In its first year in office the Reagan administration has laid the basis for changes in American society which may prove to be as far-reaching as those begun by Franklin Roosevelt half a century ago.
This has been done almost entirely through manipulation of the federal budget. There has been a massive shift of resources from the civilian to the military sectors of the economy. The likely result will be to widen the division between rich and poor and to sharpen the distinction between two parallel societies - one prospering off defense contracts, the other stagnating at best and sinking into permanent poverty at worst.
The Reagan recession has brought down interest rates and inflation at the price of increasing unemployment. This would perhaps be tolerable as a short-term phenomenon, but the only thing short-term about it is likely to be the modest decline in interest rates and inflation. The 1980 campaign promise of a balanced budget was transformed within a year into the distant, pie-in-the-sky goal of a balanced budget.
The prospective deficit for the current fiscal year ending next September is Unless the administration resorts to the printing press, this can only be financed by borrowing in the money markets. And if the federal government borrows this much, there will be very little left for loans for housing or automobiles. So interest rates will go up again.
The Reagan administration has used budgetary and tax policies more as social than as economic instruments. The burden of budget cuts - and the budget needed to be cut - has fallen on those least able to bear it. It is a good deal more arguable that taxes needed to be cut, at least until the budget was brought under a semblance of control, but in any event the benefit of the tax cuts has gone to those who least need it. The 1981 tax act is probably the worst law Congress has passed since the Smoot-Hawley Tariff of the Hoover administration.
The tax bill was supposed to stimulate investment in new plants and equipment. What it has stimulated instead is a rash of corporate mergers. Instead of modernizing and becoming competitive with European and Japanese producers, US Steel continues to complain about imports while it is trying to buy the Marathon Oil Company, an acquisition which, if accomplished, will not add one dollar to the gross national product. Instead of looking for new oil, Mobil is trying to buy US Steel so as to get control of reserves Marathon has already discovered, something which will not add one barrel to the American oil supply.
It is implicit in Reagan's new federalism that, as the federal government reduces its social spending, either states or localities pick up the slack or the needs are not met. But states and cities have shown little inclination to do this, and some of them are prevented from doing so in any case by constitutional limitations such as California's Proposition 13.
Meanwhile, as the poor suffer through a grim winter, the rich get richer. Jewelers cannot keep enough $5,000 watches in stock to meet the demand. Plush restaurants catering to the expense account trade turn away patrons. New office buildings to house the lobbyists, public relations men, and lawyers crowd the Washington skyline.
Thus the trend toward two Americas accelerates. On the one hand, there are those who live off defense contracts; and on the other hand, there is everybody else. Geographically, it is only a few miles from the South Bronx to Park Avenue. Socially, it is a couple of light years and getting farther. The distortions, which always existed, and the tensions, which have never been far below the surface, seem bound to increase.
All of this is compounded by the sharp increase in defense spending which absorbs resources without producing anything which is economically useful. Nor does it contribute much to solving unemployment: the kinds of people defense industry hires - engineers, technicians, and skilled workers - are already in short supply.
For a long time, unemployment in the United States - as epitomized by black urban youth - has been more a social than an economic problem anyway. The hard-core unemployed lack the education and skills to take advantage of growth in, say, the aerospace industry. The Great Society programs which are now being dismantled never dealt with this problem very well. But the Reagan administration is not even trying to deal with it, and maybe doesn't even recognize it.
The long-term implications of these trends are gloomy, but the process is not yet irreversible. The shifts in budgetary priorities have only begun to bite, and the full effects of the tax cuts have not yet been felt. It is a faint hope that Reagan will show the same agility in reversing his devotion to lower taxes and higher defense spending that he showed in reversing his devotion to a balanced budget. It is perhaps more substantial to hope that Congress will recover from its supine acceptance of the Reagan blitz in 1981 and reassert itself in 1982.