Making Policy

Ronald Reagan's election changed the decision-making process within his coalition because the decisions now meant something different: instead of campaign stances, they would be the "president's program." His defense advisers, no longer letting election worries restrain their arguments for a massive buildup, emphasized their vision of military needs. In response to their briefings, one close aide reports, Reagan "continually upped in his mind the need for spending more."

Economic advisers were organized into a series of task forces to define the program more precisely.^[28] The tax policy task force "tried to put together a program which expressed what the President wanted, a marriage of the capital formation and the populist people." With Charls Walker as chairman, capital formation, represented by the "10-5-3" depreciation plan wed individual tax-cutting populism, the Kemp-Roth plan at a meeting of Reagan's Economic Policy Coordinating Committee on November 15. "You would have liked it," a participant told us academics, "the notes were taken by a Nobel prize-winning economist, Milton Friedman." Both the higher defense spending and bigger tax cuts meant that balancing the budget, still a key and publicized part of the economic package, would be more difficult.

Reagan and most of his advisers did not really ask whether the conflict could be resolved; instead they asked how it might be resolved. They developed a laundry list of reasons; if any were true, the tax cut would work. The reasons contradicted each other; political argument, however, is not validated by logical consistency. Coalitions for any policy, such as the 1974 Budget Act, usually involve groups with different purposes and ideas about how it will work out. A member of a coalition need not care why others are his allies, so long as he believes his own reason for supporting the bill.

By one argument, Kemp-Roth was nowhere near as big as it looked. Because inflation would drive up peoples' taxes during the years to come, most of Kemp-Roth would merely keep taxes from reflecting the rise. The issue then was not how to balance the budget but what to do with the huge, expected tax increases—fund more government spending, or give money back to the people. This argument would prove misleading

given flaws in the economic projections, but at the time no one could have known that. The real difficulty was that if Kemp-Roth were not much of a tax cut, it would do little to relieve the economic disaster that Reagan and much of the public perceived. But it also would do little harm.

Supply-siders claimed that their tax cut would produce so much economic growth that revenues on the increment of growth would exceed the loss from lower tax rates. Based on intuition and his own experience, Reagan agreed. He would tell visitors, for example, that every other modern tax cut had resulted in the government ending up with more revenues that it started out with, and "we're just convinced" that it would happen again. Aides said Reagan really did believe it, but many advisers did not.^[29] The campaign's projections always assumed an overall revenue loss. Still Reagan spoke of dramatic economic change, which required a real policy change, and therefore contradicted the first argument.

The third argument, the "children's allowance theory," received less attention than it deserved in 1981. Reagan expressed it best himself in his February 5, 1981, address to the nation on the state of the economy:

Over the past decades we've talked of curtailing Government so that we can then lower the tax burden. Sometimes we've even taken a run at doing that. But there were always those who told us that taxes couldn't be cut until spending was reduced. Well, you know we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance simply by reducing their allowance.^[30]

Taxes would be cut first. Only by using deficits as pressure to reduce spending could spending be reduced enough to reduce deficits.^[31]

The Republicans' natural good-thing-for-people, lower taxes, was foreclosed by the need to cut spending first lest the deficit rise. Cutting taxes first would reverse the political dynamic that had frustrated Republicans for years. The Democrats, until Carter, had something to offer people—spending programs. Now the Republicans could offer tax cuts.

Reagan's characterization of politicians as children or as irresponsible "spenders" neatly fit his distrust of domestic government and therefore was easily accepted by many of his allies. The argument did, however, contradict the supply-side: if tax cuts raised revenue, they did not reduce the allowance.

All three arguments—it was not really much of a tax cut; it was a dramatic change that would create enough economic growth to pay for itself; it would create deficits, but deficits themselves would restrain spending and thus eventually deficits—were blithely employed by the administration, often by the same people and even at the same time. The best way to justify the tax cut, for the many people who believe in

budget balance, however, was to translate rhetoric about waste, fraud, abuse, and extravagance into spending cuts. Enter David Stockman.