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Reaganomics '82

December 30, 1981



For the giant US economy, 1981 proved to be the type of year that historians measure as ''turning points'' - momentous occasions that serve as transitions between the old and the new. As the year was closing, the major development was clearly the recession - one of the most severe since World War II, with unemployment at 8.4 percent and heading towards 9 percent. But beyond the dismaying reports of downturn and layoffs was also the potentially far-reaching development of a fundamental shift in the nation's tax laws and government policies toward the business sector which could - and the word must be stressed - mean steady economic growth in the latter half of 1982 and perhaps well into the decade.

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The Reagan administration's tax cut and budget restraint measures were not as wrenching a break with the past as many people imagine. They were adopted in part because of substantial support from conservative Democrats. Moreover, a number of congressional Democrats throughout the late 1970s (as well as officials within the Carter White House) had come to realize that the tax code penalized savings and capital formation while overly stimulating consumption.

But it was Mr. Reagan's no-nonsense call that nudged Congress finally to enact what Business Week correctly calls ''revolutionary changes in the ground rules of personal finance'' and in ''the balance between investment and consumption'' in the US. The official rationale for ''Reaganomics'' - a hodgepodge policy of tight money, deep budget cuts in the social service area, and reductions in corporate and personal tax rates - was that there would be an explosion of savings and productive investment in the US that would lead to new economic activity.

Whether that program will work is still uncertain. Wall Street remains deeply troubled by the prospects of massive budget deficits. Also, the business community has not yet responded to the administration's tax breaks. Instead of investing assets in new equipment or plants, many firms are using their excess cash to buy out other companies in an unprecedented merger and acquisition spree , acquiring corporate debts for lucrative tax write-offs under federal leasing rules (thanks to a dubious law approved by Mr. Reagan), and buying back their own corporate shares.

Such practices may have some economic justification. But they are disappointing. The public can hardly long support massive tax breaks for corporations, while social programs are dramatically reduced, when those same corporations use their tax advantages for personal gain rather than programs that further the economy as a whole.

While the business community has yet to take full advantage of new tax laws, the overall US savings rate has inched slightly upward from the 5 percent range of recent years. Inflation has eased, down to a rate of about 8 percent for the third quarter of this year, compared to 12.7 percent during 1979-1980. Moreover, because of the recession, it is now assumed that wage demands will be held to only modest increases for the months ahead. This may well be one of the most promising developments for 1982, particularly since the administration has repeatedly resisted establishing any incomes policy (even going so far as rejecting the use of jawboning). Primarily because of restraint at the bargaining table, many economists now look for inflation to drop into the 7 percent to 8 percent range by late 1982 or 1983.

Some other bright spots can also be noted. Despite recession, a few enterprising firms took advantage of new technology in 1981 by adopting mechanization or robots. The nation's farm economy continued to be the envy - and breakbasket - of the world.

Still, the US economy at year's end posed tough challenges that cried out for innovative solutions. Traditional industries such as steel, automobiles, forest products, and home-building either showed little growth or declined. Small business was particularly hard hit by the recession. Unemployment was especially severe among blacks. Older industrial cities of the North and Midwest faced severe budgetary restraints as factories moved to the Sunbelt. Moreover, the administration's ''new federalism'' - shifting federal responsibilities to state and local governments while reducing money grants to them - raised the likelihood of further economic hardships at the local level.

The recession is as much a Federal Reserve Board-Carter administration recession as a ''Reagan recession.'' But whatever happens from here on out will clearly accrue either to the credit - or discredit - of the incumbent administration. In a remarkably short period Mr. Reagan has fashioned a major redirection in federal tax and fiscal policy. At best, in 1982, economic growth ''will blossom in the spring'' and the ''bloom will endure,'' as Fortune magazine recently con-cluded.

But, if that growth does not materialize, the public will properly demand a complete redirection of the economy by the administration, including possible reduction or scrapping of the huge tax cuts now in place.