Washington Reality Vs. Republican Zeal

ECONOMIC reality has started to descend on Washington.

After Republicans won control of Congress last month, Rep. Newt Gingrich of Georgia and some other Republican leaders talked of the dramatic changes outlined in their ``Contract With America'' - tax cuts, spending increases, a lower deficit - as almost sure things.

But ``the initial evangelical ardor is starting to give way to the realities of government,'' notes Paul McCracken, chief economic adviser to President Nixon in his first term.

``The budget rules and the basic laws of mathematics apply to Republicans in the same way as they do Democrats,'' says Stanley Collender, the federal budget expert in Washington with Price Waterhouse, a major accounting firm.

Change ``is not going to be as great as people assumed right after the election,'' he adds. The newly elected Republicans will become ``more socialized'' to the ways of Congress and influenced by the Washington establishment, the need for political contributions, and a desire to be reelected.

``Being in positions of responsibility will moderate them [Republican congressional leaders] some,'' says Herbert Stein, who was chairman of the Council of Economic Advisers during Nixon's second term. ``They are hemmed in by the budget.''

These three long-time observers of the Washington scene, however, do anticipate some action by the new Congress.

For instance, Dr. Stein expects Congress to pass a cut in the capital gains tax. This, he says, will boost federal revenues at first as investors take advantage of the lower tax rate to sell investments with accumulated capital gains; then the measure will start adding to the deficit.

It is also questionable whether a capital gains tax cut will stimulate the economy. A senior Democratic staffer in Congress noted that it was hard to find any evidence that either the capital gains tax cut in 1979 or the hike in 1986 had any effect on the economy.

All three analysts assume that the new Congress will approve a tax cut for the middle class. ``I don't know if the Republicans are more likely to reduce the public deficit than the Democrats,'' Stein says. ``Probably not.'' He suspects the Republican-controlled Congress will pass a balanced-budget amendment to the constitution and assure the country that it has dealt with the deficit. ``There is a lot of hypocrisy in that,'' he says.

The budget rules of Congress require that tax cuts or spending increases be paid for by tax hikes or cuts in outlays. Key to this exercise is the assessment by the head of the Congressional Budget Office (CBO) of the fiscal effect of budget measures. The incumbent, Robert Reischauer, has a reputation for bipartisan fairness, as demonstrated by his treatment of the cost of the president's health-care program. Republicans are now searching for a replacement.

If they should appoint a strong Republican partisan, the bond market might be alarmed, Mr. Collender notes. Investors would figure that lax CBO estimates would permit bigger deficits.

One technique for making tax cuts or spending hikes more palatable, notes a congressional staff expert, would be for CBO estimates to be based on the impact on the budget for only five years instead of the 10 years Sen. George Mitchell (D) of Maine insists on. Revenue losses from a capital gains tax cut, for example, would continue after five years, probably canceling out early revenue gains. There would be a similar revenue pattern if Congress approved a popular Republican proposal for a more generous Individual Retirement Account.

Stein, who calls himself an ``Eisenhower Republican,'' expressed concern with the tough Republican talk about cutting government social welfare measures. ``There seems to be a kind of meanness in dealing with the disadvantaged, poor people, and the blacks,'' he says. ``Nobody seems to be willing to invest a lot of money in taking care of these people, helping them.''

Mr. McCracken says: ``Humanity has been struggling with the dole problem - after all, you read about it in Charles Dickens - for hundreds of years, and they haven't found an answer. You don't want people to starve. But if you give them money, there is a disincentive to work. There is no neat, clever answer to this problem. There are certain problems you live with.''