When Ronald Reagan was sworn into office last January, he confronted an American economy that was anything but buoyant. Among Western nations, only Italy registered a more dismal level of productivity. Interest rates were soaring, the U.S. dollar was anemic and personal savings—the reservoir of economic growth—were the lowest of any major industrial country. In real terms, very little has changed. Interest rates continue to flirt with near-record highs, and such vital signs as consumer spending and inventories suggest that another recession may be imminent.
Yet in another sense everything has changed, and the administration’s first 200 days are now being referred to as the Reagan Revolution. In a world in which perception is often the only reality, Reagan is seen as being in full control of the levers of government, knowing exactly where he wants to lead America and how he intends to get there. Looking at their improbable president, an old man who has spent the better part of his adult life reading
scripts, Americans find none of Jimmy Carter’s righteous uncertainty, Gerald Ford’s bland ineptitude, Richard Nixon’s petty vindictiveness. They see, instead, a man who knows his limitations and refuses to apologize for them. As though he had taken a graduate degree from the school of positive thinking, Reagan has begun the ultimate sales campaign—selling Americans on the potential of America. In the process, the office that only a few years ago seemed imperilled, weakened by Watergate and a headstrong Congress, has now recaptured its authority.
Against all expectation, the president has finessed Congress into approving the largest tax and budget cuts in American history. He has persuaded the Federal Reserve, concierge of the nation’s money supply, to keep its doofs only narrowly ajar; reducing the access to money, Reaganites argue, will ultimately reduce demand for money, thus curbing inflation.
Essentially, as Treasury Secretary Donald Regan observed recently, all of this might be likened to taking the wheel of some vast, oceangoing vessel and turning the ship 180 degrees. The reversal of direction is now almost com-
plete. What remains unclear—and much contested—is whether the ship will be able to move any faster. The entire Reagan package is based on the theory of supply-side economics, which has never been proven in the harsh crucible of the real world.
The theory holds that inflation can be controlled by dramatically improving the climate for business. That is accomplished by providing incentives to investors—greater after-tax profits that will not be diluted by still higher inflation. With an expectation of more cash in pocket, corporations will be able to invest in new plants and equipment facilities which will increase the supply of goods and services and make business more efficient.
But there are many doubters. At the heart of their criticisms lies the central paradox of supply-side theory: on the one hand, the administration is hoping to reduce demand by restricting the availability of money; on the other, it is giving consumers more money through tax cuts. The monetary policy is avowedly anti-inflationary: the fiscal path has historically been a catalyst of inflation. If the two strategies effectively cancel each other out, the economy will continue to stagnate.
The skeptics also disparage the efficacy of tax cuts. They contend the impulse of most Americans suddenly contemplating a fatter paycheque will be to spend it, not save it or invest it. That would undoubtedly spur inflation. At the same time, state and municipal taxes are likely to rise as they compensate for the reduced federal services.
While the Reagan program has clearly not silenced its critics, it is obvious the majority of Americans are prepared to give the president a chance. If the program works, Reagan may well become one of the legendary presidents. If it fails, he will lose his credibility and much more besides. It is, as Senate Majority Leader Howard Baker admitted the other day, “a riverboat gamble,” a crap shoot the entire world is watching with baited breath. —MICHAEL POSNER
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