U.S.A.

Reagan mounts an offensive

Michael Posner February 8 1982
U.S.A.

Reagan mounts an offensive

Michael Posner February 8 1982

Reagan mounts an offensive

U.S.A.

Michael Posner

The key to Ronald Reagan’s political success in 1981 was his ability to make his own concerns—budget and tax reform—dominant on the agenda in Congress. In tone and in timing, he controlled the debate. Last week, from the august podium of the House of Representatives, the president delivered his first state of the union address. With its radical proposals for reordering federal-state responsibilities, it was a message clearly aimed, once again, at seizing and riveting the nation’s attention.

Indeed, the actual merit of Reagan’s

“new federalism” is for -

the moment almost irrelevant—though it is sure to fuel a long and spirited discussion. In the months ahead, its chief recommendation will be to draw the political focus away from the sensitive subject of budget deficits. By the administration’s own optimistic reckoning, the 1982 deficit will approach $95 billion. Given congressional assent to new budget cuts and tax increases, the debt will drop to $78

billion by 1984. But a significant body of economic opinion still does not accept the budgetary assumptions on which the Reagan projections are based. Even consultant Alan Greenspan, a Reagan adviser, concedes that the president’s program cannot succeed unless “long-term interest rates come down somewhat.”

What makes the financial markets jittery, however, is the fear that the Treasury’s continued borrowing needs—coupled with the Federal Reserve Board’s tight grip on the money supply—will keep interest rates high, stalling the expected recovery from the current recession. In an election year, - few would blame the administration for opening a new ring at the circus.

The new federalism is neither new nor particularly federalist. But it is consistent with Reagan’s longest-held views on the proper role of the federal government. The growth in federal programs over the past half century, the president insisted last week, has made Washington “more pervasive, more intrusive, more unmanageable, more ineffective,

more costly and above all more unaccountable.” His solution is not quite the “single bold stroke” he suggested to a prime-time audience. But it is easily as sweeping a proposition as has been tabled in recent memory.

In essence, what Reagan is proposing is a trade. Washington will assume responsibility for the rising costs of Medicaid, while states and local governments over the next decade take control of some 43 federal programs, from water and sewer grants to low-income energy assistance.

After 1984, the states would be broadly responsible for administering food stamps and aid to families with dependent children—two of the largest categories of current federal expenditure on entitlements. Until 1988, these programs would be funded by a newly created trust fund, made up of revenues from excise taxes and the windfall profits tax on domestically produced oil. But after that date, Washington’s revenue sharing would drop by 25 per cent annually. By 1991, the states would effectively be forced to raise their own taxes to finance these assistance programs, cut back the levels of support or abandon them entirely. Says National Association of Governors spokesman Joe McLaughlin: “This is making federalism the heart of the domestic political debate for the next several years.”

That is precisely the point. Reagan himself plans a whirlwind campaign through several states next month to sell the idea. Already, mayors, such as New York’s Edward Koch, and governors have jumped into the fray, arguing over the fairness of the proposed swap, which states will gain or lose and how to restructure the deal so that the poor and the disadvantaged are not vulnerable.

Much lies in the way of any final agreement on the issues. For one thing, the subject itself is soporific, unlikely to stir passions to the same extent as the price of beer or gasoline. As Newark Mayor Kenneth Gibson put it last week, “Federalism concepts aren’t talked about on the street corners.”

A more fundamental flaw may be found on Capitol Hill. In ceding control of billions of dollars in federal programs to the states, senators and representatives would also be yielding the vast storehouse of influence, patronage and power that automatically goes with them. Without those programs there would be fewer committee assignments and smaller staffs. In a sense, the programs justify their political lives.

In 1982, political survival is far more likely to depend on the shifting economic tides than on the arcane nuances of the new federalism. The president’s central dilemma is unchanged: he must somehow resolve the conflict between

what supply-side economist Jude Wanniski calls “contractionary monetary policy and expansionary fiscal policy.” Warns Wanniski: “It dooms us to stalemate.”

In his state of the union message, Reagan prudently avoided raising excise taxes on alcohol, tobacco and gasoline. The additional revenues would have had only marginal impact on the deficit and would surely have angered voters across the board. Nevertheless, there is widespread sentiment in Congress that the projected deficits are intolerable; that view is now shared not only by conservative Democrats who supported Reaganomics last year but by the Republican moderates from the northeast, where unemployment is raging. In the absence of tax increases, the Reagan consensus for fresh budget surgery may have dissipated.

Before the 97th Congress’ second session gets too far along, most Washington observers expect the House to advance a number of tax-hike proposals. Master of timing that he is, Ronald Reagan will choose a convenient moment to explain that, contrary to his supply-side instincts, he has been forced by a stubborn Congress to raise American taxes; and as deficits mount and interest rates climb, it will then be Congress—not Reaganomics—that is burdened with the guilt.