

By GEORGE J. CHURCH

In his State of the Union and budget messages, Reagan will shift his stance

"How time flies when you're having fun."

--Ronald Reagan at an informal news conference on the second anniversary of his Inauguration

The irony was unmistakable. For as everyone in the White House press room knew, the President is under siege at the half-time mark of his Administration. Indeed, more than a few of the inevitable stories analyzing his performance at the mid-point sound more like obituaries than dispassionate assessments.

Against this background, the State of the Union speech that Reagan is delivering this Tuesday night and the budget he is sending to Capitol Hill six days later have assumed even greater importance than is customary. They will bring the Administration, and the nation, to a critical test. At issue is whether Reagan can produce a credible program to nurture sustained recovery from the crippling recession that seems to have finally hit bottom. That in turn will go far to determine whether he can regain enough of the political momentum he lost in the past year to restore his effectiveness during the second half of his term.

Final touches were still being put to both documents over the weekend. But all last week Reagan was in effect rehearsing themes and lines for the two big messages: at the news session, at a fund-raising dinner in Chicago for Republican Senator Charles Percy and at a kind of mid-term pep rally in Washington for his political appointees. The sum of his remarks suggests that he may be about to moderate his harshly ideological stance just enough, and just in time, to stave off disaster.

The most striking change is in tone. Last year's State of the Union speech was a self-confident stay-the-course message typified by this assertion to Congress: "I will not ask you to try to balance the budget on the backs of the American taxpayer." But last week he was stressing moderation and an appeal for bipartisan cooperation. To the Republican contributors at the Percy dinner, Reagan held up as a model the accord worked out among the White House, the National Commission on Social Security Reform and House Speaker Tip O'Neill, even though it includes huge tax increases. "Yes, it involves necessary compromise," said Reagan. "We must now seek similar answers to other problems weighing on our economy and on our people."

A comparable note of somber concern is creeping into the President's assessments of the economy too. Reagan is well aware that the recession has reinforced a widespread impression that he is indifferent to the sufferings of the poor and unemployed; some 300 demonstrators drove home the point last week by assembling in the bitter cold outside Chicago's Conrad Hilton Hotel and chanting, "We want jobs!" At the Percy dinner inside, the President told his partisan audience: "In the long run, economic growth will put our unemployed back to work, revive idle factories and open new doors of opportunity. But in the short run, our people continue to hurt. So we must take action." That marked a sharp contrast to Reagan's previous denunciations of "make-work" programs.

The policy changes accompanying this shift in rhetoric, however, are in some cases minor. Job programs are an example. Reagan is likely to suggest little more than a revival of his "enterprise zone" plan to give businesses tax breaks if they set up shop in city slums; a tiny increase of perhaps $300 million in job-training funds; and permission for employers to pay subminimum wages to teenagers hired for summer jobs.

In other cases, however, the President is about to propose some far more important steps that he long resisted, notably a hold-down in military spending and some kind of stand-by plan to raise taxes if necessary to shrink gargantuan deficits. Nonetheless, these measures amount to much less than a wholesale retreat from Reaganomics. The President, indeed, sees himself quite accurately as making the minimal concessions necessary to keep a rebellious Congress from attacking the core of his program, chiefly the income tax cuts, the social spending rollback and the big military buildup. For that matter, the change in tone is also less than total. Echoes of the chipper, partisan Reagan of yore rang through the President's remarks last week, and doubtless will resound in the State of the Union speech as well. At his news briefing, Reagan once more pinned blame for the recession on "the overtaxing, overspending, over-regulating binge of the '60s and '70s . . . that we've finally started to correct." He added: "Nearly every economic indicator shows us heading into recovery. The same economists who were arguing a few months ago about how much worse the economy would get are now arguing how strong the recovery is going to be."

That was an overstatement. There was only one unqualifiedly good piece of economic news last week--though, to be sure, it was all important. The Consumer Price Index actually went down in December by .3%, only its second monthly decline in more than 17 years (the other also occurred under Reagan, last March). For all of 1982, prices rose a mere 3.9%, the smallest increase since 1972, when wage and price controls were in effect. Since Reagan took office the rate of inflation has been reduced by more than two-thirds, an achievement the President will crow about, with justification, in the State of the Union speech.

But other statistics made clear the high cost the nation has incurred to tame inflation. Total national production of goods and services, adjusted for inflation, dropped an unexpectedly sharp 2.5% in last year's final quarter. For all of 1982, real G.N.P. fell 1.8%, its worst tumble since 1946. U.S. mines and factories in December ran at only 67.3% of capacity, the lowest figure on record since these statistics were first compiled in 1948.

Even the gloomiest figures, though, now offer some paradoxical cheer. The fourth-quarter dive in G.N.P. resulted largely from a cleanout of inventories of unsold goods, especially cars. That puts business in a position to raise production sharply and rehire workers once final sales turn up, as auto sales already have. Housing starts last year, at 1,061,000, were the fewest since 1946. But the monthly rate, even after a December setback, has jumped 43% from its October 1981 low. Further increases are likely because of a sharp drop in mortgage interest rates that also was the primary force pushing down consumer prices in December. Personal income last year rose only 6.4%, the puniest increase in 19 years. Still, that was above the rate of inflation, so those Americans who are not among the 12 million unemployed enjoyed a genuine, though small, increase in their ability to buy goods and services.

On balance, the economy does seem to be poised for a recovery, but one that most economists still expect to be so slow that unemployment will remain above 10.5% for many months to come. More worrisome, there are signs that a vicious circle has begun that could block any sustained ad vance. The fourth-quarter drop in G.N.P. so reduced tax collections that the federal deficit in fiscal 1983, which started Oct. 1, is now certain to exceed $200 billion. That intensifies the threat that Government borrowing to cover the deficit will gobble up the lendable money needed to finance business investment and consumer buying. A group calling itself the Bi-Partisan Budget Appeal, headed by former Secretary of Commerce Peter Peterson, last week published an ad calling on Reagan to make draconian reductions in the deficit. The ad was signed by five former Secretaries of the Treasury and some 500 top lawyers, academicians and heads of blue-chip corporations.

Reagan, who long dismissed deficits as a kind of passing annoyance, formally recognized the danger last week. Said he: "A high priority must be to get a hammerlock on this monster known as the federal budget." It is too late now to do anything much about fiscal 1983, but White House aides hope to propose a budget lowering the fiscal 1984 deficit to $188 billion. By their figuring, that would be $47 billion less red ink than could be expected if all federal programs were to continue unchanged. (Both numbers were calculated at the end of last week and could be revised further.)

A big chunk of the saving would be provided by the payroll-tax hike and delay in benefit increases recommended last week by the Social Security commission. The rest would come from an $8 billion reduction in planned military spending already announced by Secretary of Defense Caspar Weinberger, skipping of a pay increase for federal employees, a delay in cost of living increases for federal civilian and military as well as Social Security pensioners, and further reductions in such social programs as food stamps, Medicare and Medicaid. Overall, the aim is to freeze most nondefense spending at fiscal 1983 levels in dollar terms. That would mean real cutbacks in many programs; how severe would depend on the rate of inflation. In both his State of the Union speech and budget message, Reagan is sure to sound the theme that everyone must sacrifice in order to get the deficits under control.

After some eleventh-hour fluttering, the White House also settled last week on the outlines of its tax proposals. Reagan was expected to ask Congress to enact immediately a levy on imported oil and a surcharge on individual income taxes that would not go into effect until Oct. 1, 1985, and then only if the deficit in the fiscal year that begins on that date seems likely to exceed 2% of G.N.P. That would work out to around $100 billion of red ink a year. The President's hope is that spending cuts and economic recovery will make the increase unnecessary. But, says one high official, the stand-by proposal "has the double advantage of not raising taxes now that would hinder economic recovery and showing the capital markets that something will be done about the deficit in the long run."

Reagan was expected to leave himself another out: the tax boosts would take effect only if Congress in the next two years fails to enact a tax simplification plan. The President intends to pledge that he will study and eventually submit a proposal that would trade wholesale repeal of exemptions and deductions for a lower and narrower range of income tax rates than the present 14% to 50%. That would be a variation of the flat-tax idea that many reformers, both conservative and liberal, urge on grounds of both simplicity and equity (since everyone with approximately the same income would pay the same tax). Said Reagan last week: "The top priority in taxes in this country is to have a tax system that people can understand."

Whatever Reagan's final detailed proposals might be, Congress is virtually certain to demand a faster and more certain drop in the deficit than the President envisions. Democrats, with some Republican support, will howl that Reagan's plans constitute anything but an equitable sharing of sacrifice and that the poor have been forced to give up far too much already. They will insist on increases in some social spending, accompanied by deeper slashes out of the Pentagon budget than Reagan will recommend.

Even some of the President's aides consider the proposal for stand-by tax increases to be a "Rube Goldberg" scheme that the legislature will reject. The tax-writing committees of Congress are loath to let the President specify the conditions under which levies should be raised. Republicans Robert Dole of Kansas, chairman of the Senate Finance Committee, and Barber Conable of New York, a tax expert in the House, put their opposition on the record last week. Many Congressmen and Senators also feel that a plan to raise taxes only if certain conditions prevail is inadequate. They will propose a surcharge that would take effect in late 1985, come what may.

Still, Reagan probably has bent enough to avoid a repetition of last year, when, as one of his subordinates puts it, his budget "got laughed out of town." The Republican Senate will be eager to find compromises that he might accept. The Democrats who control the House have enough leverage to force further adjustments, but not to enact an alternative program, even in the unlikely event that they could agree on one. The big question is whether the President's recommendations, and the modifications that Congress enacts, will in fact promote the recovery that Reagan belatedly recognizes is essential to his political survival and to the health of the nation. --By George J. Church. Reported by Lawrence I. Barrett and David Beckwith/Washington

With reporting by Laurence I. Barrett, David Beckwith This file is automatically generated by a robot program, so viewer discretion is required.