Pyrrhic victory for Reagan

Nicholas von Hoffman

Washington

By tradition August is a month for pranks and small outbursts of madness. It is sometimes attributed to the heat on the prairies which makes the corn and wheat grow — and grow so profusely this year that a bumper crop is driving the price of agricultural commodities down close to bankruptcy levels. As in the early Thirties, the farmers are again in danger of going broke by being too good at their work.

As if that weren't enough, in Illinois, bang in the middle of the tall corn country, a group of 'pro-life terrorists', calling themselves The Army of God, kidnapped a doctor and his wife who operate a gynaecological clinic specialising in abor- tions. In the Senate another group of pro- life terrorists has been hard at work pushing through legislation to end this means of birth control.

However, the biggest news has been the fight over the Administration's tax Bill. In the last few days it has even managed to push Lebanon into second place in public attention. The people on the right of the President's party are exquisitely unhappy with this Bill, which has been described as the biggest single tax increase ever to be passed by Congress. Mr Reagan says it is actually a very modest tax increase, but a very large tax reform by which many loopholes used by the wealthy to escape tax- ation are closed. Until now it had not been known that Mr Reagan was much interested in tax reform, and there is still considerable doubt that the Bill does what he claims for it.

At any rate it is a strange Bill for him to fight so hard for in view of the fact that one year ago he signed a tax decrease of almost the same size. Then the argument was that the tax cuts would so stimulate business that the Government would recapture the lost revenue by the growth in profits and in- comes. Business, as we know, has con- tinued either to languish or decline so that, even without the new arms appropriations, the Government would have had to increase spending on unemployment benefits and suchlike.

As business continued bad and the lines on the graph showing projected revenues and expenditures grew even farther apart, something like panic took hold. The bankers, stock jobbers and financiers foresaw the Government having to borrow $150 billion, perhaps more, thereby driving interest rates up higher. By May they could stand it no longer. The noise on Wall Street had got so ear-splittingly plangent that five former Secretaries of the Treasury, under Kennedy, Johnson, Nixon, Ford and Carter, came to Washington, called a press conference and demanded a huge tax Bill plus cuts in social - security benefits. Last week they got what they demanded.

The Bill's passage is being regarded in the newspapers as an important 'victory' for the President, although it is not clear exact- ly over what powerful political class he has prevailed. It certainly wasn't over any organised liberal support. Both the Speaker of the House, Tip O'Neill, and Senator Teddy Kennedy, the national legislature's most publicised liberals, voted and spoke for the Bill. Some liberals and some of last year's leading 'supply side' right-wingers did not. In so far as there was organised op- position it came from the radical Right.

Nevertheless, the Bill passed by the smallest of margins. One of the reasons for the reluctance of some to vote for it was that few people have a clear understanding of what it contains. When the final votes were taken no printed copy of this measure, which runs to hundreds of pages, was available to those voting for it. This is the second year in a row that a major tax Bill has been passed by a Congress ignorant of its contents. After last year's cut was passed into law, a number of people got some numbing surprises when they discovered what they had voted for. Indeed part of the impetus for the passage of this year's law was reaction at learning they had voted into existence what were in effect scandalous tax subsidies for some of the biggest and most prosperous corporations. It was this that allowed Mr Reagan to call this year's effort `tax reform,' although he was kind enough to point out he was only reforming the damage he had done.

Considering that this year's Bill was writ- ten in a room filled with the same corporate lobbyists who encircled the same set of legislators as last year, you can be sure there

will again be some brutish surprises. Already we have learned ex post facto that the steel industry got a $100 million bonus that nobody had known about.

As with last year's law, this one also is guaranteed to be the elixir of prosperity; maybe it will be but, taken with its compa- nion cuts in spending, it appears to take a good chunk out of disposable income. That doesn't bother many people here because in this 'supply side' miasma consideration of the public's purchasing power might smack of closet Keynesianism. It is an odd blind spot for an economy which has often been powered upwards by consumer demand the biggest exception to that observation is 1940-1941 — but the structure of the economy and the nature of military pro curement have changed so much since those days that there is some doubt whether guns can beget butter yet one more time.

They had better. This Bill increases taxes on cigarettes and telephones, it cuts govern- ment pensions and it cuts medical benefits for the poor and the not quite so poor elder- ly, it cuts back on tax exemptions for medical expenses incurred by working peo- ple and eliminates the merely partial tax deduction on medical insurance.

The tendency of events was nicely summ- ed up by one of Mr Reagan's opponents as follows: 'Did you know the Administration tried to cut the budget for children's im- munisations by 30 per cent? I figure they were trying to introduce the new paralysis. Reagan admires Franklin Roosevelt, who

was a cripple, so what more fitting way to honour FDR's centennial year than bring back polio? We could have special ceremonies at Warm Springs, Georgia, with guests in designer crutches.' Not unfair hyperbole about a politician who came back from a Jamaica vacation this winter to tell a luncheon group of corporation presidents that 'I am convinced they [the Jamaicans]haven't been spoiled by as much welfare as we have in our country.'

There were other events which the White House found to be a cause for rejoicing. The stock market gave a great leap forward on the strength of the Federal Reserve Board's dropping of the discount rate the rate of interest it charges banks to bor- row from it. This was taken as a sign that the Fed had at last decided to try to kick all interest rates down. Others were not so sure. Rates have been coming down gently for weeks due to lack of borrowers. The precipitous cuts in the Fed's rates may be due to the realisation that the banking system is in much worse trouble than the Fed thought.

The recent demise of Oklahoma City's Penn Square Bank suggests that the Government's machinery for bank supervi- sion is almost completely useless. Not only were many millions in bad loans concealed but loans were being made in the back room of a saloon. One borrower told reporters: `The bar had a private room in the back for oil men and horse traders... I could hardly believe it — they loaned me $2.5 million,

hardly asking any questions.' Not surpris- ing in an institution in which the senior vice-president could be seen marching through the lobby wearing a three-Piece banker's suit and a World War II German army combat helmet. The same gentleman would take out-of-town customers to restaurants where he would start food fights and drink beer out of his cowboy boots. Oklahoma is a long way from the bowlers and umbrellas of Lombard Street, but Citibank isn't. Before Mexico defaulted on I its loans, rumours were suggesting that all s decidedly unwell at America's number two financial institution. The Mexican news can only increase anxieties. No one knows the extent of Citibank's involvement, but it is thought to be rather a large chunk of the approximately $80 billion which that country owes. One must suspect that it is the realisation by the Fed that it had lost control of the condition of the banking system as a whole, coupled with the Mexican problem, that ac- counts for the interest rate drop. The Fed has also lent Mexico upwards of $1 billion to tide them over and the Treasury has forc- ed that hapless nation to make significant concessions on oil in return for this and other forms of emergency financial aid. While that is certain to affect the political

i economy of oil world-wide, nothing else s

predictable. It is a wild time getting wilder; however the tax Bill works out, we are not about to sail back into smooth, uneventful waters.