Analysts Cite ’81 as Time Matters Got Out of Hand : Policy: They focus on the day President Ronald Reagan signed the massive tax cut bill that was the centerpiece of his economic agenda.

The budget mess that has paralyzed Congress, the White House and the rest of Washington this fall did not just appear overnight.

Its roots date back a generation and include the military buildup of the Vietnam War, the creation of a dizzying array of entitlement programs in the 1960s and 1970s and the inflation monster that eventually brought on runaway costs for programs such as Medicare and Medicaid.

But as analysts look back, they increasingly point to 1981 as the year when the magnitude of the deficit began to change--when it burst out of control into a full-blown crisis and no longer was just a nagging, but manageable problem.

To some, the most significant event that year--with reverberations that have been felt ever since--came on a foggy August morning, when then President Ronald Reagan took time from his California vacation to sign the massive tax cut bill that was the centerpiece of his economic agenda.

Many analysts argue that the long-term effects of that tax cut and related Reagan budget policies--including the massive military buildup of the early 1980s--have swamped the budget, bringing on mounting deficits that Washington has been wrestling with ever since.

“The original problem with Reagan’s policies is still there,” noted Alan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh.

“We had a tax cut and a military buildup but Reagan never really followed through on his promise to cut other spending” to compensate, Meltzer said. “So the budgets remained unbalanced.”

Indeed, the current effort to work off those enormous deficits represents a slap at Reagan’s initial policies and the supply-side economic theories that underlay them--especially the idea that lowering taxes can lead to higher government revenues.

Those are ideas that George Bush--now deeply enmeshed in this budget dilemma--once labeled “voodoo economics.”

Supply-siders contended that it was the tight-money policies of the Federal Reserve Board, introduced by then-Chairman Paul A. Volcker to help wring inflation out of the economy, that created the recession and sidetracked their own plans. But others vehemently disagree.

“Supply-side economics was an unmitigated disaster,” asserted Lawrence Chimerine, senior adviser to DRI-McGraw Hill, a Lexington, Mass., economic forecasting firm. “There was little doubt at the time that (supply-side theory) would create massive deficits--and it did.”

Analysts say that Washington is now trying to correct a once-in-a-generation fiscal error that will continue to dominate the budget process for at least another decade.

“Back in 1981, we had a huge mistake and the inertia in our system makes it hard to get out of big mistakes,” argues Charles Schultze, who was budget director under President Lyndon B. Johnson and now is an analyst at the Brookings Institution.

To be sure, the federal government still would be running large deficits even if tax rates had remained unchanged in 1981.

Entitlement programs--especially those aimed at helping the elderly, which were protected from the ravages of inflation through automatic cost-of-living increases, were undergoing an explosive growth by the end of the 1970s.

That gave Washington its first real taste of so-called “structural” deficits--excess spending that was actually built into the system.

At the same time, anti-tax fever was gripping the nation by 1980 and the political pressure to cut taxes might have been enormous even if Reagan had not become President.

“I think whoever was President in the 1980s would have had some deficit problem,” said Rudolph G. Penner, a former director of the Congressional Budget Office and now an analyst at the Urban Institute.

“By the end of the 1970s, we had already spent our peace dividend from the Vietnam War on promises to the elderly and so we were facing a squeeze.”

Still, many agree that without the tax cut, which slashed federal tax rates just as a recession was sapping government tax revenues as well, the government could have financed the Reagan Administration’s military buildup far more easily.

“The defense buildup was not of tremendous proportions. . . . The revenue losses from the tax cut were far larger than were the spending increases from the defense buildup,” observed Robert Reischauer, director of the Congressional Budget Office.

In fact, figures show that the Reagan-era defense increases could have been largely offset by the domestic spending cuts that the Reagan Administration pushed through--and so by themselves would not have led to massive deficits.

It was only when the Administration sought to increase military spending at a time when overall tax revenues were declining--as a result of the tax cut and the recession--that the deficits actually became unmanageable.

“What happened was that in the heady summer of 1981, we did a whole bunch of things all at once and they didn’t balance out,” noted David Mathiasen, a budget specialist for the General Accounting Office and a former official at the Office of Management and Budget.

“It was a combination of ingredients medically proven to create deficits.”

“The 1981 policies came just as the economy was sliding into a recession, which made the deficits much worse than anyone expected and that led to escalating interest payments,” added Carol Cox, president of the Committee for a Responsible Federal Budget.

Ultimately, the policies of 1981 also made it much more difficult to pay for the popular middle-class entitlement programs, especially Medicare, that started to balloon in the 1970s. Since then, those programs have proven almost untouchable politically.

The result has been a series of small tax increases since 1981 to help offset that year’s ambitious policies.

“The 1981 tax cut was the most significant thing that led to this deficit problem,” observed Isabel Sawhill, a budget specialist at the Urban Institute in Washington.

“We have chipped away with tax hikes of one form or another almost every year since. But they have not been enough.”