The prospects for Reaganomics II.

IF REAGAN IS to achieve anything in his second term, the first thing he must do is acquire some help. He has suffered through four years with senior White House aides, Council of Economic Advisors (CEA) chairmen, and a budget director who do not echo his beliefs and who have no confidence in his policies. Conservatives might enjoy their righteous indignation at Tip O'Neill and the Democrats for "sabotaging Reagan," but most of the problem is in the Reagan Administration itself. Indeed, it is not at all clear that the Reagan Revolution will survive Reagan's re-election.

As Richard Viguerie has complained, many of the people who work for Reagan today have records of denigrating him. During his first term his aides often allowed his policies to twist slowly in the wind. After being beat up by his own government for four years, President Reagan is in danger of losing the vision that made him attractive to conservatives and to the American people. You do not have to be a "right-wing conservative" to recognize this. The liberal Washington Post reconized the fact halfway through Reagan's first term when an editorial writer observed that "the Reagan Presidency cannot survive either without the President's vision of what he wants to accomplish or with the whispered slander of the President from his own appointees." Conservatives can pretend that their man will "put things straight" in his second term, but he has no prospect of putting things straight if he cannot put his government straight. As the Wall Street Journal has regularly noted, President Reagan has proved that he is not a manager, and that is why the staffing of his government is critical. If this battle is again lost, most of the other battles will also be lost.

Assuming that Reagan can find the determination to acquire some help, what would he like to achieve and what are the prospects for success?

Reagan has made it clear that he wants further to reduce the tax rates and to simplify the tax code. There is strong bipartisan support for a fundamental reform that would broaden the tax base and lower the tax rates. On the Republican side there is the Kemp-Kasten bill. On the Democratic side there is the Bradley-Gephardt bill. And many other members of Congress in both parties have their own versions of a broad-based flat-rate tax. Policy think-tanks from the Hoover Institution to the Brookings Institution support such reforms. Reagan has some support within his Administration. Treasury Secretary Donald Regan, Assistant Secretary Manuel Johnson, and Deputy Assistant Secretary Steve Entin all support a flat-rate tax. The odds are favorable, but not if the President's budget director, the CEA chairman, and the White House chief of staff are trying to raise tax rates instead of lowering them. The President may think it doesn't matter who works for him, but I know from personal experience that it is decisive. For example, Reagan did not want to raise taxes in 1982, but senior members of his government used the media and Congress to maneuver a President, whose popularity was weakened by recession, into a situation where he had no alternative to a tax increase.

Monetary Reform

A SECOND ITEM on the agenda is monetary reform. Proposals range from reforms that would make the Federal Reserve System accountable, on the basis of principle and well-defined law, to the re-establishment of an international gold system and fixed exchange rates. How far these reforms go will depend on the extent of public disillusionment with the results of the existing arrangements. A consensus is building that discretionary monetary policy has not been successful. When there are no clear rules, the central bank can substitute its own judgment. Since discretionary behavior is not predictable, uncertainty has risen in the financial markets. Moreover, the independence of the Federal Reserve and the secrecy with which it conducts monetary policy mean that every President risks having his policies crowded out by those of unelected officials.

In a second Reagan term there will be an effort to make the Federal Reserve more accountable by placing constraints on its behavior. Some often mentioned constraints are: 1) to require the Federal Reserve to announce publicly all policy decisions at the time they are made, 2) to make the Secretary of the Treasury a member of the Federal Open Market Committee, and 3) to make the term of office of the Federal Reserve chairman concurrent with that of the President. If these reforms do not increase the effectiveness of the Federal Reserve System to an acceptable level, they may turn out to be a first step toward more fundamental reforms.

These items, though small in number, are large in importance, and there is a chance that both tax and monetary reforms can be achieved. Another important item on the agenda is to reduce the growth in real transfer payments. Here prospects are less good. Reagan's men mishandled Social Security early in his Administration. Consequently, Reagan was forced to respond to the Democrats' demagoguery by vowing never to touch Social Security benefits. The issue may have become so politically sensitive that a solution will have to await Reagan's successor.

The Social Security problem is a long-term problem, and it is possible to deal with it without affecting Social Security benefits of current retirees. Future retirees would be affected only in the sense that the real value of their benefits would grow more slowly, but since benefits would still continue to grow, no retiree would experience and actual cut in his Social check. This approach would free up payroll tax revenues to support Medicare, thereby dealing with that problem as well.

Other items can be added to the agenda. For example, a rollback of the "voluntary" import quotas that are crowding out free trade with protectionism. But it is important not to add too much to the economic agenda, because other areas of policy also require the Administration's time, energy, and political capital.

A Growing Economy

IT IS POSSIBLE that the Administration will find it has lost control over the agenda by the time Reagan is sworn in. If the Federal Reserve Board has again erred on the side of constraint, Reagan's second term could begin with a growth recession or even a full-fledged recession. In either case the deficit projections would rise, reviving the deficit hysteria and the agitation for a tax increase. The President would find himself on the defensive, and, without strong spokesmen for his policy, he would be pushed in directions that he does not want to go. If he suffers reverses in economic policy, the Reagan Revolution may falter in other areas as well.

an economic downturn would revive the international debt crisis and worries about the stability of the banking system. Protectionist pressures would rise with unemployment, and the Administration would be forced to react rather than lead. Prospects of controlling spending would evaporate as the people's confidence in the future gave way to anxiety.

The future depends on the economy growing faster than government spending. Austerity policies applied to the private sector, such as tight money and higher taxes, automatically reduce the growth of the economy and increase the growth of government spending, thereby worsening the deficit. A proper austerity policy would apply to the government sector. But there is little prospect of controlling the growth of government when the economy is bad and people feel threatened.

The success or failure of Reagan's second term may depend largely on Federal Reserve chairman Paul Volcker. Normally, Administrations take actions to circumscribe the independence of the Fed. However, in the depths of the 1981-82 recession, there were no accomplishments that the Administration could claim other than the fall in inflation. By claiming credit for the unexpectedly sharp drop in inflation, the Administration accepted responsibility for the Fed's recession. The recession, of course, produced the deficits that endangered the tax-rate reductions, and the Administration let Volcker further off the reservation when Reagan's spokesmen blamed high interest rates on Reagan's fiscal policy and not on the Fed's monetary policy. Consequently, for the first time in history the Federal Reserve Board has ahieved de facto as well as de jure independence. If the Fed makes another mistake, it is going to be very hard on Ronald Reagan and conservative causes.