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Reagan economic era bows out; Democrats to bring on new focus

By RICHARD A. NENNEMAN / December 22, 1986



ON the political side of the ledger, the Iran-contra arms scandal seems likely to add finis to the Reagan era of adventurism in foreign affairs. It was an era that tugged at the reins of public tolerance in its departure from at least the theoretical norms for the conduct of foreign policy in our three-branch system of government. Perhaps for different reasons, the end of 1986 is also most likely to end the Reagan economic era. The election of a Democratic majority in the Senate will change the focus of economic debate in that body. The Democrats have been without major domestic issues for some time. Their willingness to spend for 40 years helped them win elections. The spending was also seen as one cause of the inflation that began in the 1970s and eventually added to a growing public disenchantment with many of their social programs.

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The passage of six Republican years, however, has now given the Democrats some new issues. These years have not been all good or all bad, of course, and some of the new problems that give the Democrats issues arise out of solutions to old problems.

To be more specific, President Reagan came into office committed to ending inflation. It is not ended in the sense that it was under President Eisenhower, when it ran at just about 1 percent for almost seven years. But it is ended in the public eye, and for now that is what counts.

To end the inflation, Mr. Reagan supported a very hard monetary line at the Federal Reserve. And to spare the country from severl years of slow growth, he made up for the hard monetary policy by having the largest Keynesian tax cut in history. Some 25 percent was taken off personal income tax bills over the period 1981-83. This, in turn, stimulated the economy, brought foreign money into the country because of high interest rates, and left the US with an overvalued dollar by the end of 1984.

What the Reagan economic team did not take into account was the rapid productivity growth in many other countries and the permanent place their manufactures were taking in the American economy. Therefore, trade policy will be a major item on the Democrats' agenda, come January.

Another thing Mr. Reagan did not take into account was the seriousness with which our competitors overseas take their economic challenges. It was in the American tradition to boost the entrepreneurial spirit in this country. But that spirit, without the right investment policies and a first-rate, focused educational system behind it, isn't enough to compete with nations organized today for economic battle, so to speak.

Many serious mistakes were also made in the so-called tax reform passed this year. The small personal tax cuts most individuals will enjoy were purchased at the expense of corporate taxes, which were increased more than $100 billion over the next five years.

At a time when the US needs to invest more in itself, we purposely skewed the system to aid consumption still more and hurt investment. The investment environment was further hurt by the 40 percent increase in the capital gains tax rate.

But the most serious mistake remains the cavalier attitude toward budget balancing. The deficits run up in the Reagan years have already more than doubled the national debt, much of which is now held by foreign creditors. The US has just this year become the world's largest debtor nation.

There is, in short, an ample economic agenda for the Democratic Congress to begin working on in January. At some point, taxes will have to be increased. Given the President's apparent inability to see that taxes are too low in relation to any kind of congressional consensus on spending levels, one cannot place all the burden on Congress.

But the next two years should tell us whether the Democrats have a new agenda and whether that agenda is the proper one for tackling the many serious economic problems the United States will face under a new president in 1989.