Contract hits home.

When a large institution or government restructures to address the seemingly insurmountable new situations confronting it, its first attempt at reform is invariably a patch-up job. But, Peter Drucker writes in the February Atlantic, if the situation is grave enough - and he implies that the U.S. government is in such a predicament today - simply patching will fail every time.

Then follows a second phase: the frenzy to slash or downsize. That, says Drucker, is what the Republican majorities are about today. When Massachusetts Governor William Weld signed his state's tough new welfare law last month, he almost chortled that "we are obliterating today the mistakes of welfare as it has existed for decades." Yet, Drucker warns, downsizing of itself won't succeed in reshaping the institution in question. In fact, it can be a dangerous mistake: Amputation before diagnosis results in fatalities.

Drucker insists, however, that troubled institutions can successfully reshape themselves if they first clarify their purpose and devise the means for achieving it. For example, the best way for a corporation to get control of its costs is not to begin by reducing its expenditures but by identifying its most productive activities. If the corporation is to survive, it is these activities that must be strengthened, promoted, and expanded.

We are now more than fifty days into the diluvian 104th Congress, the Congress of the long knives, or what the Wall Street Journal calls "the New Deal and the Great Society in Reverse." The scope of legislation considered so far has been dizzying: the balanced-budget amendment, line-item veto, tort reform, curtailment of Congress's taxing powers, slashing welfare, relinquishing federal oversight, and restricting the executive branch in foreign affairs. But for all the sound and fury, the 104th's proposed adjustments to what ails the republic represent little more than Drucker's second, self-defeating phase. Instead of reappraising the functions and the means of enhancing democratic governance for the common good, the mighty 104th has settled for downsizing.

Take the mantra on taxes. Although total federal receipts as a percentage of Gross Domestic Product are no higher than they were in 1954 (see Herbert Stein, the New Republic, January 23), the new Congress has put a priority on cutting taxes, particularly for the wealthy through lower capital gains taxes and more generous depreciation allowances. But nowhere has the 104th and its Contract with America determined how much these proposals will translate into lost revenue. E.J. Dionne, Jr. (Washington Post, February 7), estimates that this "tax-cut extravaganza" could cost the treasury $200 billion in the first five years and $500 billion in the next five. This is "deja voodoo" economics. As Republican Congressman Sherwood Boehlert (N.Y.) courageously declared, "It's sheer lunacy to be focusing on tax cuts before we complete budget cutting."

One might argue that the contract's balanced-budget amendment - certainly the most constitutionally dubious Republican proposal - fits Drucker's third step, and that it would force profound structural changes on how the republic does its business. There can be little doubt that such an amendment would have a revolutionary effect, but not even the contract's most ardent proponents have been willing to spell out the details. Robert L. Livingston (R-La.), chairman of the House Appropriations Committee, did hint recently only that the cuts will be "monumental."

There is something of a precedent, however. A similar experiment in reforming government through the back door was undertaken by frustrated California voters in 1978 with Proposition 13 . It mandated super majorities to approve tax raises. Now, after recurring municipal crises in school funding, basic services, and even police protection, Proposition 13 is increasingly seen as a debacle, straitjacketing the state. Some local governments, unable to drum up sufficient operating revenue from balking voters, turned to risky investment strategies. Last year, caught in a crossover of interest rates, the wealthy district of Orange County suffered a series of huge losses in its investment portfolio and was forced to declare bankruptcy.

While some Orange County conservatives have taken the county's default as a golden opportunity to cut government even more, there is another lesson that can be drawn from this sad chapter: Ill-conceived legislation can lead not only to "smaller government" but to the useless destruction of valuable and necessary public institutions.

To date, the 104th Congress has equated constriction with reform. But "revolutionary glee" and budgetary knife-wielding are no substitute for real progress.