THE new five-year federal budget represents an argument lost by conservative, anti-tax economists - a loss they believe will forfeit economic growth. The former architects of Reaganomics, which Republicans have credited with the longest peacetime expansion in United States history, were rebuffed at nearly every stage of the budget dealing.
They argue that higher taxes, in particular extra taxes on the wealthy, drag down investment enough to swamp any economic benefits from closing the deficit.
Supply-side economics is well-represented in the Bush administration. Its advocates are not sharing their views publicly; however, most supply-siders believe that the new tax increases Mr. Bush has endorsed will cut deeply into economic growth and increase the chances for a deep recession, and may even swell the federal deficit instead of cutting it.
The supporters of the budget agreement are more optimistic about the economic benefits of beginning to balance the government books. They are banking on an improved climate for growth emerging in a year or two from less government borrowing and lower interest rates.
The Federal Reserve Board lowered overnight interest rates by a quarter of a percentage point early this week in response to the budget agreement. But the impact on market interest rates was negligible. ``This isn't enough to make a difference in the short run,'' says Barry Bosworth, an economist with the liberal-leaning Brookings Institution. ``The Federal Reserve cannot loosen credit substantially and head off any acceleration of inflation.''
However, Mr. Bosworth predicts that next year lighter federal borrowing could ease long-term interest rates as much as 1 percentage point. Without a deficit-cutting package, he adds, ``the rates might have gone considerably higher.''
Business economists see mixed prospects for the budget agreement and the economy. Wall Street investors eagerly hoped for such deficit cuts, even at a cost of higher taxes. Others are not so confident that the deal is good for growth.
The new taxes in the budget will not improve the nearly stagnant investment climate, according to Margo Thorning, chief economist at the American Council for Capital Formation. The budget ``isn't good for capital formation,'' she says. The higher marginal taxes on high incomes will work against expanding the savings that finance investment, she says, and she is skeptical that interest rates will drop.
The deepest doubts are among the supply-side economists.
The full impact of the new taxes will not hit business immediately, says Jim Miller, former Reagan budget director and now cochairman of Citizens for a Sound Economy. But the costs will be enormous, he says, when added to the price of complying with the new Clean Air Act.
Gary Robbins, a former Treasury official under Reagan and now a private economist, forecasts that the cost of the new budget package to the economy will run as high as $50 billion a year toward the end of the five-year plan. That would shave a percentage point off growth in the gross national product (GNP), says Mr. Robbins.
Jeffrey Eisenach, president of the conservative Washington Policy Group, estimates that the budget package will cost between half a million and a million jobs over the next five years.
The supply-side views have been represented chiefly by conservative Republicans in the House of Representatives, led by Minority Whip Newt Gingrich of Georgia.
Within the administration, supply-siders range from Housing and Urban Development Secretary Jack Kemp to White House tax policy staffer Lawrence Lindsey, who wrote a widely cited defense of Reagan tax policies published last year.
According to one conservative adviser and activist, none of these tax-cut mavens ``were in any of the rooms that mattered'' as the White House settled on its course.
The course was apparently set by White House budget director Richard Darman, with Treasury Secretary Nicholas Brady and Republican pollster Robert Teeter as allies.
Conservative House members, led by Mr. Gingrich, rebelled at supporting the budget deal produced by the summit sessions. Gingrich argued that it was an anti-growth package.
The rebellion, however, caused the White House to write off the support of most Republicans in the House and to rely on Democratic support. The result was a package tilted somewhat further to the left by concentrating more of the tax hikes on the wealthy.
Conservatives tend to believe that the taxes in the budget will stick, but the spending cuts can slip away through loopholes in the agreement - or simply through legislative changes in future budget years.
``Bush has created a civil war in the Republican Party,'' says Dan Mitchell of the conservative Heritage Foundation, ``between the pro-growth tax-cutters and the tax collectors for the welfare state'' - his epithet for Bush, Senate minority leader Robert Dole, and House minority leader Robert Michel.