Forget the Tax Mantra--the Key Is Performance : Economy: The GOP risks its ‘party of prosperity’ image if financial problems worsen--chief among them the disastrous S&L; bailout.

Provocative slogans like “read my lips” notwithstanding, the most important debate in this year’s elections may not be over keeping federal taxes down but over keeping economic performance up. If the Republicans still appear to be the party of national prosperity and successful economic management come November, the Democrats will be in trouble. Yet these same issues are rapidly emerging as a potential Achilles’ heel for the Bush Administration.

Whether cigarette taxes rise or there is or isn’t a new oil-import fee matters much less than the seeming 1990 convergence of half a dozen weaknesses and mistakes in Washington’s handling of the U.S. economy.

First, there’s the budget crisis that’s making mincemeat out of prior forecasts and reassurances.

Second, there’s the prospect that the deficit-reduction mechanisms of the Gramm-Rudman Act could come into play right before this year’s elections by slashing a number of popular federal programs.

Third, the Administration’s ever-more-expensive bailout of the savings-and-loan system is on its way to becoming the biggest financial mess of the late-20th Century.

Take the federal budget crisis. Official forecasts turn out to have been on a par with those of TV weathermen and gypsy fortunetellers. In January, the federal deficit was under control--down from $220 billion in 1986 to $100 billion in 1990 and heading for $64 billion in 1991. Now, all of a sudden, thanks to insufficient receipts, unexpected outlays and S&L; miscalculations, it’s rising and possibly out of control. Small wonder that one national poll in mid-May found a 58% majority of Americans giving George Bush a “below average” or “poor” rating on handling the budget.

Nor is this miscalculation merely academic. The deficit is threatening again to soar to more than $200 billion a year could force painful tax increases. Moreover, unless Congress and the Administration take some corrective measure, by October--just before the election--the huge deficit could trigger the automatic program-cut provisions of Gramm-Rudman.

This “sequestration” process, as it is called, would devastate popular programs along with unpopular ones--infuriating the electorate just in time for the vote. Republicans worry that in this situation, the reputation they built during the 1980s as good economic managers would be devastated. Avoiding this has been one of the reasons Bush is signaling his willingness to entertain tax increases despite his prior pledge not to.

But even pre-election sequestration is not the biggest 1990 danger to the GOP’s economic management credibility. That dubious honor must go to the bungled S&L; bailout that now threatens to cost from $300 billion to $500 billion before it’s all over. Blame for the basic failure of federal S&L; policy during the 1980s is bipartisan--congressional Democrats played just as clumsy (and even shady) a role as executive-branch Republicans. Responsibility for the mismanagement of the 1989-90 S&L; bailout, however, appears disproportionately Republican, from the way rich investors were given first crack at buying insolvent S&Ls; to the relentlessly inadequate estimates of the expense to taxpayers. Congressional Democrats voicing populist attacks on GOP handling of the bailout--that it forces working people to save the bacon of millionaires--could also be missing a powerful non-populist indictment: the extent that the S&L; disaster undercuts the Republicans’ claims to keeping the economy well-run and prosperous. Bush’s national leadership credentials are not exactly enhanced, either.

Democrats have another potential economic management target--if they have the courage. This winter, Sen. Daniel Patrick Moynihan of New York succeeded in shining a political spotlight on the federal government’s use of the huge surplus--now $70 billion a year--raised through Social Security taxes to reduce and mask the annual federal budget deficit.

Moynihan’s idea was to either stop the Treasury from using Social Security revenues this way or to reduce the Social Security tax rate itself. Workers and pensioners alike would have been outraged by a broad discussion and debate. Back in January, Republican strategists feared it was coming, but so far Democrats have been afraid of such boldness--although the vulnerability still remains.

Yet another Achilles’ heel of Reagan-Bush economic management lies in how the policies of the last 10 years--so wedded to the practice and convenience of deficits--have surrounded Congress and the business cycle with an extraordinary complex of debt and credit issues. They range from Gramm-Rudman and the S&L; bailout to emerging vulnerabilities in other federal loan- and pension-guarantee programs, fears about real estate and commercial bank solvency, concern over junk bonds, leveraged buy-outs and corporate debt, worry over America’s emergence as the world’s leading debtor nation and apprehension over increasing U.S. vulnerability to the interest rates of the new creditor nations--West Germany and Japan.

It’s not particularly auspicious that today’s Washington debt agenda is unmatched since the late 1920s and early 1930s, when politicians confronted issues such as European war debt forgiveness, the gold standard, credit contraction, bank collapses, the 1933 bank holiday, farm debt and creation of the Federal Deposit Insurance Corp. The question is whether some of 1990’s shaky debts and credit dominoes have still to fall onto the “real economy.”

Indeed, spring’s pattern of regional economic weakness already reflects these debt-and-credit problems. New England, with the most pronounced weakness in real estate, commercial banks and insurance, is in a clear recession. New York and New Jersey aren’t far behind. Ray Scheppach, executive director of the National Governors Assn., bluntly said, “the economic slowdown that plunged the Northeastern states into fiscal distress last year has moved down the Eastern Seaboard.” Concern is also growing about two major Sun Belt state economies--Florida and California.

All of this, and with it the GOP’s Reagan-era credibility for economic management and ability to keep the country prosperous, is much more important to the GOP future and the outcome of the 1990 and 1992 elections than a shallow debate over Bush’s “read my lips” pledge and what he meant by it. If the economy avoids a larger 1990 reckoning for the fiscal sins of the 1980s, then it won’t matter to the GOP whether voters are a little miffed over higher excise taxes or an oil import fee as evidence that Bush and they haven’t kept their promises.

The extent to which the political stakes of overall economic management success are higher than the “read my lips” tax quibbling can be further confirmed by a quick look at previous Republican midterm election patterns. From 1954 to 1986, every GOP administration has had some economic difficulty--usually a full recession--to spoil its midterm election patterns. If this could be avoided in 1990, it would be a Republican boon--for not only do economic issues usually dominate midterm elections, they invariably count for or against the party in the White House. No matter that a different party may control Congress, the party in the White House gets the blame or credit and wins or loses seats in the House and Senate based on the state of the economy. The Republicans, for example, relentlessly lost seats in the midterm elections of 1954, 1958, 1970, 1974, 1982 and 1986--even though Democrats controlled one or both houses of Congress.

Thus the potential payoff for the Democrats in developing a broad-based critique of Republican economic management abilities--and possibly also sitting on their hands rather enabling the Washington budget summit to ease the nation’s fiscal crisis and pull the GOP’s chestnuts from what is becoming an increasingly hot political fire. If, by the time voters go to the polls in November, they do so with a sense that Republicans are no longer managing the economy well, but mismanaging it and jeopardizing future prosperity, the politics could be surprisingly powerful. This could call up the ghosts of GOP midterm election jeopardy.

May polling results already show a sharp decline in Bush’s ratings for handling the U.S. economy, and voter disillusionment in this broader direction could overshadow the politics of a parochial dismay with unrealistic “no tax increase” pledges that should not have been believed in the first place.